taxontax

Taxontax is a term used in economic policy discussions to describe the phenomenon in which taxation effectively compounds because a tax is levied on items or transactions that have already been taxed. It is not a formal tax category, but a descriptor of cascading or double taxation that can arise from tax design that does not provide credits or exemptions for prior taxes.

The mechanism behind taxontax typically involves taxes imposed at multiple stages of a production or sales process without full input tax credits. For example, a business may pay a tax on its purchases and, when selling its product, face another tax on the sale amount that does not account for the tax already paid on inputs. In some systems, gross receipts taxes or certain turnover taxes exhibit this behavior more directly than a value-added tax (VAT), which generally uses input tax credits to avoid cascading.

Implications of taxontax include higher prices for final consumers, misallocation of resources, and reduced investment competitiveness due to the hidden or compounded tax burden. It also adds administrative complexity and can create economic distortions by favoring certain business structures or sourcing choices.

Policy responses aim to eliminate or mitigate taxontax by extending input tax credits, broadening the tax base with credit mechanisms, or replacing cascading taxes with VAT-like systems. Critics argue that reducing taxontax improves efficiency and transparency, while proponents emphasize revenue stability and administrative practicality.

See also: cascading tax, value-added tax, gross receipts tax, input tax credit.