Taxes and its different classification

Mr Hafiz Muhammad Qasim Lecturer Department of Economics, Lahore Leads University

1. Taxes and Its Different Types Public Sector Economics Mr Hafiz Muhammad Qasim

2. Taxes and Its Different Types What is Tax? Tax is compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions . Tax  is money that people have to pay to the government

3. The Main T ypes of Taxes Direct vs Indirect Taxes Progressive vs Regressive Taxes Proportional and flat Taxes

4. Direct vs Indirect Taxes Taxes  can be either  direct or indirect . A   direct tax  is one that the taxpayer pays  directly  to the government. These  taxes  cannot be shifted to any other person  or  group. An   indirect tax  is one that can be passed on- or  shifted-to another person  or  group by the person  or  business that owes it.

5. Progressive vs Regressive Tax A  progressive tax  is defined as a  tax  whose rate increases as the payer's income increases. That is, individuals who earn high incomes have a greater proportion of their incomes taken to pay the  tax . A   regressive tax , on the other hand, is one whose rate increases as the payer's income decreases

6. Proportional and Flat T axes A proportional tax is one where the amount you pay is proportional to how much you have. You will also hear people refer to this as a flat tax. For example, imagine you live in a state with a flat income tax of 5%. Each taxpayer will pay 5% of his or her taxable income. Since everyone is paying a proportional amount of their income, this is a proportional tax.

7. Taxes on Income and Earnings The three types of taxes above describe systems of taxation. The following are examples of the taxes you may actually pay in your daily life. Federal income tax Income tax is a tax on your income, wages and earnings. The federal government uses a progressive tax with seven marginal tax rates. It collects income tax over the course of the year. For most people, income tax comes out of your paycheck. If you are self-employed or a freelancer, you will probably need to make  estimated tax payments  each quarter.

8. Wealth Taxes A wealth tax is a tax on a person’s entire net worth. Your net worth is the combined value of your annual income, personal savings, investment accounts, property, real estate, and other belongings, like jewelry or collectibles.

9. Ad Valorem T axes An ad valorem tax is based directly on the value of a good, service or property. One of the most common ad valorem taxes in the U.S. is property tax . Property taxes When you buy a home, in addition to your mortgage and  homeowners insurance , you will have to pay  property taxes . This is an ad valorem tax based on the value of your property. City or county governments usually collect property taxes. Some areas also levy taxes by school district or according to other local districts.

10. Consumption Taxes A consumption tax applies when you purchase certain goods and services. These are often indirect taxes because even though the government is collecting the tax from a retailer, the person who buys the good is the one who pays the tax. (A direct tax applies not to goods or transactions but to someone’s income, profit or assets. Federal income tax and property taxes are direct taxes.) Two common types of consumption taxes are sales tax and value-added tax.

11. Sales Tax Sales tax applies to goods and services you buy. You pay them at the point of sale. There is no sales tax at the federal level, but states, cities and local districts may all have their own taxes. Not all places collect sales tax and different areas charge different rates, based on what you’re buying. For example, a state may collect a 2% tax on groceries but a 4% tax on all other goods. Sales tax is also a type of ad valorem tax; the amount you pay depends directly on the value of what you’re buying.

12. Value-Added T ax A value-added tax (VAT) applies to goods you purchase. It’s similar to a sales tax in that sense, but it’s different because a VAT isn’t just applied to the final sale price of a product. It applies at each stage of the production process, based on the value that has been added to the product. Since the product is taxed throughout production, the price you see in a store already includes the VAT. This is different from sales tax, which you pay in addition to a retailer’s price.

13. Excise Taxes An excise tax applies to particular goods, services and activities. This is different from a sales tax because it applies only to specific transactions. Excise taxes are usually included in the price you see for a product. Some excise taxes are ad valorem: When you buy an airline ticket, there is a 7.5% excise tax included in the ticket price. Other excise taxes are the same no matter the value of the product. For example, the federal government levies an excise tax of 18.4 cents on each gallon of regular gasoline. Whether a specific company was planning to sell you gasoline for $2 or $3 per gallon, the excise tax is still 18.4 cents per gallon. Each state also has its own excise tax for gasoline.

14. Excise Taxes Continue Excise taxes are a very popular way for federal and state governments to raise revenue. According to the Urban-Brookings Tax Policy Center,  federal excise tax revenue in 2017  was more than $83 billion. Common excise taxes you’ll see at either the federal or state level are on alcohol, tobacco, fuel, airfare and telecommunications services. There are also health-related taxes, like the Affordable Care Act’s  individual mandate , and environmental taxes on pollution or gas emissions. While a bit outdated, you may also see the term “sin tax.” This refers to taxes on products or activities that are considered harmful to individuals or to society as a whole. The excise taxes on alcohol and tobacco are considered sin taxes, as are those on sugary drinks, gambling, and indoor tanning.

15. Other Types of Taxes W orth M entioning Surtax A surtax is a tax on something that is already taxed. Surtaxes usually apply only to individuals who are above a certain threshold. For example, all taxpayers contribute to Medicare through a Medicare tax. Single-filers who earn more than $200,000 also have to pay a surtax of 0.9% (the Additional Medicare Tax) on all wages that exceed $200,000.

16. Other Types Continue Business and corporate taxes With individual income taxes, you generally pay tax based on the total amount you made (revenue). Corporate taxes typically apply to a company’s profit, which is its revenue minus expenses. Corporate tax rates are also different from individual tax rates. Instead of the seven marginal rates, the federal corporate tax rate is a flat 21%. Many states also have rates that are different from their regular income tax rates. For example, Maine’s personal income tax rates start at 5.8% and go up to 7.15% across three income brackets. The corporate tax rates range from 3.5% up to 8.93% across four brackets.

17. Other Types Continue Tariffs A tariff is a tax on goods that cross national borders. The country importing a good collects the tariff. In many cases, tariffs are a way for a government to bolster local businesses or to level the playing field with foreign competition. For a real-life example, here’s a look at  tariffs the Trump administration imposed on Chinese goods .

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