Cascade Tax

A cascade tax is tax that is levied on a good at each stage of the production process up to the point of being sold to the final consumer. A cascade tax is a type of turnover tax with each successive transfer being taxed inclusive of any previous cascade taxes being levied. Because each successive turnovers includes the taxes of all previous turnovers, the end tax amount will be greater than the stated cascade tax rate.

Cascade tax can create higher tax revenues compared to a single stage tax, because tax is imposed on top of tax. For example, a government levies a 2% cascade tax on all goods produced and distributed. A company sells $1,000 worth of stone for a tax-inclusive price of $1,020 ($1000 + 2% cascade tax) to an artist. The artist makes a sculpture out of the stone and wants to make $2,000 when he sells it to an art dealer, so he adds this figure to what he paid for the stone to get $3,020, and then adds on the cascade tax to bring the total to get $3,080 ($3020 + 2% tax). The art dealer wants to make $5,000 for the sculpture, adding this to $3,080 for a pre-tax $8,080. She then adds the 2% cascade tax for a total price of $8,242. In sum, the government collected taxes of $20 + $60 + $162 = $242, which is actually an effective tax rate of $242/$8,000 = 3.025%.

The cascading tax effect means that the consumer of the good has to bear the load of tax on tax and the inflationary prices that result from the effect. To eliminate the multiple taxation that results at the various stages of production, the European Union and some countries, such as Canada, Monaco, Spain, Nigeria, and India, implemented a tax system known in some regions as the Value Added Tax (VAT) or Goods and Services Tax (GST). Most countries with a GST have a single unified GST system, which means that a single tax rate is applied throughout the country. A country with a unified GST platform merges central taxes (e.g. sales tax, excise duty tax, and service tax) with state-level taxes (e.g. entertainment tax, entry tax, transfer tax, and luxury tax) and collects them as one single tax. So, whenever a good moves down each level of production, the vendor is able to deduct the tax s/he paid from the tax s/he collected and remit it to the government. No matter how many times the good changes hands, the final consumer only pays the full tax rate, not a multiple of it.

Countries with cascade tax struggle with being competitive in the international markets. This is because the resulting inflationary prices stifle the availability of cheap labor and other factors of production, forcing market prices to be above international prices.