Types of Taxes
There are different types of taxes they are
Direct and Indirect taxation
– this is taxation on income. This covers taxes like income tax profits tax and wealth taxes on inheritance.
- Indirect-taxation – this is taxation on expenditure. This covers taxes like VAT, excise duties (tax on cigarettes, alcohol etc.).
Progressive, Regressive and Proportional Taxes
Taxes differ according to their impact on different income groups. Some taxes will redistribute from better-off groups to less well-off and these are called progressive taxes.
However, others will have the opposite effect and these are called regressive taxes. The definitions that you need to know are:
Progressive tax – a tax that takes a greater proportion of a person’s income as their income rises.
Regressive tax – a tax that takes a smaller proportion of a person’s income as their income rises.
Proportional tax – a tax where the percentage of income paid in taxation always stays the same.
Taxes on What You Earn
- Individual Income Taxes
An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns.
Many individual income taxes are “progressive,” meaning tax rates increase as a taxpayer’s income increases, resulting in higher-earners paying a larger share of income taxes than lower-earners.
- Corporate Income Taxes
A corporate income tax (CIT) is levied by federal and state governments on business profits, which are revenues (what a business makes in sales) minus costs (the cost of doing business).
While C corporations are required to pay the corporate income tax, the burden of the tax falls not only on the business but also on its consumers and employees through higher prices and lower wages.
Due to their negative economic effects, over time, more countries have shifted to taxing corporations at rates lower than 30 percent, including the United States, which lowered its federal corporate income tax rate to 21 percent as part of the Tax Cuts and Jobs Act of 2017.
Distribution of worldwide statutory corporate income tax rates, 1980-2019
- Payroll Taxes
Payroll taxes are taxes paid on the wages and salaries of employees to finance social insurance programs. Most taxpayers will be familiar with payroll taxes from looking at their pay stub at the end of each pay period, where the amount of payroll tax withheld by their employer from their income is clearly listed.
Though roughly half of the payroll taxes are paid by employers, the economic burden of payroll taxes is mostly borne by workers in the form of lower wages.
- Capital Gains Taxes
Capital assets generally include everything owned and used for personal purposes, pleasure, or investment, including stocks, bonds, homes, cars, jewelry, and art. Whenever one of those assets increases in value—e.g., when the price of a stock you own goes up—the result is what’s called a “capital gain.”
In jurisdictions with a capital gains tax, when a person “realizes” a capital gain—i.e., sells an asset that has increased in value—they pay tax on the profit they earn.
When applied to profits earned from stocks, capital gains taxes result in the same dollar being taxed twice, also known as double taxation. That’s because corporate earnings are already subject to the corporate income tax.
Taxes on What You Buy
- Sales Taxes
Sales taxes are a form of consumption tax levied on retail sales of goods and services. If you live in the U.S., you are likely familiar with the sales tax from having seen it printed at the bottom of store receipts.
The U.S. is one of the few industrialized countries that still relies on traditional retail sales taxes, which are a significant source of state and local revenue. All U.S. states other than Alaska, Delaware, Montana, New Hampshire, and Oregon collect statewide sales taxes, as do localities in 38 states.
Sales tax rates can have a significant impact on where consumers choose to shop, but the sales tax base—what is and is not subject to sales tax—also matters. Tax experts recommend that sales taxes apply to all goods and services that consumers purchase but not to those that businesses purchase when producing their own goods.
- Gross Receipts Taxes
Gross receipts taxes (GRTs) are applied to a company’s gross sales, regardless of profitability and without deductions for business expenses. This is a key difference from other taxes businesses pay, such as those based on profits or net income, like a corporate income tax, or final consumption, like a well-constructed sales tax.
Because GRTs are imposed at each stage in the production chain, they result in “tax pyramiding,” where the tax burden multiplies throughout the production chain and is eventually passed on to consumers.
GRTs are particularly harmful for startups, which post losses in early years, and businesses with long production chains. Despite being dismissed for decades as inefficient and unsound tax policy, policymakers have recently begun considering GRTs again as they seek new revenue streams.
- Value-Added Taxes
A Value-Added Tax (VAT) is a consumption tax assessed on the value added in each production stage of a good or service. Each business along the production chain is required to pay a VAT on the value of the produced good/service at that stage, with the VAT previously paid for that good/service being deductible at each step.
The final consumer, however, pays the VAT without being able to deduct the previously paid VAT, making it a tax on final consumption. This system ensures that only final consumption can be taxed under a VAT, avoiding tax pyramiding.
More than 140 countries worldwide and all OECD countries except the United States levy a VAT, making it a significant revenue source and the most common form of consumption taxation globally.
- Excise Taxes
Excise taxes are taxes imposed on a specific good or activity, usually in addition to a broad consumption tax, and comprise a relatively small and volatile share of total tax collections. Common examples of excise taxes include those on cigarettes, alcohol, soda, gasoline, and betting.
Excise taxes can be employed as “sin” taxes, to offset externalities. An externality is a harmful side effect or consequence not reflected in the cost of something. For instance, governments may place a special tax on cigarettes in hopes of reducing consumption and associated health-care costs, or an additional tax on carbon to curb pollution.
Excise taxes can also be employed as user fees. A good example of this is the gas tax. The amount of gas a driver purchases generally reflects their contribution to traffic congestion and road wear-and-tear. Taxing this purchase effectively puts a price on using public roads.
Taxes on Things You Own
- Property Taxes
Property taxes are primarily levied on immovable property like land and buildings and are an essential source of revenue for state and local governments in the U.S.
Property taxes in the U.S. account for over 30 percent of total state and local tax collections and over 70 percent of total local tax collections. Local governments rely on property tax revenue to fund public services like schools, roads, police and fire departments, and emergency medical services.
While most people are familiar with residential property taxes on land and structures, known as “real” property taxes, many states also tax “tangible personal property” (TPP), such as vehicles and equipment owned by individuals and businesses.
Overall, taxes on real property are relatively stable, neutral, and transparent, whereas taxes on tangible personal property are more problematic.
- Tangible Personal Property (TPP) Taxes
Tangible personal property (TPP) is property that can be moved or touched, such as business equipment, machinery, inventory, furniture, and automobiles.
Taxes on TPP make up a small share of total state and local tax collections, but are complex, creating high compliance costs; are non neutral, favoring some industries over others; and distort investment decisions.
TPP taxes place a burden on many of the assets businesses use to grow and become more productive, such as machinery and equipment. By making ownership of these assets more expensive, TPP taxes discourage new investment and have a negative impact on economic growth overall.
As of 2019, 43 states taxed tangible personal property. Tangible personal property tax liability, state tangible personal property taxes
- Estate and Inheritance Taxes
Both estate and inheritance taxes are imposed on the value of an individual’s property at the time of their death. While estate taxes are paid by the estate itself, before assets are distributed to heirs, inheritance taxes are paid by those who inherit property. Both taxes are usually paired with a “gift tax” so that they cannot be avoided by transferring the property prior to death.
Estate and inheritance taxes are poor economic policy because they fall almost exclusively on a country or state’s “capital stock”—the accumulated wealth that makes it richer and more productive as a whole—thus discouraging investment.
Both taxes are also complex, hard for jurisdictions to administer, and can incentivize high-net-worth individuals to either engage in economically inefficient estate planning or leave a state or country altogether.
- Wealth Taxes
Wealth taxes are typically imposed annually on an individual’s net wealth (total assets, minus any debts owed) above a certain threshold.
For example, a person with $2.5 million in wealth and $500,000 in debt would have a net wealth of $2 million. If a wealth tax applies to all wealth above $1 million, then under a 5 percent wealth tax the individual would owe $50,000 in taxes.