How a Value Added Tax Would Work, Talking Tomatoes and Ketchup

Since the U.S. doesn't use this system at the moment, we look abroad to the VAT gods – Europeans -- for an example.  As a very simple exercise, we’ll apply this tax system to the tomato and ketchup industries because, c'mon, who doesn't like ketchup?

Let's say a tomato farmer sells tomatoes to Heinz for $10,000; it's a lot of tomatoes. Now, if the U.S. VAT rate was, say, 10%, the tomato farmer would charge Heinz a total of $11,000. That's $10,000 plus a $1,000 tax. The farmer would then pay that tax to the government. Sorry, Old MacDonald, you don't get to keep that money.

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