What does a value-added tax (VAT) apply to?

A value-added tax (VAT) is designed to be applied at each stage of production and distribution, specifically targeting the increase in value that occurs at each stage. It is levied on the difference between the cost of goods sold and the price at which they are sold, meaning that businesses collect VAT on their sales and receive credits for the VAT they pay on their purchases of goods or services. This mechanism ensures that the tax is applied incrementally, reflecting the value added at each step in the production process.

In contrast to the other choices, which either pertain to different aspects of taxation or do not relate to the mechanism of value addition in the production process, VAT specifically targets the increase in value as goods move through various stages from production to the final consumer. This differentiates it from taxes on profits, individual income, or financial securities.