<p>Take the expenditure approach:
GDP = Consumption + Investment + Government Spending + Net Exports</p>
<p>Personal consumption expenditure includes expenditure on sales tax. When you buy a phone your expenditure covers the intermediary costs of producing the phone, the wages of the shop's staff, the profit of the shop's owner, and the sales tax.</p>
<p>Under equilibrium, income equals expenditure. Meaning every time you consume something, the money you spend is another persons income. As sales tax is included in expenditure it must also be included in income for the equilibrium equation to be true - otherwise there would be a discrepency of the final price (including sales tax) and the price of factor costs (excluding sales tax).</p>
<p>This begs the question: why include sales tax in the expenditure approach? GDP is defined as the total current market value of final goods and services produced in an economy in a given period. From the perspective of consumers, sales tax is in the market price - high sales taxes on a restaurant meal may make a tax exempt home cooked meal more preferable.</p>

CC BY-SA 4.0
2024-10-13T17:12:06.353Z
2024-11-12T18:37:26.020Z
2024-11-12T18:37:26.020Z
williams-ji
<p>In the income approach to GDP:</p>
<p>Y = p + w + dep + ib.tax</p>
<p>where p, w, dep, and ib.tax are profits, wages, depreciation, and indirect business taxes respectively.</p>
<p>Profits and wages are straightforward, and depreciation has been dealt with in another thread. But what is the intuition behind adding business taxes to get GDP?
Is it because labour taxes are already baked into w, and profit taxes already baked into p, so that we need to add sales taxes? Otherwise the income approach wouldn't be the same as the expenditure or production approaches?</p>

<gdp><taxation><national-accounts>
Why are sales taxes added in the income approach to GDP
R.S.
# Why are sales taxes added in the income approach to GDP

(Asked by: username_0 on 2024-06-18)

In the income approach to GDP:

Y = p + w + dep + ib.tax

where p, w, dep, and ib.tax are profits, wages, depreciation, and indirect business taxes respectively.

Profits and wages are straightforward, and depreciation has been dealt with in another thread. But what is the intuition behind adding business taxes to get GDP?
Is it because labour taxes are already baked into w, and profit taxes already baked into p, so that we need to add sales taxes? Otherwise the income approach wouldn't be the same as the expenditure or production approaches?

**Tags:** gdp, taxation, national-accounts


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## 1 answers

### Answer by username_1 on 2024-10-13. Score: 0

Take the expenditure approach:
GDP = Consumption + Investment + Government Spending + Net Exports

Personal consumption expenditure includes expenditure on sales tax. When you buy a phone your expenditure covers the intermediary costs of producing the phone, the wages of the shop's staff, the profit of the shop's owner, and the sales tax.

Under equilibrium, income equals expenditure. Meaning every time you consume something, the money you spend is another persons income. As sales tax is included in expenditure it must also be included in income for the equilibrium equation to be true - otherwise there would be a discrepency of the final price (including sales tax) and the price of factor costs (excluding sales tax).

This begs the question: why include sales tax in the expenditure approach? GDP is defined as the total current market value of final goods and services produced in an economy in a given period. From the perspective of consumers, sales tax is in the market price - high sales taxes on a restaurant meal may make a tax exempt home cooked meal more preferable.


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