It’s Monday night and you’ve just finished dinner. Maybe an episode of your favorite series is premiering, or a new book is catching your eye from the coffee table. Time to relax?
Wrong. Time to file your income taxes. That was the scene just a few weeks ago. Millions of Americans waited until the last moment to file their taxes. And if you ask me, this is the main reason why so many of us resent the IRS for taxing our earnings.
But, have you ever thought about the scores ― if not hundreds ― of taxes you are paying every day?
Handing over a $5 bill to pay for a cup of coffee doesn’t seem like the same thing but that cup is as full of taxes as it is coffee.
Taxes Lurk In Every Purchase
Taxes masquerade under terms like tariff or duty or excise tax. The technical definition of a hidden tax is one that is indirectly assessed on consumer goods without the consumer’s’ knowledge. They are paid by one entity in the supply chain and passed along to the next entity in the form of a higher cost for that product.
The distinction between an indirect tax and a direct tax becomes clear when you look at the difference between a sales tax and an import duty. A bottle of extra virgin olive oil produced in Spain is taxed when it is transported here (this tax is called a tariff). The bottle is taxed again when the distributor sells it to a supermarket chain. And finally, the oil is taxed when you purchase it at your neighborhood grocery. But when you look at the receipt, you only see one tax: the sales tax. Why? Because the other taxes have already been built into the price you’re paying for your olive oil.
Taxed Out: Your Morning Coffee
It’s easy when you think of taxing imported goods like olive oil. But, what about when you look at something like a cup of coffee?
First, start at the farm. The grower needs fertilizer which has been taxed at the various stages of its production. The various pieces of machinery needed to grow the beans or harvest them have been taxed along the manufacturing process. Those machines probably need gas, which has had its share of taxes paid during its refinement. With luck the grower can price the crop to recoup some of those indirect taxes.
The beans might next be sold to a middleman, or coyote, who transports them from the farm to a mill. Again, taxes are paid on the gas used in the trucks and on the production of the vehicles themselves. The mill then processes the beans usings equipment that has a string of indirect taxes associated with its production. The mill may also be importing coffee beans and paying duty taxes on them.
From the mill, the beans move on to the roaster and possibly more import duties and taxes paid behind the scenes for the roasting equipment. Yet another layer of taxation is added when the roasted beans move to the logistics company that transports them (in vehicles that have hidden production and gasoline taxes) to the coffee shop. At every step, the cost of the product has increased as each link in the supply chain passes the taxes it has paid along to the next link.
At last, the brew is poured into the paper cup and the consumer pays the one direct cost in the entire supply chain, the sales tax.
Is the story over after the last drop is drained and the cup tossed in the trash? No, the same pyramid of hidden taxes applies to the paper cup that holds it, along with the sugar that sweetens it.