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 proportionally greater part of their income than people with a high income.

BrE: petrol; AmE: gasoline

Non-payment of tax

To reduce the amount of income tax that employees have to 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 lead to big penalties.

IV. Answer the questions

1. How do governments finance their expenditure?

2. What are the kinds of direct taxes?

3. What do indirect taxes include?

4. What are the ways of non-payment of tax?

5. What is the difference between tax avoidance and tax evasion?

V. What are the standard names for the tax or taxes paid on the following? Look at the texts to help you

1. alcoholic drinks and tobacco products

2. company profits

3. goods bought in stores

4. money received from relatives after their death

5. salaries and wages

6. goods made in other countries

7. money made by selling stocks at a profit

VI. Find words in the texts with the following meanings

1. an adjective describing taxes on revenue or income

2. a tax that has one rate that is the same for everybody

3. money paid by the government to sick and unemployed people

4. a tax that has a higher rate for taxpayers with a higher income

5. an adjective describing taxes on consumption or spending

VII. Are the following statements true of false? Find reasons for your answers

1. Capital gains are generally taxed at a higher rate than income.

2. The same sum of money can be taxed more than once.

3. Sales taxes can be both proportional and progressive at the same time.

4. Excise duties are extra sales taxes on selected products.

5. Many international companies have their registered headquarters in small countries where they do only a small proportion of their business.

6. Employees will generally pay less tax if their employer reduces their salary a little and provides them with a car.

7. Tax avoidance is illegal.

8. Perks and loopholes are forms of tax evasion.