What are Stealth Taxes?

Stealth taxes are a type of tax levy. The defining feature of a stealth tax is that the formal taxpayer passes the cost of the tax along to others via higher expenses or lower payments, and the ultimate payer of the tax is unaware they shoulder the burden.

Governments use stealth taxes to increase revenue without raising the ire of taxpayers. Stealth taxes sometimes arise from government regulations that do not directly raise any tax revenue, but increase the cost of doing business.

Key Takeaways

  • Stealth taxes are often built into a product price and the consumer is unware of how much of the tax they are paying.
  • Stealth taxes are typically levied on businesses or other entities which are in a position to pass them along to shareholders, customers, workers, or other parties.
  • Regulatory and compliance costs are a kind of stealth tax, because these costs are passed along to the ultimate payer who is often unaware they shoulder the cost.

Understanding Stealth Taxes

Stealth taxes are often built into product prices, leaving consumers unware of how much tax they are paying. While personal income taxes and property taxes are visible, stealth taxes are less so, and therefore attract less scrutiny.

Governments find stealth taxes easier to collect than other types of taxes because they are imposed at the point of sale and do not depend on a taxpayer's income level. Stealth taxes can also refer to the removal of existing tax breaks.

The most common stealth tax is the sales tax. A sales tax is an income tax imposed by the government on business profits. The government levies the tax against the business rather than individuals. The company pays the tax and passes along the cost to others. A stealth tax might be paid by shareholders in the form of lower returns, by employees in the form of lower wages and benefits, or by customers in the form of higher prices.

The government charges the business the tax. However, because the business functions as a pass-through to organize economic activity and distribute the income that results, the burden actually falls on a party other than the business itself.

Stealth taxes can vary, depending on the kind of tax, specific tax provisions, and the ability of various parties to avoid or shift the tax onto others. Stealth taxes can vary by jurisdictions and often overlap, such as when states, counties, and municipalities each levy their own taxes. Stealth taxes are usually levied against some kind of business entity or organization that is situated to pass the tax onto someone else. They can take the form of business income taxes, sales taxes, property taxes, fees, surcharges, business licensing and permitting costs, etc.

Stealth taxes can occur without any formal tax paid to the government. This is because governments impose regulations on businesses, which incur costs. These compliance costs are similar to a stealth tax, in that the expense is passed along to shareholders, business counterparties, or customers as a cost of doing business.

For example, a government health authority might require a restaurant's employees to wear disposable gloves. This would be a kind of regulatory stealth tax. The restaurant could pass the cost of the gloves onto customers by charging more for meals, or onto staff by lowering wages. Alternatively, it could keep prices and wages the same and absorb the cost itself, resulting in lower profits for the owners or shareholders. In any case, the ultimate taxpayers are often unaware they bear the cost of the government mandate, making it a stealth tax.