The Emanuel/Fuchs voucher plan (which I owe you guys my second post on) is funded by a value added tax, and in comments yesterday, Scott asked for an explanation of how such a tax works. I vaguely remembered writing such a post awhile back, and indeed I did! But looking back, it's confusingly written. I think I can do better.A VAT is a sales tax, but rather than being collected only from the consumer, it's collected at each step in the production process. The Congressional Research Service -- which has a nice backgrounder document on the tax (pdf) -- offers up this chart, which will help illustrate the next paragraph:
Alright, so we're making widgets. And our widget has four stops before it gets to the consumer. There's the transformation of raw materials into usable form. Producer does that, and sells the resulting product to Manufacturer for $200. Manufacturer takes those materials and transforms them into a delightful widget, selling the widget to Wholesaler for $500. Wholesaler does whatever it is that Wholesalers do, marks our increasingly road-weary widget up to $750, and sells it to Retailer. And Retailer, finally, jacks it up to $1,000 and sells it to you.Now imagine a 10 percent value added tax. At each step, these companies will pay a 10 percent tax on the difference between what they bought and what they sold -- in other words, the "value" they added to the product. So for Producer, they started with 0, and sold a product for $200. 10 percent of $200 is $20, so they pay $20. Manufacturer bought for $200 but sold for $500. The difference there is $300, so they pay 10 percent of $300, which is $30. The wholesaler tacked on another $250 to the total cost, so they pay $25, and so on.
Alright, so we're making widgets. And our widget has four stops before it gets to the consumer. There's the transformation of raw materials into usable form. Producer does that, and sells the resulting product to Manufacturer for $200. Manufacturer takes those materials and transforms them into a delightful widget, selling the widget to Wholesaler for $500. Wholesaler does whatever it is that Wholesalers do, marks our increasingly road-weary widget up to $750, and sells it to Retailer. And Retailer, finally, jacks it up to $1,000 and sells it to you.Now imagine a 10 percent value added tax. At each step, these companies will pay a 10 percent tax on the difference between what they bought and what they sold -- in other words, the "value" they added to the product. So for Producer, they started with 0, and sold a product for $200. 10 percent of $200 is $20, so they pay $20. Manufacturer bought for $200 but sold for $500. The difference there is $300, so they pay 10 percent of $300, which is $30. The wholesaler tacked on another $250 to the total cost, so they pay $25, and so on. 
