How does an indirect tax work?

In contrast to direct tax, indirect tax is levied against a person or thing but is paid for by someone else. The group that receives the tax will send it to the government. When the government wants to tax someone directly, that person is the one who pays the tax right away.

Some examples of indirect taxes are the excise fees on cigarettes, alcohol, and gas.

Note

A value-added tax (VAT) is an example of an indirect tax, also known as a spending tax.

The fact that an indirect tax is regressive

The government often uses and imposes indirect taxes to bring in money. No matter how much money you make, you must pay these taxes. There are fees that everyone has to pay.

However, many people think these taxes are unfair because they make people with lower incomes pay the same tax as people with higher incomes.

For example, the import tax on a TV from Japan will be the same for everyone, no matter how much money they make. This tax doesn’t depend on how much money someone makes, so someone making $25,000 a year will have to pay the same tax on the same TV as someone making $150,000 a year.

Concerns have also been raised that specific industries may be taxed more than others to support a particular government strategy.

Note

Some experts say indirect taxes make the market less efficient and change prices from where they should be.

Everyday Indirect Taxes

Most of the time, import fees are an example of an indirect tax. When an item comes into the country, the person who brought it in pays the tax. The tax cost is built into the buyer’s price if the importer sells the good to another person. Most people won’t know this, but they will pay the import fee roundaboutly.

An indirect tax is any tax or fee that the government charges at the level of production or industry. Carbon emissions fees have been put on producers in many countries over the past few years. People who buy things pay for these taxes, called secondary taxes.

The way sales taxes work can be straight or indirect. If they only apply to the last sale to a customer, they are called direct. They are indirect if added to the cost of goods as value-added taxes (VATs).

In the United States, what are indirect taxes?

People in the U.S. pay indirect taxes like sales taxes, which are not paid directly to the government but to a company that does pay taxes to the government. Also, things that come into the U.S. are taxed when they come in. There is no sales tax in the United States.

How do businesses make up for the taxes they have to pay?

When there is a sales tax, businesses may raise the prices of the things they buy to make up for the money they lose on taxes.

Why do we have value-added taxes (VATs)?

Value-added taxes, or VATs, are extra fees that are added to the price of a product as it is being made. That cost can be taken away at the next step in the process. The VAT is not taken out of the price the customer pays for the item, so the customer is the one who pays the tax.

Conclusion

• People who buy things or use services pay taxes that aren’t directly on those goods or services. They are not charged to a person or a business. You will always have to pay the same indirect sales tax when you buy something, no matter how much money you make.