Indirect taxes

Indirect taxes are levied on the production or sale of goods and services. They are included in the price paid by the final purchaser.

· In most European countries, companies pay VAT or value-added tax, which is levied at each stage of production, based on the value added to the product at that stage. The whole amount is added to the final price paid by the consumer. In Canada, Australia, New Zealand and Singapore, this tax is called goods and services tax or GST.

· In the USA, there are sales taxes, collected by retailers, levied on the retail price of goods.

· Governments also levy excise taxes or excise duties – additional sales taxes on commodities like tobacco products, alcoholic drinks and petrol.

· Special taxes, called tariffs, are often charged on goods imported from abroad.

Income tax for individuals is usually progressive: people with higher incomes pay a higher rate of tax (and therefore a higher percentage of their income) than people with lower incomes. Indirect taxes such as sales tax and VAT are called proportional taxes, imposed at a fixed rate. But indirect taxes are actually regressive: people with a low income pay a proportially greater part of their income than people with a high income.

Non-payment of tax

To reduce the amount of income that employees have pay, some employers give their staff advantages instead of taxable money, called perks, such as company cars and free health insurance.

Multinational companies often register their head offices in tax havens – small countries where income taxes for foreign companies are low, such as Liechtenstein, Monaco, the Cayman Islands, and the Bahamas.

Using legal methods to minimize your tax burden – the amount of tax you have to pay – is called tax avoidance. This often involves using loopholes – ways of getting around the law, because of an error or a technicality in the law itself. Using illegal methods – such as not declaring your income, or reporting it inaccurately – is called tax evasion, and can lead to big penalties.

Exercise 2.3 Match the words with their meanings: