Hidden Taxes

What Are Hidden Taxes

Hidden taxes are taxes indirectly assessed on consumer goods without the explicitly knowledge of consumers who purchase the product. At the heart of the concept of a hidden tax is the notion that if you cannot see it, your purchasing behavior will be largely unchanged. With the advent of modern transactional systems, visibility into a variety of hidden taxes ranging from highway tolls paid using automatic transponders to music downloads is becoming more obscured.

Breaking Down Hidden Taxes

Hidden taxes are everywhere, lurking mostly unseen while effectively raising the prices of many ordinary goods we consume in our daily lives. Most everyone is aware that a sales tax applies when they purchase goods in most states, but not many consumers fully grasp the extent to which hidden taxes are included in the final price of many products.

The goal of hidden taxes is to stay hidden, but one of the most visible of these types of taxation is the one added to cable bills. Cable companies and cell phone service providers are required to include all charges on their statements, but not many consumers actually read all the pages detailing the fees and taxes. The goal of this approach to taxes is to add revenue to the government without negatively impacting product demand through higher consumer prices. It is a balancing act.

Other examples of hidden taxes include taxes on cigarettes, alcohol, gambling, gasoline and hotel rooms. These taxes are typically collected as part of an ordinary transaction, which serves to bury them in the final price, a price that is higher than it would be without the hidden tax.

Other examples include duties imposed upon products imported from overseas. Tariffs added during global trade wars have been linked to serious economic downturns, including the Great Depression. Tariffs are a new cost that the manufacturer has no choice but to pay if they want to continue shipping their goods overseas. Given the interconnectedness of our modern global economy, most suppliers cannot afford to lose international market share, so they bury the new costs into the product cost hoping demand is not adversely slowed. These increases pass along through wholesalers and distributors, who have their own margin requirements, making their way to the final consumer.

Pro and Cons of Hidden Taxes

No one wants to pay more in taxes yet there is an ongoing debate about whether taxing those who use “sin products” is fair given they are in aggregate drawing upon social services more than those who do not consume those products. Examples include cigarettes, alcohol and gambling. One side of this argument believes that by making these products very expensive through hidden taxes, consumption will decline. Ironically, one would think in order for a tax to affect consumer behavior the consumer needs to be able to see it, which is not so easily done with hidden taxes. The other side of the argument says we live in a free society where people should be able to pay a fair price for whatever they want. Compounding matters, in the case of known addictive products like cigarettes, consumer behavior is less likely to be modified by higher prices.

Technology is making it much easier to include hidden taxes. With the advent of facial and finger recognition on smartphones, consumers can now make a purchase in seconds without much effort and without closely reviewing the presence of any hidden taxes or fees. Another example of this can be seen on our highways with the rise of automated tolls. 

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