Understanding Tax Types
Taxation is one of the most important aspects of the tax system. A tax is any monetary payment or other sort of legal levy payable on a citizen by a government body in order to finance various public expenses and government spending. A person may be charged with tax even for some lawful business activity. In simple terms, tax signifies a payment or contribution made by an individual or group to a public body designed to undertake some particular function. A person may also be taxed for property he owns, income from professional activities like writing and teaching, and money obtained by inheritance or bequest.
There are different types of taxes applicable to citizens of different countries and they differ according to the country’s government. The two most common types of taxes are progressive and proportional. In a progressive tax, the amount of tax paid increases with the level of income of the taxpayer. In proportional tax, the amount of tax paid is fixed at a certain rate irrespective of the income of the taxpayer. A good example of a progressive tax is the US tax system.
A sales tax also occurs in the US. This tax is another example of taxes everyone has to shell out irrespective of their income. Sales tax in the US is based on the purchase price or selling price of the product or service. A good example of sales tax is the capital gains tax.
Progressive and proportional taxes also have other names. Examples of proportional taxes include income tax and estate tax. Progressive tax system gives the highest percentage of tax benefit to the lower income group and the wealthy people. Proportional taxes include sales taxes, inheritance tax, property tax, and the property tax.
The estate tax on the other hand, imposes a tax on the transfer of wealth from one generation to another. The gifting exemption is one of the exemptions included in the estate tax. Some wealthy individuals opt for charitable giving. In this way they can claim exemption from paying the tax on the gifts. Though the wealthy individuals may be able to save a lot of money using the charitable giving option, it may not help in reducing the tax payments.
It is necessary to understand the difference between income tax, capital gains tax, and sales tax. Income tax includes all the incomes such as salary, interest, dividends, rental income, and more and is paid by the employee, business person, and the self-employed individuals. Capital gains tax refers to the profit gained on sale of assets. Sales tax is paid by the purchaser of goods and services and is also deductible on income tax.