Basically, taxes are one of the major features in any economy that provide the government with needed revenues for financing public services, infrastructure, and welfare plans. With that said, every citizen should be able to understand what taxes are, the different types of taxes that are available, who pays them, and most importantly, why they are necessary. This guide will break down these complex concepts into manageable pieces to help you further understand how taxes affect your life.
What Are Taxes?
Taxes are the compulsorily paid financial charges or levies by the government on individuals, businesses, and other entities to generate revenue. The center point of this revenue collection is to finance the various budgetary allotments for public goods and services like, but not limited to, education, health, and other similar social provisions, including infrastructure, defense, and welfare programs. Taxes would complete the circle, where if they were not there, the resources that the government would use to offer the services would form a crack in the infrastructure and services in the state.
The taxes can be levied on income, wealth, and property directly, or on goods and services indirectly. They form the basis of any properly functioning society as they help ensure that everyone makes at least a minimum contribution to the community.
Types of Taxes
There are several types of taxes, each serving to target various different aspects of the economy. Here’s a breakdown of the most common types:
Income Tax
Definition: An income tax is a tax levied on an individual or an entity, e.g., a corporation, based on their earnings or profits.
Who Pays?: People and businesses that earn beyond some set minimum.
Why?: More than 80% of all revenue accrued by government all over the global world comes from income taxes. They are drawn to finance the many public goods and social services within the economy.
Sales Tax
Definition: The tax imposed upon the selling of goods or services.
Who Pays?: The consumers, as the tax is still levied upon sale price of goods or services.
Why? : State and local governments often afford for sales taxes to support public services, such as schools, roads, and emergency services.
Example : Suppose you are purchasing a $ 100 item and you are in a state that has a 7% sales tax. You will have to pay $ 107 when checking out.
Property Tax
Definition : A local tax on your real estate. It is based on its value.
Who Pays?: The owners of the property pay it.
Why? : Property taxes pay for all local services – schools, police and fire protection, parks, and so forth.
Example : Suppose your house is assessed at $300,000, and suppose a typical property tax rate is 1.5 percent. That means you would pay $4,500 a year in property taxes.
Corporate Tax
Definition : Tax on the corporate profits.
Who pays? : the corporation, but the tax may be shifted to be paid by consumers, the employees, or the shareholders.
Why?: It’s a means of raising revenues to finance infrastructure, health, and education while observing the principles of horizontal or vertical equity.
Example: A business having a profit of $1 million would be liable for paying $210,000 at a tax rate of 21% in the USA.
Capital Gains Tax
Definition: Tax paid on the profit made from selling assets, such as stocks, bonds, or real estate.
Who Pays?: It is payable by investors or individuals disposing of their assets at a price higher than the buying price.
Why?: They represent some of the taxes that are used for wealth distribution and for the funding of government projects / programs.
Example: If a person sells a stock, purchased for $5,000, for $10,000, then capital gain would be $5,000 and hence would tax capital gains tax.
Excise Tax
Definition: An excise is a tax on use or consumption of certain products i.e. tobacco or fuel or alcohol.
Who Pays?: The consumers, though mostly it is included in the price of the product.
Why?: Excise taxes are good for discouraging the use of a deleterious product and/or to fund a specific government program or programs.
Example: A gallon of gasoline will have an excise tax that is in addition to the gallon price.
Estate Tax
Definition: Estate tax is a tax on the transfer of an estate after someone dies.
Who Pays?: The estate itself before the assets are distributed to beneficiaries.
Why?: Estate taxes reduce the percolation of money and thus fund many government services.
Example: A $10 million estate could have a 40% estate tax, meaning the government gets $4 million of it.
Who Pays Taxes?
Everyone pays something in taxes, either that or pays off the government debt and lets somebody else worry about it another day. But it is a fact that the burden of taxes is not equally shared, nor could or should it be. Here is who pays what:
Individuals
Individuals pay taxes based on their income, property, as well as consumption, better known as sales tax. What an individual pays normally depends on the level of his income, where the higher earners part with a bigger percentage of their income in the form of taxes.
Businesses
Businesses pay corporate taxes on their profits, besides payroll taxes for the employees working for them. They can collect and remit sales taxes on goods and services they sell.
Investors
Capital gains taxes are paid by the investor on the profit he makes through sale of assets like stocks or real estate. The tax rate on capital gains tax is generally lower relative to the ordinary tax rate, which acts as a motivator to invest.
Property Owners
Property owners pay property taxes. The taxes are paid based on the assessed value of the real estate and are usually paid each year to finance local services.
Consumers
Consumers are required to pay sales taxes applicable on purchased products or services. Such taxes are mostly visible at the point of sale, where a specific percentage is added up on the total purchase amount.
Why Do We Pay Taxes?
The levying of taxes stands out as one of the most paramount actions for running a society. Following are the reasons why we pay taxes:
Funding Public Services
Taxes form the major income of governments, where the money collected is used to finance various public amenities, among them infrastructure, education, health, and public order.
Redistribution of Wealth
Taxes are equally important in the ability of redistribution. With progressive taxation, there happens to be a reduction in the inequality of income.
Economic Stability
Taxes help regulate the economy by influencing consumer behavior and business investment. An example would be excise taxes, which could be imposed on tobacco and alcohol to discourage consumption or, on the other hand, tax incentives that may lead to an increase in investments in relevant sectors.
Social Welfare
The taxations provide funds for the social welfare programs that provide support for the vulnerable members of society such as unemployment benefits, food assistance, and healthcare.
National Defense
Much of the tax revenues go into providing adequate national defence, which safeguards the nation.
Conclusion
Important to understand is what, how, whom, and why tax is collected. Taxes are equally the life source of any government since they form the very basis of the financial resources for services and infrastructure supporting life as needed today. When paying taxes, individuals and corporate entities contribute vital resources necessary for the maintenance of public and social goods available to the entire society.
Whether it be earnings tax, sales tax, or property tax, the reason for each tax in the economy is very much distinguished. Imposing taxes is not just the law of the land but a way of safeguarding the nation’s future and towards a contribution to the common good.
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