1Running Head: SALES TAX Title Author’s Name Institutional Affiliation
2SALES TAX IntroductionDefinition Tax, is a fee levied by an authority of a particular place, to the inhabitants of thatgeographical region. Tax is normally settled in monetary terms, though in some circumstances, itmay be settled in terms of labour, paid labour. It is worth noting that taxes are not paid byvolition of the people or corporations in which it has been imposed, but rather, it is a mandatoryfinancial burden, such that failure to pay is a criminal offence, punishable by law.Tax rate Taxes are usually expressed as a percentage, and this percentage charged is referred to asthe tax rate. This percentage may be charged on the personal income of an individual, the incomeof a corporation, goods imported, goods sold to final consumers, manufactured goods, in roads(toll stations), and in many other forms and places. This rate will vary with varyingadministrators of the tax. Two expressions used when talking about tax rate are, the effectiverate, and the marginal rate. The effective rate is the fraction of the total amount of the tax paid, tothe total amount that the tax rate is applied. The marginal rate, is the tax rate that is paid on theadditional one unit of the currency being used, say the dollar.Purpose of taxation Governments will impose taxes because of various purposes; to raise money to meet itsbudget, to finance wars in which the government is involved in, to try and discourage sometrends or externalities, for example, cigarette tax is imposed to discourage smoking while carbontax is imposed to discourage pollution of the environment. Some taxes are imposed to protectdomestic industries from competition, and this practice is most common in less developed and
3SALES TAXdeveloping economies. The money raised from taxation may be used for development projects inthe country, as well as settling of the external debt, also in the funding of the welfare of thesociety, and recreational facilities. The purpose of taxation can therefore be classified in fourmain categories; revenue, where taxes are imposed to raise money for the government,redistribution, where the government attempts to transfer wealth from the haves, to the have-nots, in the society. Reprising, which is done to try and discourage externalities, andrepresentation, which is historically, more of a bargain between rulers and subjects, where rulerstax the subjects, and the rulers have in turn, to be accountable to the subjects. Types of taxes There are two broad classifications of taxes: tax may be direct, or indirect. Direct taxestarget the individual traits of the tax payer, an example is the income tax. Indirect taxes areimposed as wholesome and do not target the individual characteristics of the tax payer. Thefollowing are some common kinds of taxes;Income tax This is levied on corporations and on the income of individuals. On corporations, it willbe levied on the net profits, gross profits, or other income of the corporation, and is usuallyaffected by accounting principles. Some corporations however do not pay taxes. On personalincome, income tax is charged on the gross income of the individual, as well as other incomesthe individual may raise. It is paid at the conclusion of the year, or financial year for the case ofcorporations. Some individuals may overpay, and thus may be a refunded by the government, atthe end of the year.
4SALES TAXThere are many other taxes imposed on various sources of income for different groups andcorporations; social security contributions, capital gains tax, taxes on property, tax on payroll,inheritance tax, expatriations tax, transfer tax and wealth tax. There are also taxes on goods andservices, and this include value added tax (VAT ), and sales tax.Value added tax (VAT ) This is one form of taxes on goods and services. This is imposed on every level ofproduction, through to distribution to the final consumer, where value is added to the product orservice. An example may be that of a manufacturer who imports raw materials for his business,he will then pay the value added tax on his purchase price, and give that amount to thegovernment. He will then convert the raw materials into some product, which he will sell to adistributor, or a consumer of his product, which may be another manufacturer. This, he will sellat a higher price, and collect the VAT on that sale. He will, however, remit to the government, anamount that is only the excess of his cost price, thus, only the amount related to the value added,before selling his product. This process will continue upto the final retail consumer, who will beunable to recover his amount of VAT paid. SALES TAX Sales tax is a kind of tax that is paid by a consumer of goods, at the point of purchase ofthe goods, or service. Sales tax is usually put as a separate line item at the base of the receipt ofpurchase that one has made, and is determined by subjecting purchases to a certain percentage,authorized by the relevant tax authority, or the tax laws of the administering authority, to thetotal price of the taxable goods or services purchased by the consumer. The administeringauthority may also determine whether the sales tax is included in the price of the commodity or
5SALES TAXservice, or is calculated separately after the commodity or service has been purchased. The salestax will then be collected from the buyer, by the seller, who will then remit the amount to therelevant tax administration authority. Sales tax is most effectively administered than other formsof taxes, because it is difficult to evade, it is easily calculated, and it is easy to collect. Sales tax is thought to have been started as early as 2000BC, if the depictions on thewalls of Egyptian tombs, is anything to be believed. In Greece, sales tax is reported to have beenpaid on the sale of 16 slaves, in 415BC. The roman emperor, Augustus, also collected sales tax,at around 6AD, which was to be used to fund his army. This tax was later abolished by Caliglus.In the United States of America, the earliest form of tax was in 1791, although it was not ageneral sales tax. This was an excise tax, imposed on whiskey. This was so unpopular, and itthus gave rise to the whiskey rebellion, in 1794. In the 19th century, the United States enactedexcise taxes on so many commodities that it appeared as though it was charging sales tax. In1930, Kentucky and Mississippi enacted the first general sales taxes, and soon after, many otherstates followed suit. Most recently, the health care Act of 2010 selectively imposed a 10% salestax on indoor tanning services. SALES TAX AND ELASTICITY OF DEMAND AND SUPPLY Elasticity is the amount by which quantity demanded, responds to changes in the factorsaffecting. The most common looked at factors in this regard are; price, closely related goods, andincome. Elasticity of demand, is therefore the amount by which quantity demanded, reacts to achange in price of the commodity. Elasticity of supply on the other hand, is the amount by whichquantity supplied, responds to the change in the price of the commodity. The effect of a sales tax(one that is included in the selling price), will be to raise the price of a commodity or service.
6SALES TAXGiven that sales tax is imposed selectively, consumers may switch to other goods, and thereforemaking the sales tax ineffective in raising revenue for the administering authority. The same mayapply on the part of producers. The term used to describe how the tax burden is shared betweenmarket participants, is tax incidence. The market participant who has the most inelastic curve,will bear the most burden.ExampleFrom the graph, the original equilibrium is at point A. The imposition of tax, say of $1 causes thesupply curve to shift to the left, thus reducing the supply. The new equilibrium is at point B,where the price is $ 2.60, and the quantity is lower than the quantity at the initial equilibrium(without tax). The supplier thus receives $1.60. This means that he pays a tax of $40 cents, andthe consumers bear the rest, $60 cents. Triangle ABC represents the dead weight loss as a resultof imposition of the tax. The formula used to calculate the tax burden that is borne by either thesupplier or the consumer, is called the pass-through fraction, which for consumers is calculatedas follows:
7SALES TAX Pass-through fraction for consumers =For suppliers, Pass-through fraction =Where: PES- price elasticity of supply PED- Price elasticity of demand.This fraction will give the percentage of the imposed tax, which either party will bear. If thedemand curve is elastic relative to the supply curve, then the supplier will bear a large percentageof the imposed tax, and vice versa. Sales tax in CanadaCanada applies three types of sales tax. There is the provincial sales tax (PST), which is leviedby the different provinces, the goods and services tax (GST), which is levied by the federalgovernment, and the harmonized sales tax (HST), which is a combined and blended tax of thePST and GST, that is used in several provinces in Canada. A combination of these taxes may beapplied in one province, for example, GST and PST, or only one tax, for example, HST. Thegoods to which the taxes are imposed on, also vary with the different provinces, and also the taxrates applied also vary. Products subjected to sales tax in CanadaSales tax is imposed on many products in Canada. Some products are, however, zero rated, or taxexempt. Products such as groceries and milk, are zero rated, while services such as child day careservices (for less than 24 hours) are exempt. Three examples of taxable products in Canada are;soft drinks, clothing and footwear, and potato chips.
8SALES TAXSoft drinks When sales tax is imposed on all soft drinks, the consumers will bear the most burden ofthe tax. Milk is a zero rated product, yet studies still show that the demand for soft drinks isinelastic. The demand curve for soft drinks is more inelastic relative to its supply curve, andtherefore, through the pass-through fraction, consumers will bear the most burden of the tax.Clothes and footwear There is no substitute for clothes and footwear, for Canadians. The demand curve forclothes and footwear is almost perfectly inelastic. If a tax is imposed, producers will simply passthe bulk of this tax to consumers, by raising the prices.Potato chips If a sales tax is imposed on potato chips, the suppliers will bear the most burden of thetax imposed. Potato chips has so many substitutes in the snack industry, if a tax was imposed onpotato chips, consumers will shift from consuming potato chips, and move to other snacks, forexample, corn chips. Conclusion Sales tax is regarded as the most effective form of taxation, as it is easy to administer,and calculate. Some, however, say that sales tax has a regressive effect on sales. But this willclearly depend on the elasticity of the affected commodity.
9SALES TAX ReferencesBusiness Development Centre. What Is GST/ HST TAX? Retrieved from http://www.gst- tax.com/GST/About_GST_Tax.htmCanada Revenue Agency, (2011). Exempt goods and services. Retrieved from http://www.cra- arc.gc.ca/tx/bsnss/tpcs/gst-tps/gnrl/txbl/xmptgds-eng.htmlEuromonitor International, (2009). Clothing and Footwear- Canada (PDF document). Retrieved from http://www.ryerson.ca/~rmichon/mkt731/reading/Industry%20Reports/Clothing%20and %20Footwear.pdfFrank, H. R. and Bernanke, B. S. (2001). PRINCIPLES OF MICRO-ECONOMICS. London, McGraw-HillHIGHBEAM BUSINESS (2012). Potato chips, corn chips and other snacks. Retrieved from http://business.highbeam.com/industry-reports/food/potato-chips-corn-chips-similar- snacksINVESTOPEDIA, (2012). CFA Level 1- Microeconomics: Effect of Taxes on Supply and Demand. Retrieved from http://www.investopedia.com/exam-guide/cfa-level- 1/microeconomics/tax-effects.asp#axzz1nwoFlySSJay Kaplan, (2002). Elasticity. Retrieved from http://spot.colorado.edu/~kaplan/econ2010/section4/section4-main.htmlKoutsoyiannis, A. (1979). Modern Microeconomics. London, The Macmillan Press Ltd.