Sales tax

From Academic Kids

A sales tax is a tax on consumption. It is normally a certain percentage that is added onto the price of a good or service that is purchased.

Ideally a sales tax is charged exactly once on any one item. A conventional or retail sales tax attempts to achieve this by charging the tax only on retail transactions, not on businesses buying raw materials for production or finished goods for resale. This prevents so-called tax "cascading," in which an item is taxed more than once as it makes its way from production to final retail sale. A related type of tax is the value-added tax, or VAT. It is a system in which all businesses remit taxes on their sales, but they are also refunded the amount of VAT remitted by their suppliers. In addition to avoiding cascading, under VAT there is no need for government to determine which sales are taxable and which are not, since all sales--retail and wholesale--are taxed.

Most countries in the world have sales taxes or value-added taxes at either the national or local level. Countries in western Europe, especially in Scandinavia have some of the world's highest valued-added taxes. Denmark, Sweden and Hungary have the highest VATs at 25% although reduced rates are sometimes used. In some countries, there are multiple levels of government which each impose a sales tax. For example, sales tax in Chicago is 8.75%, consisting of 5% state, 2% city, 0.75% county and 1% regional transportation authority.

Sales taxes are generally regressive, that is, poorer people tend to pay a greater percentage of their income in sales tax than richer people, because they tend to spend a far higher percentage of their income. In some locations, items such as food, clothing, or prescription drugs are exempt from sales taxes ostensibly to alleviate the burden on the poor. Some of these exemptions (such as exemptions for clothing or prescription drugs) actually may make the tax more regressive, since poorer individuals may spend a smaller percentage of their incomes on these items than do richer individuals.

Since the 1990s, the idea of replacing the income tax with a national sales tax has been floated in the United States; many of the actual proposals would include giving each household an annual rebate, paid in monthly installments, equivalent to the percentage of the tax (which varies from 15% to 23% in most cases) multiplied by the poverty level based on the number of persons in the household, in an effort to reduce the sales tax's inherent regressivity. Chances of such a change ever being adopted are considered remote by most American political observers.

See also

Sales taxes in Canada


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