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The president says the VAT system used across Europe gives other countries unfair trade advantages. Here’s how the system started.
Feb. 14, 2025Updated 2:11 p.m. ET
President Trump on Thursday ordered his advisers to determine new tariff rates on America’s trading partners, a move that he said would “correct longstanding imbalances in international trade.”
As part of his plan, Mr. Trump has taken aim at the value-added tax, a system used widely in Europe and elsewhere to tax the consumption of goods and services. The president and his team describe the tax as giving other countries an unfair trade advantage over the United States.
Here’s what to know.
What is a value-added tax?
It’s a consumption tax that adds tax on a good or service at each stage of production. The final VAT is the sum of the tax paid at each stage. This system is unlike a sales tax in the United States, which is imposed by states on the final sale of the good.
In Europe, VAT rates vary by country, but on average are about 20 percent — far higher than state sales taxes in the United States, which averaged 6.6 percent in 2023, according to the Tax Foundation.
Value-added taxes accumulate through the various stages and are eventually paid by consumers if the good is sold in the country in which it was made.
But if the goods are exported, much of the value-added taxes are given back to the exporter as a rebate. That provides an incentive for businesses to export goods instead of selling in their home market.
