A tax is a compulsory financial charge or some other type of levy
imposed on a taxpayer by a governmental organization in order
to collectively fund government spending, public expenditures,
or as a way to regulate and reduce negative externalities.
Taxation occurs when a governmental authority
imposes levies on citizens and business
organizations.
Fees paid through taxation are compulsory and may
not be linked to any service delivery.
Revenues collected are used to finance government
expenditures.
The International Centre for Tax and Development (ICTD)
estimates that 80% of overall government funding in half of
the countries around the world is accounted for by tax
revenues. Governing authorities are able to increase
taxation levels by changing taxation rules and expanding tax
bases.
Primarily, the revenue collected is utilized for the welfare of taxpayers;
this means that the specific benefit received is independent of the
individual payment. However, there are some exceptions, such as
payroll taxes, where the taxpayer will directly benefit from medical
coverage and retirement benefits.
Taxation patterns differ greatly among developing and developed
countries. Higher tax revenues are collected in developed countries
than in developing countries due to efficient taxation compliance
mechanisms and effective tax collection methods.
However, both of these factors are directly affected by the competency
of the political system. Generally, developed countries rely more on
income taxation to realize most of their national output, more so than
developing countries who rely heavily on consumption and trade taxes.
Types of Taxation
The following are the different types of levies imposed on residents by
the government:
1. Income Taxes
Income taxes are levies imposed on the total financial income of an
individual, such as wages, investments, and salaries. Most income
taxes increase with the rise in the taxpayer’s earnings. This means
that higher-income earners pay more taxes than low-earners. This is
also referred to as progressive taxation.
2. Corporate Taxes
Corporate income tax is levied on business income. The burden of
corporate tax is shared between the business, its consumers, and the
employees through setting higher prices and paying low wages. To
encourage business growth, most governments levy businesses a
corporate tax rate of below 30%.
3. Payroll Taxes
Payroll taxes are levies imposed on employees’ income to finance
social security funds. Normally, the payroll tax amount is automatically
deducted from the income and paid by the employer on behalf of the
employee.
For example, in the United States, the highest payroll taxes are 12.4%
tax to finance Social Security and 2.9% tax to pay Medicare,
accounting for a 15.3% total tax rate. In this case, the employer remits
7.65% of the tax rate, which amounts to half of the payroll taxes. The
other half is automatically deducted from the employee’s income.
4. Capital Gain Taxes
Capital gains taxes are levied on capital assets, which include personal
properties and investments like stocks, homes, bonds, cars, or jewelry.
When an asset increases in value, such as rising stock prices, it is
referred to as capital gain.
Therefore, when an individual benefits from a capital gain, tax is paid
on the profit earned.
5. Property Taxes
Property taxes are generally imposed on physical property, such as
land and buildings. They are the primary revenue source for local state
governments. Property levies account for over 70% of local tax
revenues. Property taxes finance key public services, such as fire
departments, schools, roads, security, and rapid medical services.
Classes of Taxes
Taxes are classified into different criteria ranging from the mode of
payment, the subject bearing the tax burden, and the extent of shifting
the burden.
1. Direct Taxes
Direct taxes are levies subjected to individuals based on the taxpayer’s
net wealth, expenditure, or personal net income. Levies on net worth
are based on the taxpayer’s assets value minus total liabilities, while
expenditure taxes are paid on income that is not directed to savings.
2. Indirect Taxes
Indirect taxes are taxes imposed on transactions such as imports and
exports and the production and consumption of goods and services.
Examples include value-added taxes, legal transaction taxes,
manufacturing taxes, and custom taxes on import duties.
