Indirect tax facts for kids
An indirect tax is a special kind of tax that you pay without even realizing it directly. It's usually added to the price of things you buy, like a bottle of soda or a new video game. When you buy these items, the tax is already included in the price. The shop then collects this tax and pays it to the government.
This is different from a direct tax, which is something you pay directly to the government, like income tax from your paycheck. With an indirect tax, the tax is "hidden" in the price of goods and services.
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What is an Indirect Tax?
An indirect tax is a tax on goods and services, not on a person's income or wealth. Imagine you buy a candy bar. A small part of the price you pay for that candy bar might be an indirect tax. The company that made the candy bar, or the shop that sold it, collects this tax from you and then sends it to the government.
How Indirect Taxes Work
When a company sells a product, like a car or a phone, they add the indirect tax to the price. So, when you buy it, you're paying the tax as part of the total cost. The company then gives that tax money to the government. It's called "indirect" because you don't send the money directly to the government yourself.
Examples of Indirect Taxes
Many countries use indirect taxes on common items. Here are a few examples:
- Gasoline: When you fill up a car with gasoline, part of the price per gallon or liter is an indirect tax. This tax helps fund things like roads and public transport.
- Cigarettes: There's often a high indirect tax on cigarettes. This makes them more expensive and can discourage people from smoking.
- Sales Tax: In some places, when you buy almost anything from a store, a sales tax is added at the checkout. This is a common type of indirect tax.
- Value Added Tax (VAT): Many countries in Europe and elsewhere use VAT. This tax is added at each stage of a product's journey, from when it's made to when it's sold in a shop.
Why Governments Use Indirect Taxes
Governments use indirect taxes to collect money for public services. This money helps pay for schools, hospitals, roads, and many other things that benefit everyone. Indirect taxes are often easier to collect than direct taxes because they are built into the price of goods.
Benefits of Indirect Taxes
- Easy to Collect: Businesses collect the tax when they sell products, making it simpler for the government.
- Broad Reach: Almost everyone buys goods and services, so many people contribute to these taxes.
- Can Influence Behavior: High taxes on certain items, like sugary drinks or tobacco, can encourage people to buy less of them.
Differences from Direct Taxes
The main difference is who pays the tax directly.
- Indirect Tax: Paid by the consumer as part of the price of goods and services. The business collects it.
- Direct Tax: Paid directly by individuals or companies to the government, based on their income or profits.
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Trends in Tax Structures in OECD Countries
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Tax structure per OECD country in 2018.
