Types of Taxation
Posted Oct 19, 2019 01:54 PM
It's always been a light-hearted idiom that nothing in the world nothing can be certain, except death and taxes. Governments need money, and in some form or another we need Government. In this blog post, we're going to discuss the various ways the population is taxed in a modern society.
Generally, taxation occurs in two forms: direct and indirect.
A indirect tax is a tax which is generally levied against consumption of goods and services. This usually occurs as a tax on suppliers against their sales. In reality, the consumer will end up paying this tax as it is often passed on to an inflated retail price. Therefore the more you buy (or consume), the more you'll be indirectly taxed by the government for the goods and services you've attained. Indirect taxes come in different mediums and can sometimes see a product/service taxed multiple times before reaching the consumer. A few examples of indirect taxes would be; Tariffs, duties and customs, which are levied on goods imported or purchased internationally. Excise taxes which are targeted on specific goods or services such as fuel, tobacco, alcohol and gambling which are taxed to "discourage" their use. And most commonly, Value Add Taxes (VAT) which may also be called Goods and Services Tax (GST) or Sales Tax depending on where abouts in the world you're reading from. A Value Add Tax is the most blatant form of indirect tax, as they're designed to charge a set rate of tax on the sale price of the good/service.
On the other hand, we have direct taxes. Direct taxes draw their contrast as they're levied directly against the fiscal income of a person or entity. Direct taxes are the main source of income for a government, and they will likely levy direct taxes on almost all income sources they can politically justify. However it's worth noting that taxes in the direct sense are great tools for government intervention/management in the economy on a macro scale. In their reduction, a government can free up money in the economy and allow for stimulus. While the increasing of direct taxes can also be used to increase government finances at the sometimes strategic expense of dampened growth. Arguably the most well known direct tax is Income Tax, in which a proportion of an individual's salary or wage is taken as tax by the government. The business equivalent of this is often called Company Tax, by which a proportion of the businesses profit is levied. Other smaller income taxes can include; Capital Gains Tax, which is often charged at a flat rate on the profitable sale of large assets such as real estate, shares and even vehicles. Inheritance, Estate or Death Tax, in which the transfer of funds and various assets are taxed after the division of the deceased persons wealth is spread amongst beneficiaries.
Nature of Taxation
When discussing the nature of tax, I will be referring to the progressive, regressive or proportional nature of taxes in the economy. This information is very important to governments when designing a tax system, as disproportionate taxing will always exacerbate social inequity, which is a topic for another time. However, taxes in a progressive nature will see the rate of tax increase as income increases. This is very common in direct taxes, as people and entities earning larger amounts are often taxed a fuller amount of their total income, whist, those whom are earning smaller incomes are taxed a lesser proportion of their income. The opposite of this, is a regressively natured tax in which, those earning more will often pay a lesser proportion of their income. While this sounds may unfair, it's quite common among business taxes. A large multi-national business with vast assets is much more able to negotiate their own tax rates or tax concessions, which can lead to effectively paying less tax. Governing bodies have been known to yield to the bargaining power that these entities have, while those without are taxed the usual rate. Finally, there's proportional taxes which simply can be explained as a tax that is charged at a flat or even rate to all applicable taxpayers without concern of income. Some indirect taxes are often confused to be proportional taxes... however this isn't always the case. I'll give β100 to the first person who can explain why a VAT/GST/Sales Tax often isn't proportional in nature.
Anywho, thanks for reading my first blog post!
Spaark
Notice! This is by no means a guide designed to inform you on your obligations as a tax payer. This information is designed as an outline of economic understanding in the forms and nature of taxation used in modern societies. Taxation varies from nation to nation so not everything described in this blog post may be relevant where you reside. You should always seek registered financial professionals when dealing with your finances.
Generally, taxation occurs in two forms: direct and indirect.
A indirect tax is a tax which is generally levied against consumption of goods and services. This usually occurs as a tax on suppliers against their sales. In reality, the consumer will end up paying this tax as it is often passed on to an inflated retail price. Therefore the more you buy (or consume), the more you'll be indirectly taxed by the government for the goods and services you've attained. Indirect taxes come in different mediums and can sometimes see a product/service taxed multiple times before reaching the consumer. A few examples of indirect taxes would be; Tariffs, duties and customs, which are levied on goods imported or purchased internationally. Excise taxes which are targeted on specific goods or services such as fuel, tobacco, alcohol and gambling which are taxed to "discourage" their use. And most commonly, Value Add Taxes (VAT) which may also be called Goods and Services Tax (GST) or Sales Tax depending on where abouts in the world you're reading from. A Value Add Tax is the most blatant form of indirect tax, as they're designed to charge a set rate of tax on the sale price of the good/service.
On the other hand, we have direct taxes. Direct taxes draw their contrast as they're levied directly against the fiscal income of a person or entity. Direct taxes are the main source of income for a government, and they will likely levy direct taxes on almost all income sources they can politically justify. However it's worth noting that taxes in the direct sense are great tools for government intervention/management in the economy on a macro scale. In their reduction, a government can free up money in the economy and allow for stimulus. While the increasing of direct taxes can also be used to increase government finances at the sometimes strategic expense of dampened growth. Arguably the most well known direct tax is Income Tax, in which a proportion of an individual's salary or wage is taken as tax by the government. The business equivalent of this is often called Company Tax, by which a proportion of the businesses profit is levied. Other smaller income taxes can include; Capital Gains Tax, which is often charged at a flat rate on the profitable sale of large assets such as real estate, shares and even vehicles. Inheritance, Estate or Death Tax, in which the transfer of funds and various assets are taxed after the division of the deceased persons wealth is spread amongst beneficiaries.
Nature of Taxation
When discussing the nature of tax, I will be referring to the progressive, regressive or proportional nature of taxes in the economy. This information is very important to governments when designing a tax system, as disproportionate taxing will always exacerbate social inequity, which is a topic for another time. However, taxes in a progressive nature will see the rate of tax increase as income increases. This is very common in direct taxes, as people and entities earning larger amounts are often taxed a fuller amount of their total income, whist, those whom are earning smaller incomes are taxed a lesser proportion of their income. The opposite of this, is a regressively natured tax in which, those earning more will often pay a lesser proportion of their income. While this sounds may unfair, it's quite common among business taxes. A large multi-national business with vast assets is much more able to negotiate their own tax rates or tax concessions, which can lead to effectively paying less tax. Governing bodies have been known to yield to the bargaining power that these entities have, while those without are taxed the usual rate. Finally, there's proportional taxes which simply can be explained as a tax that is charged at a flat or even rate to all applicable taxpayers without concern of income. Some indirect taxes are often confused to be proportional taxes... however this isn't always the case. I'll give β100 to the first person who can explain why a VAT/GST/Sales Tax often isn't proportional in nature.
Anywho, thanks for reading my first blog post!
Spaark
