Why do we add indirect business taxes(sales taxes,excise taxes) to the national income when we compute GDP using the income approach?

Expert Answers
pohnpei397 eNotes educator| Certified Educator

Please note that when you use the income approach you are actually subtracting these indirect taxes, not adding them.  (You can say they're being added, but if you are adding them, you are adding them as a negative number).

The reason you need to do this is because indirect taxes like this are not really part of a business's income.  The business does take this money in when it sells goods, but the money is then passed on to the government.  It is not really part of the prices of the good or service and therefore it should not be counted in GDP.

krishna-agrawala | Student

Indirect taxes such as sales tax and excise tax do not have any effect on computation of GDP using income approach. In the income approach, GDP is measured as total of all household income which is the sum of  salaries, interests, rent and profit. Indirect taxes do not figure any where in computation of these. They form a component of the price of goods purchased, these do not feature in the total household income at all.

However, taxes such as corporate/income tax need to be subtracted from the gross profit of firms to arrive at their net profit. Generally firms do not include the amount of indirect taxes in computation of gross profit. But if a firm follows an accounting system that includes the amount of indirect taxes in gross profit then these will also have to be subtracted to arrive at net profit.