Types of Income Taxation
A tax is an annual financial burden or any kind of tax levied on a taxpayer by some governmental body in order to finance various public functions and government spending. Failure to pay, and/or evasion of or refusal to pay tax, are punishable by criminal law. Taxation is generally required for government use as revenue. It also facilitates harmonization of the tax system in many ways. There are various types of tax, all of which are used for different purposes.
In general, direct taxes are taxes that are collected from a person or an entity by an agent. Examples of direct taxes are income tax, sales tax, property tax, and inheritance tax. The term ‘direct tax’ refers to the amount of money directly collected by the government. The amounts collected from individuals vary according to individual receipts and the amount of money they earn. Proportional taxes include indirect taxes such as sales tax, property tax and income tax, which are usually levied on goods and services performed within the jurisdiction.
Income tax is levied on an individual’s salary or wages, and on certain situations certain types of additional receipts could be included which are considered income, like interest or dividends. The amount you would pay in taxes depends upon your tax bracket and the amount of money you earn. Those who earn lower than a specific percent above the applicable rate to get an exemption. People who earn higher than a specified percent above the applicable rate receive a deduction.
The progressive system is a popular choice for taxpayers paying taxes. In a progressive system, the amount you pay is fixed and won’t change unless you make alterations to your deductions or take up further education. This means that it is an effective way of avoiding double taxation. A tax which is based on the amount you earn can increase if you do not continue to save and invest. The progressive tax rates are also progressive, hence if you invest more you will have less to pay in taxes.
There is also a proportional tax system. In a proportional tax system, those earning more pay less while others pay more. A percentage of sales and use tax are deducted from your gross salary before the amount you would pay in taxes is calculated. This method is used in places such as New Zealand, where the sales tax is quite high while the unemployment rate is relatively low.
There is another system called the regressive tax system. In this system, you pay more taxes when you earn more, because the more you earn the higher the taxes you pay. For instance, if you have higher incomes but live on welfare then you would have to pay a lot more in taxes than someone with lower incomes who have higher incomes. This type of system usually applies to wealthier individuals.