how an indirect tax works
in contrast to direct taxes indirect taxes are taxation on an individual or entity which is ultimately paid for by another person the body that collects the tax will then remit it to the government with direct taxes the person immediately paying the tax is the person that the government is seeking to tax 1excise duties on fuel liquor and cigarettes are all considered examples of indirect taxes 2 by contrast income tax is the clearest example of a direct tax since the person earning the income is the one immediately paying the tax admission fees to a national park are another example of direct taxation some indirect taxes are also referred to as consumption taxes such as a value added tax vat 2regressive nature of an indirect taxindirect taxes are commonly used and imposed by the government to generate revenue they are essentially fees that are levied equally upon taxpayers no matter your income so rich or poor everyone has to pay them but many consider them to be regressive taxes as they can bear a heavy burden on people with lower incomes who end up paying the same amount of tax as those who make a higher income 3for example the import duty on a television from japan will be the same amount no matter the income of the consumer purchasing the television 4 and because this levy has nothing to do with a person s income that means someone who earns 25 000 a year will have to pay the same duty on the same television as someone who earns 150 000 there are also concerns that indirect taxes can be used to further a particular government policy by taxing certain industries and not others some economists argue that indirect taxes lead to an inefficient marketplace and alter market prices from their equilibrium price 5common indirect taxesthe most common example of an indirect tax is import duties the duty is paid by the importer of a good at the time it enters the country if the importer goes on to resell the good to a consumer the cost of the duty in effect is included in the price that the consumer pays the consumer is likely to be unaware of this but they will be indirectly paying the import duty 4essentially any taxes or fees imposed by the government at the manufacturing or production level is an indirect tax 6 in recent years many countries have imposed fees on carbon emissions to manufacturers these are indirect taxes since their costs are passed along to consumers 7sales taxes can be direct or indirect if they are imposed only on the final supply to a consumer they are direct if they are imposed as value added taxes vats along the production process then they are indirect 2