What's the Difference Between VAT and Income Tax in the US? In-Depth Analysis!

Do you know the difference between value-added tax VAT and income tax in the United States? A deep analysis reveals the truth!

In the United States, the tax system is a major source of national revenue and an important economic burden for both individuals and businesses. Among various types of taxes, value-added tax VAT and income tax are the most common. Although both are ways to raise funds, they differ significantly in terms of collection methods, scope of application, and economic impact.

First, it is important to clarify that the United States does not have a unified VAT system like many other countries. This is in sharp contrast to countries such as the European Union, China, and Japan. In these countries, VAT is a broad-based tax on goods and services, and almost every product is taxed once during production and sale. However, the U.S. has not adopted this model and instead relies mainly on sales tax.

According to a 2025 report by the Tax Foundation, sales tax is widely collected across U.S. states, with rates ranging from 0% to 7.25%. Some states also exempt certain items such as food, medicine, or books from sales tax. Additionally, some cities and counties impose their own additional sales taxes, making the overall tax rate more complex. For example, New York City has a combined sales tax rate of 8.875%, while Nevada has no state-level sales tax, only local ones.

In contrast, income tax is one of the most important sources of federal revenue in the United States. It includes individual income tax and corporate income tax. Individual income tax is levied on personal earnings, with tax rates varying based on income levels, ranging from 10% to 37%. Corporate income tax is imposed on company profits, currently at a federal rate of 21%.

According to data from the Internal Revenue Service IRS in 2025, individual income tax accounts for about 46% of federal tax revenue, while corporate income tax contributes approximately 7%. This indicates that the U.S. tax system relies more on individual income than on corporate profits.

Why doesn’t the U.S. implement a VAT? One important reason is its complex tax structure. The U.S. is a federal system, with most tax powers concentrated at the state and local levels. Each state has the authority to decide whether to impose a sales tax and set its rate, making it difficult to establish a nationwide VAT. American taxpayers generally have low tolerance for increased consumption taxes, believing they would place a heavier burden on low-income groups.

Additionally, U.S. tax policies are influenced by various factors. In recent years, discussions about introducing a VAT have occasionally emerged. For example, in 2025, the U.S. president proposed a tax reform plan that included raising tax rates on high-income individuals and large corporations, but did not involve the introduction of VAT. This proposal faced strong opposition in Congress and ultimately failed to pass.

Beyond the tax system itself, the U.S. economic structure also plays a role in shaping its tax model. The U.S. economy is primarily service-oriented, whereas VAT typically applies to manufacturing and retail sectors. Even if VAT were introduced, its contribution to overall tax revenue might not be significant.

However, with the development of the digital economy, traditional tax systems face new challenges. For instance, the rise of e-commerce has made the collection of traditional sales tax more complicated. To address this, U.S. states have strengthened regulation of online sales and pushed for legislation on internet sales tax. In 2025, the U.S. Supreme Court ruled that states have the right to tax remote sales, providing a legal basis for states to expand their tax base.

The U.S. VAT and income tax differ significantly in function, scope, and collection methods. Although the U.S. does not have a unified VAT system, sales tax exists widely across states, while income tax remains the main source of federal revenue. In the future, as the economic environment changes, U.S. tax policies may continue to adjust to adapt to new economic realities.

For ordinary taxpayers, understanding the differences between these two taxes can help better plan personal finances and investment strategies. At the same time, it reminds us that taxation is not only a tool for raising funds but also an important means of regulating the economy and promoting social equity.