The tax most of the world uses was first tested in a French colony
Value-added tax now raises about a fifth of all tax revenue worldwide, and by January 2025 it was used in 175 of the 193 UN member states. Every OECD country applies one except the United States. Its modern form began on 10 April 1954, when French tax official Maurice Lauré introduced it in Ivory Coast.
The idea was older. Georg Wilhelm von Siemens, a German industrialist, suggested it in 1918 as a replacement for Germany's turnover tax, though that tax survived until 1968. Pleased with the colonial trial, France adopted the tax at home in 1958, and it now supplies nearly half of French state revenue. A European committee led by Fritz Neumark judged the French model the simplest and most effective in a 1962 report, and directives in 1967 spread it across the young European Economic Community.
The mechanics are clever. Each business charges tax on what it sells and deducts the tax it already paid on its inputs, handing the government only the difference. By the time a product reaches a shopper, the full tax has been collected in slices along the chain. Almost every country tracks this through invoices; Japan is the exception, calculating from accounts instead.
Supporters point to enforcement. A retail sales tax is collected only at the final sale, so a shop and a customer can quietly skip it. With value-added tax, every link in the chain reports, and each business knows its buyers will claim credits, leaving a paper trail that discourages cheating. Since the total is the same however many times goods change hands, firms gain nothing by merging just to avoid tax.
Critics raise several objections. Poorer households spend more of their income, so opponents call the tax regressive; defenders counter that it is proportional, and an OECD study even found it slightly progressive. Lower rates on everyday goods can soften the burden. Paperwork is another cost, estimated in Britain at about 4 percent of the revenue raised and heavier for small firms. Fraud is a persistent weakness too: because exports carry no tax, schemes known as carousel fraud emerged in the Benelux countries during the 1970s and later hit Britain hard. Rate cuts can matter as well. When Sweden halved the tax on restaurant meals from 25 to 12 percent, about 11,000 jobs followed.
Source: Value-added tax
