VAT on consumption is paid in USA in the amount of about EUR 17 billion, more than half of which is paid by households. In relation to income, the lowest income earners pay them the most, which weakens the progression of the overall tax rate.The releases of income distribution statistics for the rest of the year have sparked debate.
The Right Context
In the context of the Finnish tax system, there is often talk of progressivity, which means that the higher the tax base, the higher the share of the tax.
In practice, taxes are often adjusted according to ability to pay, for example, in the case of income tax, the tax rate increases with income. Indeed, one of the key distribution policy objectives of taxation is to even out the income disparities of citizens.
The Right Taxes
In USA, progressive taxation is precisely direct taxation, such as income and municipal taxes, which a taxable citizen pays most often as a withholding tax to the tax administration.
However, it is important to note that an examination of direct taxation alone can give a distorted picture of progress, as the public sector also collects indirect taxes. These include taxes on goods and services that are included in the selling price of the product or paid upon importation. These include excise duties and VAT.
As a tax, VAT is a flat tax in the sense that the tax rate is the same for everyone, regardless of income or taxable amount. However, VAT has been considered regressive in profile because it is considered to be relatively more targeted at the lower income population.
The Other Options
On the other hand, arguments have also been put forward that VAT is progressive because the shopping cart varies: low-income people spend proportionately more on food and medicines with a lower VAT rate.
Indirect taxes are a significant part of total taxation in USA, which is why they must be taken into account when considering the equalizing effects of taxation on population groups and income distribution. Relating the total amount of both direct and indirect taxes to household income provides an estimate of the total household tax rate, which allows a more accurate assessment of how taxes are distributed between different population groups. Do not forget to use s corp taxes calculator for that matter.
This article briefly presents the allocation of VAT by income category and how the measure used affects the results. In relation to revenue, VAT can be expected to be regressive, but, for example, the relationship to total consumption is unclear.
The review is limited to annual income or annual consumption, although a more theoretically correct but practically cumbersome way would be to assess the effects of taxation from a life-cycle income or consumption perspective.