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Chapter 16 - Taxes on goods and services
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Taxes on goods and services
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CHAPTER 16Taxes on goods and services
Indirect taxes
Taxes on commodities and market transactions = indirect taxes.
A characteristic of indirect taxes → likely be shifted.
Indirect taxes → do not have to be collected once off → can be imposed in
stages.
o Collected once off → single-stage commodity tax.
o Collected more than once → multi-stage commodity tax (e.g VAT)
E.g. VAT → levied at different stages of the production process →
starting at the resource stage when raw materials are procured from
say mining or farming → manufacturing, when the next stage of the
tax is levied → wholesale and retail stages.
Indirect taxes may be:
o Selective or narrow-based → excise tax, customs duties
o General or broad-based → VAT when there are no exemptions and zero-
rating → a turnover tax or a general sales tax.
o Excise duties → selective taxes levied on specific goods and transactions
→ levied on domestic or imported goods (tariffs or customs duties if levied
on imported goods)
Specific or unit taxes, or ad valorem taxes (percentage of value)
VAT without exemptions and zero-ratings is broad and general and
the excise taxes are the opposite (highly selective.)
Introduce plenty of exemptions and zero-ratings to VAT →
becomes increasingly less broad and more selective → VAT
increasingly resembles an excise tax → sliding away from
broad tax towards selective tax.
o Sumptuary/sin tax → selective excise tax imposed to reduce consumption
of certain good (carbon taxes, tax on tobacco and liquor, sugar tax.)
, Critical assessment of indirect taxed:
Merits of indirect taxes
o Practical way to raise revenue from people who may otherwise be outside
of the tax net → relies on the principle that everyone that benefits from
government services should contribute at least something → conforms to
the benefit principle.
o Included in the prices we pay → tax is invisible → called fiscal illusion
(when people pay taxes they are unaware of)
These taxes are less likely to experience tax resistance.
Downside to that is that these taxes are also not transparent
as good governance principles would require.
o Unlike direct taxes, these taxes can be avoided by the taxpayer by not
transacting for the taxed commodity, or by substituting a non-taxed
commodity for the taxed one.
Taxpayer has a degree of control over indirect tax liability.
However, VAT on necessities for instance cannot be avoided
altogether.
o Indirect taxes → used to achieve multiple policy objectives through high
sumptuary taxes on carbon emissions, tobacco and liquor → even through
excise taxes on luxury, capital-intensive goods shift production towards
labour-intensive necessities.
o Ad valorem taxes are automatically indexed for inflation.
o Simple to administer.
o Consumers have limited scope to evade these taxes and compliance is →
easier to enforce.
Disadvantages of indirect taxes
o Broad-based = efficient and raise adequate revenue while adhering to the
benefit principle of fairness
Can violate the ability to pay notion of fairness → regressive.
Exemptions and zero-ratings in our VAT system → makes our VAT
no longer a general tax → introduce selectivity and non-neutralities
= efficiency considerations are at stake.
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