Hidden Taxes

What are Hidden Taxes?

Hidden taxes, as the name suggests, include taxes imposed on consumer goods that remain hidden. They refer to taxes that are included as part of the final price and hence are invisible to the consumer.

Hidden taxes distort the taxpayers, awareness surrounding their true tax burden and the true total cost paid to the government.

Types of Hidden Taxes

Hidden taxes manifest in the final price of goods through several aspects of our life, from international trade to personal income. Typically, hidden taxes come in three types:

1. Indirect tax

Indirect taxes include excise duty, insurance tax, and air passenger duty. For example, if a passenger travels domestically in the U.S., the standard passenger tax amounts to about 7.50%. Normally, it is not disclosed to the consumer unless there is a refund where taxes are refunded.

2. Corporation tax

Corporation taxes are primarily borne by stockholders and employees in the form of low wages and profits. As reported by the Congressional Budget Office through data in “The Distribution of Household Income (2014-2016),” the top 1% of income earners lose about 7% of their income to federal corporate income taxes, which are “hidden” from their paychecks and tax returns.

3. Tariff

Import taxes and tariffs tend to be hidden in the final price of imported goods. Thus, when a consumer purchases an item, they are unaware of charges such as import fees, taxes, etc.

Advantages of Hidden Taxes

• Excise duties are levied to influence consumer behavior and reduce demand for demerit goods and goods with negative externalities.
• The benefit of hidden tax may manifest through higher government spending due to higher government revenue.
• Hidden taxes cannot be evaded.
• Tourists, non-residents, and those who do not work within the country also contribute to the government’s revenue through hidden taxes.
• Hidden taxes increase efficiency by avoiding awkward pricing of goods (e.g., $5.18) and dealing with loose change.

Disadvantages of Hidden Taxes

• Excise duties such as alcohol and cigarettes tax are regressive. However, since the demand for such products is often inelastic, raising cigarette taxes allows governments to increase their revenue. Consequently, the poor may be heavily burdened compared to the rich by the same amount of tax due to its regressive nature.
• Hidden taxes make way for a lack of civic consciousness and decreased transparency in the distribution of an individuals’ tax money.
• Hidden taxes trigger inflationary tendencies, which result in increased prices. Sellers need to track the tax owed on each commodity when assigning a final price. It makes it possible to inflate prices to make sure buyers pay the indirect tax, which may have a cumulative effect and lead to increased prices.

Tax Rates and Inflation

Tax rates exert a considerable impact on the growth of prices and inflation within a country. However, economists often argue that inflation is a kind of hidden tax. It can be understood by analyzing the government’s spending.

On average, every year, a government spends more than they earn. It leads them to borrow money required to close the gap causing the fiscal deficit within the country. When interest and principal payments are due, there is a need to print more money to pay off the debt, which increases the money supply, thus decreasing the purchasing value of money.

Hidden Taxes in the 21^st Century

Hidden taxes in the 21^st century play a slightly different role compared to previous years. With technological advancement dominating every aspect of our lives and the economy, it is only natural such taxes get further “hidden” as the ease of online payments becomes more convenient and less transparent.

Let’s take the example of your cell phone bill. According to the Tax Foundation, an extra 17% on average is the tax that American cell phone customers pay on their wireless bills. A portion of the total amount goes to local, state, and federal governments, 911 systems, and school districts. However, the cuts are largely hidden from the customer, who only receives a final cell phone bill.

In Nebraska, which charges the highest tax rate for wireless services within the U.S., customers are required to pay around $75/month for a $60/month cell phone bill, which exceeds what customers in Oregon would pay by $10. The practice exposes wireless taxes as a way for states and cities to generate revenue since almost everyone owns a cell phone now.

Hidden taxes can also play a pivotal role in times like the 2020 COVID-19 pandemic, where small businesses started charging additional “sanitation” and COVID-related taxes to the final price. It reflects the ease of increasing commodity costs through hidden taxes and generates concern for an impending inflation crisis, as discussed earlier.

Learn More

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advance your career, the following resources will be helpful:

• Indirect Taxes
• How to Use the IRS.gov Website
• Corporate vs. Personal Income Tax
• Regressive Tax
• See all accounting resources