Indirect taxes, sometimes called hidden taxes, are taxes paid without the apparent knowledge of the taxpayer. Governments need taxes to generate revenue and maintain the economy. Also, the IRS is responsible for federal and state taxation. As a result, every law-abiding citizen must pay taxes. However, you are often unaware of indirect taxes as a consumer. So, this blog post will enlighten you on indirect taxes, how they work and how they affect consumers. So read on to learn more.
What are indirect taxes?
They are taxes you pay on consumer goods and services that cause a price increment when you buy. While these taxes are generally standard, states with no income tax significantly depend on them for government revenue. As a result, the cost of living in states with no income taxes is usually high. For instance, Texas, the lone star state, has its residents pay a tax of 20 cents per gallon on fuel. Essentially, the manufacturer or producer already pays the tax to the government and builds in the tax into the commodity or service you buy. As a result, you indirectly pay taxes every time you buy a commodity.
Indirect taxes exist at any point along the supply chain of goods and services, from the producer to the retailer and final consumer. A typical example is a VAT where each level in the supply chain adds indirect taxes for the final consumer to pay at purchase time.
Types of indirect taxes
Indirect taxes are all around you as long as you purchase goods and services. As a result, they can take various forms. Here are a few examples of types to keep you well informed.
Excise taxes are widespread since they are associated with several consumer products. Essentially, product manufacturers pay them and then include them in the price when you buy. Although usually, you shop at a shopping mall, you pay indirect taxes eventhough you may not see it on your cash receipt. Examples of excise taxes are sin taxes, usually placed on commodities considered to have severe effects like tobacco, alcohol, and fuel because of the environment.
Value-added taxes (VAT)
Although not common in the united states, VAT is another type of indirect tax. It works through the production prices of goods and having the consumer pay the final tax upon purchase. It is pretty different from sales tax since only the consumer pays VAT.
Sales taxes are pice padding on every consumer product you pay over the counter. Examples of items that have sales taxes include household items, consumables, and other things you perhaps buy at the shopping mall.
Customs Tax or Import duties
Customs tax is the reason imported commodities are pretty pricey. The reason is that exporters pay customs tax before their products can enjoy sales in another country. As a result, when exporters pay customs tax, they add the tax to the final sales prices on the imported products, which trickle down to end-users or final consumers. Also, countries impose customs taxes and tariffs on imported products to encourage you to patronize more homemade products.
How indirect taxes work and affect consumers
Typically there are three categories of taxes in the United States: regressive, proportional and progressive taxes, each having its peculiarities. Also, these tax categories affect people differently according to their income generation rate.
Essentially, indirect taxes are regressive taxes because consumer earnings do not affect or influence them. Moreover, regressive taxes affect low-income earners in comparison to higher-income earners. As a result, you pay the same tax as any other consumer, no matter your earning capacity. Examples include VAT, sin taxes, sales taxes, excise taxes, etc.
Why do governments impose indirect taxes?
Generally, governments use indirect taxes as a behavioural modification for residents. For example, governments use sin taxes to regulate how you consume certain products believed to have grave consequences on your health or the environment. For instance, tobacco, alcohol, fuel, and other toxic or addictive substances are heavily taxed to discourage or control consumer usage.
General Benefits of Indirect taxes
Like it or not, they have some advantages, even though they seem like so much burden on citizens and state residents at first sight. While every state has the right to place indirect taxes on whatever commodity is necessary, here are a few general advantages of imposing such taxes.
Indirect Taxes are pretty discreet.
While governments are customary to impose direct income taxes on people, indirect taxes make taxation unnoticeable. As a result, it is easier for people to pay than dealing with the subtle burden of direct income taxes and filing tax documents every tax season. Additionally, independent contractors do not pay direct income taxes because they do not receive W-2 forms and their 1099 forms are not subject to direct income taxes. Therefore, indirect taxation provides a means for self-employed people to contribute to government revenue generation.
Payment and collection are easy.
Unlike direct income taxes, they do not require you to file any document. It is somewhat like automatic taxation built into the commodities you purchase as a consumer. Furthermore, it is easy for the government to collect without completing your tax forms.
It works as an excellent behaviour modifier.
Banning the supply and demand for certain harmful or high impact substances might only encourage full-scale supply on the black market and a resultant unrepentant demand from consumers. However, indirect taxes work well to modify consumer behaviours towards such discouraged or prohibited substances, eventually reducing consumption and circulation.
Indirect taxes are somewhat equalizing as it affects everyone from producers to retailers to consumers. Moreover, it creates a system for everyone to play a role in active income generation for the government. What’s more? Tax evasion is significantly controlled. However, the poor and very low-income earners are often at a disadvantage since indirect taxes don’t consider your earning capacity.
FAQS: What are the three main types of taxes in the united states?
What are the three main types of taxes in the united states?
The three main types of taxes in the united states are progressive, regressive and proportional taxes, each having an impact on individuals according to their earning capacity. While progressive taxation impacts higher-income earners and regressive taxation impacts lower-income earners, proportional taxation is neither.
What are the adverse effects of taxes?
While taxes are statutory, they can seem somewhat forceful on citizens and even disadvantageous to low-income earners. Essentially, a failure to pay direct income taxes is considered tax evasion and may result in grave consequences from the government, including jail terms. Furthermore, taxes significantly reduce ready cash for individuals, limiting their abilities to caterer to their personal needs.
Can I avoid indirect taxes?
You cannot avoid indirect taxes because you will always consume goods and services. Essentially, they are woven into the sales price you pay for every product you buy. Therefore, as long as you buy products, you must pay indirect taxes. However, the only way to avoid them is to never buy anything.