Welcome, to Tax It - Today we will examine the different types of tax which are in effect today. There are many kinds of tax, each with a different mechanism of when and how the tax is due. In business, it is vital to understand when and how each of these taxes are calculated.
Let's start with sales tax. In the US, this tax is often is often used as a method for states to generate revenue. Purchases at the retail level (not wholesale) are subject to sales tax, which is a percentage of the sales price. Sales tax is not standardized, as individual states can set the applicable rates - these rates generally vary depending on the product. Sales tax is an indirect tax, as the taxes are collected by the merchant who then, at the appropriate time pays the tax to the appropriate organ. Sales tax, is also referred to as consumption tax.
Moving on to capital gains tax. Capital gains tax, is the tax which is levied against any profits from the sale of an asset which was sold for more than it was bought. This could be, for example, profit made when selling your house, a car, or any stocks. This is a per annum tax which means that loss from a sale later in the year can be offset against the profit from an earlier sale. The great thing about this tax is it only taxes people with enough excess income to actually invest. In other words, it's a tax the poor don't have to think about.
Like most taxes, property tax is self-explanatory. It's a tax based on the value of an asset. The most common occurrence of this is tax on your home, but it could also include your car and anything else the government wishes to tax. Interestingly, the focus of property tax is on private assets in public view, such as your home or car. But if you lend a work of art to a museum it can now be subject to the property tax, as this piece of art in now in the public eye. Similar to the capital gains tax, property tax generally generates revenue from people who earn enough to have assets worth taxing.
Income tax, needs no introduction. Everyone of us is aware of this tax and aware of how much it costs. It taxes the financial income of individuals and companies alike. Most countries operate a bracketed income tax system, so a person making $25,000 a year will pay a lower percentage of their income than someone making $80,000 a year. People are taxed on gross income, while companies generally are taxed on net income.
Value Added Tax is another consumption tax, similar to sales tax in the US but with a key difference. It's more complicated as it's applicable at every point in the supply chain. Generally, each step in the chain of a product being converted from raw materials to something worth buying, has value added to it. So in the gas industry you might have 3 steps. The first group pumps oil and sells it to the refiner - tax. The refiner converts the oil to gasoline and sells it to gas station - tax. You pump the gas and pay the station - tax. This system is also considered the most fair, since everyone gets taxed based on the contribution they make to the economy.
You will probably be familiar with most of the taxes talked about today, but there are some other terms in taxation that you have probably not heard about or don't understand either what they are or why they exist.
Regressive Tax is a tax that is less strenuous on the rich than it is on the poor. Sales taxes like that used in the US and the VAT in Europe are regressive taxes as everyone will have to pay an amount of this tax, but it will be easier for a richer person to do so. Income tax is the opposite in that it is a progressive tax; the more you earn, the larger your tax burden is.
A tax imposed to discourage a behavior is called a Tariff. It's most commonly levied on imports to protect domestic manufacturers. A common example of this is the situation in China, in which the government levies high levels of import duty on a variety of products so as to protect the domestic industry. Tariffs are very disruptive on free markets and pricing. The tax system can also be used to encourage certain behaviors using tax breaks. Tax breaks are given to entice you to buy green energy products, borrow to pay for college or used for stimulus in time of need. A tax break is anything which provides savings, such as tax exemption, tax reduction, or a tax credit.
As you can see the taxation system is complicated, and for millions of Americans each year this leads to mistakes on their annual return. The good news is a solution has been proposed in the form of fair tax which would be one universal sales tax replacing other taxes.