Sales Tax - The Economics of Sales Taxes

what are sales taxes

By Mike Moffatt. Economics Expert

Sales Tax - What Is It?:

The Glossary of Economics Terms defines a sales tax as a "tax levied on the sale of a good or service, which is usually proportional to the price of the good or service sold."

The second type of sales tax is a value added tax. On a value added tax (VAT), the net tax amount is the difference between the input costs and the sales price. If a retailer pays $30 for a good from a wholesaler and charges the customer $40, then the net tax is only placed on the $10 difference. VATs are used in Canada (GST), Australia (GST) and all member countries of the European Union (EU VAT).

Sales Tax - What Advantages Do Sales Taxes Have?:

The biggest advantage to sales taxes are how economically efficient they are in collecting a single dollar of revenue for the government - that is, they have the smallest negative

impact on the economy per dollar collected.

In an article about taxation in Canada a 2002 Fraser Institute study was cited on the "marginal efficiency cost" of various taxes in Canada. They found that per dollar collected, corporate income taxes did $1.55 in damage to the economy. Income taxes were somewhat more efficient in only doing $0.56 worth of damage per dollar collected. Sales taxes, however, came out on top with only $0.17 in economic damage per dollar collected.

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The biggest drawback to sales taxes, in the eyes of many, are that they are a regressive tax - A tax on income in which the proportion of tax paid relative to income decreases as income increases. In Are Sales Taxes More Regressive Than Income Taxes? we saw that the regressivity problem can be overcome, if desired, through the use of rebate cheques and tax exemptions on necessities. The Canadian GST uses both of these mechanisms to reduce the regressivity tax.

Source: economics.about.com

Category: Taxes

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