Indirect Tax

What Is an Indirect Tax?

An indirect tax is imposed on one person or group, like manufacturers, then shifted to a different payer, usually the consumer. Unlike direct taxes, indirect taxes are levied on goods and services, not individual payers, and collected by the retailer or manufacturer. Sales and Value-Added Taxes (VATs) are two examples of indirect taxes.

Examples of an Indirect Tax:

Indirect taxes include:

Indirect Taxes and Sound Tax Policy

Tax Foundation’s Principles of Sound Tax Policy are simplicity, transparency, neutrality, and stability. These principles should serve as touchstones for policymakers and taxpayers everywhere.

Indirect taxes are generally simple, both for the government to levy and collect since they are applied broadly and automatically included in purchases. This does not mean that these taxes are transparent. Gross receipts taxes lead to tax pyramiding, while sales taxes are clearly marked on invoices and receipts.

Indirect taxes, like value-added taxes (VAT) and retail sales taxes, can be neutral because they have little effect on consumer behavior and apply to all business models the same. Indirect taxes like excise taxes are not neutral because they target specific industries and activities, like cigarettes and alcohol.

All tax revenue is subject to economic cycles and changing taxpayer behavior, but indirect taxes, like broad-based consumption taxes, are more stable than taxes that target a narrow tax base, such as cigarette smokers.

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