Why Do Governments Impose Indirect Taxes

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Unlike direct taxes, which require the creation of documents and a submission, indirect taxes are paid at the time a consumer buys a product. The tax is levied by the supplier and paid to the government. Some indirect taxes are considered regressive, including excise duties. Tobacco taxes are the most regressive because smoking (cigarettes) is higher among people with low annual household income than among people with higher annual household income. The United States faces particular challenges. For the United States, the bulk of its own excise tax is the sale of products to a single package. To keep up with the rapid development of the Internet economy, many state and federal governments have successfully passed laws requiring “distance sellers” (suppliers who sell taxable goods to customers in other states) to collect and remit taxes in all states. The recent trend is to apply sales and use taxes to commercial intangible assets (remote access to electronic delivery software, digital music and books). Similarly, the processing of designated IT services, including data processing, cloud computing and information services, continues to be reviewed by national legislators. Many States have announced that they are considering expanding distribution to cover a wider range of service transactions.

Most notably, California lawmakers announced in late 2014 that they would tax nearly all service transactions in the country (with the exception of health care and education services) to offset the reduced income tax rate. Of course, if you want these measures to be successful, it depends on the situation. When we buy a new TV for £300, the indirect tax is not immediately visible, we only see the final sale price. It is the company that sells the property that is responsible for collecting the tax and paying it to the government. Indirect taxes are generally easy to collect and collect both for the government because they have a general basis and are automatically included in purchases. This does not mean that these taxes are transparent. Gross income taxes result in a tax pyramid, while sales taxes are clearly indicated on invoices and receipts. In the aftermath of the financial crisis, governments in many countries still have high financing needs.

From financing the stimulus package to gradually closing the financing gap caused by the economic shock, indirect taxes have proven to be the first choice for revenue generation for many years to come. The large number of proponents of the shift from direct to indirect taxes may explain this trend, such as the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD) and the European Commission. Some international studies have shown that value-added tax (VAT) has the least impact on economic growth, while corporate tax has a negative impact on economic growth. This article provides examples of indirect taxes and explains how they differ from direct taxes. An indirect tax is imposed on a person or group, such as manufacturers, and then transferred to another payer, usually the consumer. Unlike direct taxes, indirect taxes are levied on goods and services, not on individual payers, and are levied by the retailer or manufacturer. Value added tax and value added tax (VAT) are two examples of indirect taxes. Indirect taxes have significant regressive effects on income distribution, as indirect taxes are generally levied on goods and services independently of the consumer`s income. In practice, the effective indirect tax rate is higher for low-income individuals, meaning that a low-income person spends a higher proportion of their income on a good or service than a higher-income person. For example, consider a property with a sales tax of $100.

A person with an income of $10,000 pays 1% of his income in taxes, while a poorer person with an income of $5,000 pays 2% of his income. In addition, the regressivity of the indirect tax system affects the overall progressivity of countries` tax systems, as indirect tax revenues are significant in the State budget, and the degree of regressivity of the indirect tax system, which varies from country to country. [10] In addition, the extent to which an indirect tax is regressive depends on the type of indirect tax. Empirical evidence suggests that excise duties are generally more regressive than VAT. This could be due to the fact that excise duties are levied on products such as alcohol and tobacco, and that these products represent a higher proportion of households in the poorest households, while at the same time poorer households are likely to consume goods with reduced VAT rates, because in some countries there is a VAT deduction for basic necessities such as food and medicines. [11] Due to the regressive nature of indirect taxes and the fact that they tend not to respond to economic conditions, they cannot act as automatic stabilisers within the economy, unlike some direct taxes. [12] Excise duties are indirect taxes that businesses must pay when selling products or carrying on commercial activities that may be subject to these taxes. Compliance with federal excise tax requirements means reporting your excise tax obligation on IRS Form 720, the quarterly federal excise tax return, and making payments to the tax base. There is also concern that indirect taxes could be used to promote certain government policies by taxing some industries and not others. For this reason, some economists argue that indirect taxes lead to an inefficient market and change market prices relative to their equilibrium price. Indirect taxes account for a significant share of the State`s total tax revenue.

Data published by the OECD show that the average share of indirect taxes in total tax revenue for all Member States in 2018 was 32.7%, with a standard deviation of 7.9%. The member country with the highest share was Chile with 53.2% and at the other end the United States with 17.6%. [5] The general evolution of the ratio of direct and indirect taxes to total tax revenues in recent decades in developed countries shows an increase in the share of direct taxes in total tax revenues. Although this trend can also be observed in developing countries, it is less pronounced than in developed countries. [6] The increase in indirect tax revenues is due to the truly global upward trend in excise taxes. Excise duties on tobacco will increase in many countries, including Denmark, Ecuador, Finland, Ghana, Malta, Ireland, the Netherlands, Norway, Russia, Slovenia, Sweden and Tanzania. The countries that have increased the consumption tax on alcohol are Lithuania, Norway and Tanzania. In addition, excise duties increased in China, Estonia, Finland, Gambia, Hungary, Norway and Russia. Not only is the tax rate going up, but the government is also imposing new taxes. A relatively recent trend is, for example, the imposition of excise duties on health-related products (soft drinks and tobacco), such as taxes on fast food and sugar taxes on “unhealthy” foods. In many countries, spending on health and social protection may involve taxes, and as populations age and pressures to increase public spending in these areas increase, these taxes may become more frequent.

A flat tax is a fixed amount of tax per unit sold, such as a 10p tax on cigarette packets. In contrast, an ad valorem tax is a percentage of the manufacturer`s value-added tax. Value added tax (VAT), which currently stands at 20% in the UK, is the most important value tax. VAT was reduced to 15% in 2008 as part of the government`s bailout of the economy, but rose again to 17.5% in 2010. The base rate was increased to 20% in 2011. Sales taxes can be direct or indirect. If they are only imposed on final delivery to a consumer, they are direct. If they are levied in the form of value added tax (VAT) throughout the production process, they are indirect. However, in most countries, there is no comprehensive and uniform plan for the collection of e-commerce taxes. In recent years, governments around the world have recognized that incomplete legislation has led to huge losses of tax revenue and have begun to actively implement new rules. What many people don`t know is that virtually everyone pays taxes, especially indirect taxes. Indeed, taxes are levied on almost every product we consume.

Here are some of the types of indirect taxes. In addition to playing a role in increasing government revenue, indirect taxes in the form of customs duties and import duties are also used to regulate the amount of imports and exports entering and leaving the country. In the case of imports, by imposing tariffs, the government protects domestic producers from foreign producers who may have lower production costs and thus be able to sell their goods and services at lower prices, thus driving domestic producers out of the market. After the imposition of tariffs, imported goods will become more expensive for domestic consumers, so domestic producers will be better off than before tariffs were imposed. Import duties are a type of indirect tax because they are levied on goods when they enter the country. The customer ultimately pays this tax in the form of a premium price for the goods. Tariffs are imposed by countries on each other`s goods to give local products a price advantage, and they are usually administered through trade agreements between countries. Indirect taxes such as value-added tax (VAT) and retail sales taxes can be neutral because they have little impact on consumer behavior and apply equally to all business models.