Question

Say that our current system was changed so that our tax computations were determined by a tax on purchases that are collected by sellers who then submit the money to the IRS. What would the advantages and disadvantages be? Provide an example to illustrate.

Answer 1

This is a model of charging indirect taxes like sales tax in which tax is charged by seller from buyer and then deposited with the department on or before due date.

Advantages can be

• No tax evasion as any tax evasion will disturb the chain
• Tax on value additions
• Easy compliances

Disadvantages can be

• With more participants in value chain, the system gets complicated
• Bureaucracy

Illustration : Say Manufacturer of Goods A sell it to wholesaler, here manufacturer will charge sale tax from wholesaler and deposit it with department. This will keep going like this till Goods are reached to end customer.

Therefore, it can be said that the burden of tax is borne by the end consumer.