Types Of Taxes – How They Differ

Taxation is one of the most difficult areas of finance for people and businesses. It requires expertise and attention to avoid penalties. In simple terms, tax is any monetary charge or amount of levy imposed upon a person by a government agency in order to finance various public needs and expenditure. A person not paying tax, or evasion of or refusal to pay tax, is legally punishable by law. In order to avoid being penalized, many people make mistakes when filing their annual tax returns.

Many governments around the world have tried to change the tax system over time. The most common form of tax change is through tax hikes. These hikes usually occur when there is growing inflation, or when governments feel the need to stimulate economic activity to counteract the global recession. For instance, New York and California increased their income tax rates in 2008. The Federal government increased its tax rates at the beginning of the current recession; however, this did not help the economy much since overall revenue was decreasing.

On the other hand, regressive taxes are levied according to how someone makes his or her income. These types of taxes do not contribute to any major governmental program. Examples of regressive taxes are estate taxes, personal income taxes, vehicle valuation taxes, and sales taxes. On the other hand, progressive taxes are taxes that increase with a person’s income. Examples of progressive taxes include gasoline taxes, Medicare taxes, and inheritance taxes. Progressive taxes also tend to be much more regressive than other types of taxes.

Sales tax: Sales tax is one of the easiest types of tax to understand. The rate that is charged on sales is proportional to the cost of the item. This means that if you buy a cheap T-shirt, you will pay a lesser sales tax than those who spend hundreds of dollars on different T-shirts. For example, clothes can range from T-shirts costing $5.00 up to designer clothes. If you are looking for clothing that you can use as a business card, for example, a sales tax will be less since you are spending a lesser amount of money.

Direct taxes: This is probably the most confusing type of taxes. Direct taxes include things such as property taxes, vehicle registration fees, and personal income taxes. What most people don’t know is that direct taxes are normally revenues that go directly into the government’s general funds, and are not usually given to individual citizens. Thus, individuals will have a lower tax burden if they save or invest the money saved through these direct taxes. Examples of direct taxes are property taxes, fuel taxes, and income taxes.

As you can see from the above example, it is impossible to state which type of tax is more burdensome to an individual. Therefore, it is impossible to state whether paying a sales tax, a direct tax, or an indirect tax would be more burdensome to an individual. However, the best thing that you can do is to educate yourself on the different types of taxes so that you can make a decision that is based more on your own needs than anyone else’s.