Posts Tagged ‘tax incidence’

Hidden taxes?

Wednesday, September 23rd, 2009

You wouldn’t think you could pay taxes without knowing it, but it actually happens all the time. So-called hidden taxes are taxes on goods and services that you, the consumer, end up paying for. They’re taxes that are charged before the product or service can be purchased, and the seller just adjusts for the tax by hiking up his or her prices. So the government gets the tax money, the seller fixes things so he or she can turn the same profit, and the consumer faces a bigger price tag in the end.

You aren’t aware of hidden taxes because they’re indirect – they can take the form of import or export taxes, sales tax, excise duties, value added tax, and more. What’s more, indirect taxes can be a sneaky way for government officials to raise revenue: if they raise, say, income taxes, everyone notices and complains, but if they raise indirect taxes, people still end up paying more, but it tends to slip under their radar.

However, some people don’t like this practice because they argue indirect taxes aren’t progressive – that is, they don’t take ability-to-pay into account the way income taxes do. If prices for consumer goods go up, that price hike is usually small change for the very rich, but for less wealthy individuals, a price increase on goods they need can make a sizable dent in their budget. For example, an added standard import tax on coffee impacts everyone who drinks coffee, rich or poor. So even though indirect taxes aren’t illegal or even truly hidden (the sellers who have to pay them can certainly see them), some people still consider them a way to increase their tax burden behind their backs.

Tax Incidence is…

Thursday, July 30th, 2009

Tax incidence is an economics concept that describes how the burden of paying a tax on a good is shared – the burden can fall on the buyer, the seller, or both. Taxes on retail goods are an example where the tax burden falls on both the buyer and the seller. Often, tax incidence can mean who ends up paying the tax. If consumers are paying the entire tax, then the tax incidence falls on them.

What’s the idea behind taxing the rich more versus less?

Friday, July 17th, 2009

It might seem fair to make everyone pay the same percentage of their income in taxes. That way, the rich pay more money than the poor do, but everyone keeps the same fraction of their money to use however they wish. Then why does the government make you pay a higher percentage the more money you make? Don’t the rich contribute enough as it is?

In the U.S., we have what’s called a progressive income tax, which means you get taxed at a higher rate the more money you have available for taxation. The reason we have a progressive income tax, even though a proportional tax (where everyone gets taxed at the same percentage) might seem fairer, is because a progressive tax reduces the tax incidence of people with lower ability-to-pay.

What does this mean? Tax incidence “falls” on the group that ends up bearing the brunt of taxation. Usually, tax incidence falls on those with less money (the amount they have to pay in taxes more drastically affects their standard of living). You could take away half of Bill Gates’ or Warren Buffet’s money, and they’d still be amazingly rich, but if you took away half the income of the average worker, his ability to live comfortably – even just to pay all his bills – would be seriously affected. Our economy has made some people incredibly well-off, so we ask them to give more back because they can more easily afford to part with it.