Tax is a necessary financial burden or any other kind of levy imposed upon a taxpayer by a governmental body, so as to fund various public needs and government expenditure. A person charged with tax evading or an individual who has accrued tax debt is liable to pay tax. A person paying taxes is called an alien. A person evading taxes is called an American citizen. Any evasion or refusal to pay is punishable by law, apart from prison.
There are different kinds of taxes: direct taxes which are the taxes directly levied upon a person’s goods or property; indirect taxes, which are taxes indirectly levied upon a person’s goods or property; and regressive taxes, which are taxes that increase in a progressive way over time. All kinds of indirect taxes can be assessed against individuals or enterprises. A good example is the state income tax. An income tax is calculated by subtracting employer withholdings and net amount paid to the state for unemployment compensation from a person’s wages. In most states, the effective tax rate is between one and nine percent, with exemptions for the disabled and the blind.
Generally, the taxes are levied by multiplying the gross receipts by two. The term ‘net income’ refers to total income minus the net amount due to taxes. It should be remembered that the term gross receipts means actual cash coming into the hands of the government. It does not include the value of any depreciated or non-operational assets. A tax on dividends is usually imposed on corporations, since they generally receive dividends on their stock as a share of profits. When applied to individuals, it is known as dividends subject to capital gains tax.
There are four basic regressive systems in taxation: progressive taxation, proportional taxation, income-based taxation and absolute tax liability. Progressive taxation is based on the principle that people should pay taxes according to how much they earn. Under this system, lower incomes have lower tax liability than higher incomes. In proportional taxation, tax payments are given to those with higher earnings levels than lower-earning taxpayers.
Under regressive taxation, the highest tax rate goes to those with the highest incomes. Conversely, in the proportional regime, the lowest tax rate goes to middle-income earners. Under absolute tax liability, there is no ceiling on the tax rate. Any higher tax rate can be imposed as long as it is not offset against any saving made by the taxpayer.
Income-based taxes are regressive in nature; the rate of taxation is proportional to the income of the taxpayer. In most countries, the national monthly income is taken into account when computing the regressive tax liability. For instance, if a wage earner makes twenty thousand pounds per month, he will pay a tax of ten thousand pounds on that amount. If the same person earns less than twenty thousand pounds per month, his annual income is taken into account and he will be liable to a lesser tax burden.
In a progressive taxation regime, the rate of indirect tax is levied based on the earnings of the taxpayer. A company that earns five million pounds from the sale of its stock will pay a slightly higher tax than a company that earns one million pounds from the sale of its stock. Direct taxes are collected by taxing assets, such as estate, personal property, trade houses, and other financial holdings at fair market value.
There are two major types of indirect taxes – capital gains tax and sales tax. Capital gains tax is collected by allowing the gain (the difference between the market price of the asset and its purchase price) to be taxed. Sales tax is collected on the purchase price and on the fair market value of the asset. The principle of taxing capital gains and sales taxes harmonizes with that of income tax which itself can be complicated, and it is advisable to consult an expert before taking any decision regarding tax planning.