Taxation Types – Which One is For You?
Tax is one of the most dreaded words for anyone living in modern times. Even the Internal Revenue Service, which is responsible for collecting income tax, can be viewed as a frightening and cruel entity. It intimidates many people, including business owners, self-employed people, even some homeowners, because of its intimidating nature. The Internal Revenue Service (IRS) has proven to be notoriously inefficient in processing claims, collecting tax money, and in the overall performance of its tasks. This is why it is so important for people to know their rights and understand their responsibilities when dealing with the IRS.
In simple terms, a tax is any monetary charge levied on a person by a government agency in an effort to fund various public services and government spending. A person who have accrued tax dues, and has not been able to pay them, would be subject to a tax assessment. Failure to pay, or evasion of or refusal to pay, the tax on this basis is punishable by federal law. Some examples of proportional taxes include income, property, gasoline, and many others.
Sales tax is commonly known as the goods and services tax, or the consumption tax. In many states, sales taxes are imposed only for the items sold within a specific area, while local governments can charge a broader sales tax if the items sold do not necessarily fall under the local jurisdiction’s purview. Generally, goods sold within the jurisdiction require a higher sales tax rate, as the goods can be used in other states, while non-local goods may be exempt from sales tax entirely. In some cases, however, sales tax may be levied on purchases made abroad, for example.
One way to avoid paying too much in sales tax is to properly document and account for all purchases, sales, and receipts. This is where the services of a tax professional to become useful. When you file your tax returns, you will be required to submit financial documentation covering all transactions, from the purchase of a certain amount of food to the sale of a similar item to a competitor. This documentation, which includes sales tax statements and associated receipts, allows the government to properly calculate the amount of taxes that you owe.
Progressive taxation is another common type of tax that is designed to provide the government with extra revenues. This method of taxation is based on how much a person earns over his or her lifetime. In this system, a person’s income increases according to the level of earnings and increases each year. Because earning amounts increase over time, the taxation payable at the end of every year becomes larger until it eventually equals the amount of tax that was paid in the previous year. Progressive taxation is extremely regressive, as it applies equally to all taxpayers.
The concept behind progressive taxation is simple enough: the more you earn over time, the more you would pay in taxes. The catch, however, is that the size of the tax that you would pay does not decrease over time, only your overall income does. With this in mind, many taxpayers choose to earn above the median income in order to maximize the amount of money they would pay in taxes over their lifetime.