Question

The retail sales tax has become a popular way to finance state, county, and city governments as well as special districts. What are the pros and cons of reliance on the retail sales tax as a primary source of revenue, especially for local governments?

Answer 1

Pros:

1) Simplicity:

Everyone has to pay the same price to buy a product

2) Based on consumption

a citizen would have to pay tax according to the number of goods or services they consume.

3) Everyone is included

Sales tax is a great way to make even poor citizens of a country contribute to the nation’s pay.

4) Easy collection

The sales tax is automatically collected when goods and services are sold. Therefore, it is easy for both tax collector as well as for the taxpayer.

5) Non-evadable

A taxpayer can’t elude this tax if he wants to use a particular good or service, whereas income can be manipulated by not declaring them

6) Reduce harmful products' consumption

Sales taxes are a good way to control harmful products like tobacco and alcohol etc. sales tax on these goods is kept high to reduce their consumption.

Cons:

1) Uncertain

Revenue generated from sales tax is uncertain, because of the demand for products in the market. Sales tax imposed on goods increase the prices of the goods, which results in a decrease in the demand for the product.

2) Can be costly, required manpower

A sales tax levied on every product has to be taken care of. To do this, the government needs to have a team of administrative people to manage everything effectively.

3) Harmful for industries

Sales tax increases the burden on the manufacturing industries. These taxes discourage industries because of the high cost of production and less profit.

4) Regressive

Sales taxes are regressive in nature because it is easy for a rich person to pay price for goods no matter how high it is, at the same time it becomes a burden on the poor person.