What are Some Disadvantages of a Value Added Tax?

disadvantages of value added tax

In many European and Asian countries, a value added tax, or VAT, is utilized to gather important government funds. While there can be certain advantages to this particular tax approach, many are against this system and cite numerous reasons for a lack of favorable opinion toward it. What are some of the disadvantages to governments using a VAT for capital collection? Here are some of the main drawbacks cited by opponents.

Heavy Administrative Burdens on Some

In a value added taxation system, at every step of the production and retailing process, tax is assigned, in some proportion, to the good or service being generated. While this occurs, a large administrative burden then befalls the retail world; Each business in the process is essentially a tax calculator and collector for much of the process. While larger organizations may be able to handle this burden, smaller retailers and business owners can be crushed by this extra and very large and important responsibility assigned to their level of the market process.

Increased Complication

Another fervent argument against the use of value added taxes is that of much greater complication of process when compared to other taxation systems that can be used instead. As mentioned above, every step of the production process of a good or service must be assessed with a tax just for that particular stage in the process. This, along with extra complication in actually calculating the correct tax amounts at any given time, makes VAT very unattractive to many, especially those needing to handle the calculations and reporting processes.

A Difficult System to Implement

For any governments or regions that do not already function using a VAT system, implementing such a system and adapting to it from another tax system can be a very cumbersome and expansive process. As highlighted by the experts at the leading tax policy non-profit research organization Tax Foundation, the economy-based effects of such a change would likely include market regression, overspending patterns, and even a fall-back of export activity, among other effects. These effects on the economy are difficult changes to adapt to, but administratively, the changes in tax code and law would also be very difficult for government, businesses, and individuals alike to reconfigure to.

The Poor Taxed Disproportionately

Fairly recently, Investopedia published an article in which many of the ins and outs of value added taxes were discussed. One widely heralded disadvantage the article mentioned was an expert-wide worry in how VATs can end up actually overburdening the poorest of the population with tax responsibilities. This happens because all tax-payers ultimately pay the same tax rate in this system. Many are then very uncomfortable with the idea of a tax system that does not distinguish between the rich and the poor.


Value added taxation systems represent a popular taxation method in many countries outside of the U.S. today. While there are enough proponents of this type of system, there are certainly many in opposition to it as well. These above-mentioned disadvantages are among some of those most often cited by opponents of the value added tax method today.

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