Taxes

What is Tax ?

A tax (from the Latin taxo; "I estimate") is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many administrative divisions. A tax is a "pecuniary burden laid upon individuals or property owners to support the government,it is a payment exacted by legislative authority." It "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name.

Simple definition is , tax is a fee charged ("levied") by a government on a product, income, or activity.

• tax is ‘compulsory.’
• a tax is a ‘contribution’
• all taxation is imposed on ‘persons.’ Taxation of commodities falls on the consumers or other persons connected with the taxed articles, and a similar analysis will apply to other forms of taxation. The truth, though often forgotten, yet always holds good that a tax must ultimately be paid by some one.
• taxation is levied for ‘service’ or ‘benefit.’
• taxation is for the ‘public powers,’ i.e. it has to meet the wants of both central and local governments.

In Montesquieu's opinion, ‘the revenues of the State are the portion of his property that each citizen gives in order to have security for the remainder, or to enjoy it in comfort.’

‘Taxation is an exchange in which the State gives services and the contributor money.’ Hardly distinguishable is the belief that taxation is the insurance premium against the risks of social disorder set forth

In Mirabeau's proposition that ‘Taxation is only an advance to obtain protection for social order.’ 

Types of Taxes :

One of the most widely known and frequently used divisions of taxation is, ‘direct’ and ‘indirect’.Taxes are either direct or indirect. A direct tax is one, which is demanded from the very persons who, it is intended or desired, should pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another.

A natural result has been that practical financiers have adopted a different basis of distinction, and regard those taxes as direct which are levied on permanent and recurring occasions, while charges on occasional and particular events are placed under the category of indirect taxation. On either method the income tax would be ‘direct,’ and the excise and customs ‘indirect’

Another division is that into ‘taxes on revenue’ and ‘taxes on capital,’ or, perhaps better, on ‘property.’ The former are paid out of the annual national production; the latter encroach on the accumulated wealth of the society.

Taxes are often said to be either ‘real’ or ‘personal,’ and attempts have been made to distribute them into two classes on this basis. Personal taxes are those in which the person is taken note of in assessment. They require lists of the tax-payers. Real taxes are assessed on objects other than persons, and without direct reference to the owners or possessors. Capitation and income taxes are ‘personal’; taxes on land,houses, or goods are ‘real.’

In respect to the mode of assessment taxes may be either ‘rated’ or ‘apportioned.’ In the former class the charge per unit is fixed, but the total yield is always uncertain, depending as it does on the number of units that pay. An apportioned tax is one the total amount of which is fixed the shares being apportioned among the objects that are charged.

Further classification of taxes :

A. Taxes on Income

It is a tax on the money people earn or on the profits companies make.Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive.A personal or individual income tax is levied as a percentage of a person's wages and salaries When the tax is levied on the income of companies, it is often called a corporate tax.A capital gains tax is levied on profits from the sale of capital assets (e.g., real estate, machinery, stocks, bonds, art, commodities). 

B.Taxes on Property

(a) imposed on property, real or personal
(b) in proportion to its value or other reasonable method of apportionment Ex. Real estate tax
Many jurisdictions impose estate tax, gift tax or other inheritance taxes on property at death or gift transfer. Some jurisdictions impose taxes on financial or capital transactions.

A property tax (or millage tax) is an ad valorem tax levy on the value of property that the owner of the property is required to pay to a government in which the property is situated.Vehicle and boat registration fees are subsets of this kind of tax.

Wealth tax is a direct tax, which is charged on the net wealth of the assessee. It is a tax on the benefits derived from ownership of property. The tax is to be paid year after year on the same property on its market value, whether or not such property yields any income.wealth(net worth) tax is generally conceived of as a levy based on the aggregate value of all household assets, including owner-occupied housing; cash, bank deposits, money funds, and savings in insurance and pension plans; investment in real estate and unincorporated businesses; and corporate stock, financial securities, and personal trusts.A wealth tax is a tax on the accumulated stock of purchasing power, in contrast to income taxes which is a tax on the flow of assets (a change in stock).

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C.Taxes on goods and services

Value added tax - A type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale.

Sales tax - A tax imposed by the government at the point of sale on retail goods and services . It is collected by the retailer and passed on to the state.

Difference between VAT and Sales Tax - Click Here

1.VAT is levied on both the producer and consumer while a sales tax is levied on only the end consumer.

2.VAT involves tricky accounting while sales tax involves simpler accounting.

3.VAT is applied at the various stages of production while sales tax is applied on the total value of the purchase.

4.VAT efficiently avoids evasion of taxes while a sales tax is unable to deal with this.

Excises - Unlike an ad valorem, an excise is not a function of the value of the product being taxed. Excise taxes are based on the quantity, not the value, of product purchased.Central Excise duty is an indirect tax levied on those goods which are manufactured in India and are meant for home consumption. The taxable event is 'manufacture' and the liability of central excise duty arises as soon as the goods are manufactured. It is a tax on manufacturing, which is paid by a manufacturer, who passes its incidence on to the customers.It is different from customs which is a tax that a buyer pays when he imports goods from other countries. As such, excise duty is an inland tax. This is an indirect tax which implies that the manufacturer sells it at a higher price than was incurred on production thereby recovering the tax paid on its manufacture. Excise is always in addition to VAT which is paid by the end consumer.

If the manufacturer does not sell and uses the good himself, he does not have to pay any excise duty. But since he sells it as a higher price, he has to pay the excise tax. VAT is not paid by the vendor who purchases the goods from the manufacturer but by the end consumer in the chain. The vendor has already paid excise duty to the manufacturer who deposits it to the government.

Customs duty - Customs Duty is a type of indirect tax levied on goods imported into India as well as on goods exported from India. Taxable event is import into or export from India. Import of goods  means bringing into India of goods from a place outside India. India includes the territorial waters of India which extend upto 12 nautical miles into the sea to the coast of India. Export of goods means taking goods out of India to a place outside India. 

Duty is levied upon goods only, whereas tax is levied on both goods and individuals.Duty is generally a tax levied on good going out or coming inside a country. Duties are sometimes referred to as border taxes.

Excise is a tax levied by the government on goods manufactured inside the country while customs duty is a tax levied by the government on goods produced outside the country and upon arrival in to the country.Excise tax is payable by the manufacturers while custom duty is payable by the importers of goods which means they are just buyers

D. Classification based on-who bears the burden

1) Direct -the tax is imposed on the person who also bears the burden thereof Ex. Income tax, community tax, estate tax,corporate tax,securities transaction tax,etc.
2) Indirect- imposed on the taxpayer who shifts the burden of the tax to another Ex. VAT, specific tax, percentage tax, customs duties.

E. Classification of taxes based on - purpose of taxation

1) General, fiscal or revenue - imposed for the general purpose of supporting the government
Ex. Income tax, percentage tax
2) Special or regulatory - imposed for a special purpose, to achieve some social or economic objectives
Ex. Protective tariffs or customs duties on imported goods intended to protect local industries

F. Classification based on method of taxation :

1) Specific tax imposed and based on a physical unit of measurement, as by head, number, weight, length or volume Ex. Tax on distilled spirits, fermented liquors, cigars
2) Ad Valorem - tax of a fixed proportion of the value of property with respect to which the
tax is assessed; requires intervention of assessor. Ex. Real estate tax, excise tax on cars, nonessential
goods

G. Classification of taxes - based on authority imposing the tax

1) National - imposed by the national government Ex. National internal revenue taxes, custom duties
2) Municipal or local - imposed by the municipal corporations or local governments Ex. Real estate tax, occupation tax

H. Classification based on - graduation of rate (Three systems of taxation)

1) Proportional - based on a fixed percentage of the amount of the property, income or other basis to be taxed Ex. Real estate tax, VAT, percentage tax
2) Progressive or graduated - tax rate increases as the tax base or bracket increases
Ex. Income tax, estate tax, donor's tax
3) Regressive - tax rate decreases as the tax base increases
4) Degressive - increase of rate is not proportionate to the increase of tax base

Progressive taxes

A progressive tax is a tax imposed so that the tax rate increases as the amount subject to taxation increases. In simple terms, it imposes a greater burden (relative to resources) on the rich than on the poor. It  can be applied to individual taxes or to a tax system as a whole. Progressive taxes attempt to reduce the tax incidence of people with a lower ability-to-pay, as they shift the incidence disproportionately to those with a higher ability-to-pay. People with higher incomes pay a larger percentage of their incomes in taxes, while people with lower incomes pay a lower percentage in taxes. The result is people with more disposable income pay a higher percentage of that income in tax than do those with less income.Some people argue that progressive taxation is fair, because low-income people cannot afford to pay taxes as much as high-income people can. Others argue that progressive taxation discourages a strong work ethic because people do not want to work hard to become wealthy if they have to give more money away in taxes.

Regressive Taxation

Regressive taxation takes a higher percentage of taxes from low-income people and a lower percentage of taxes from high-income people, according to the IRS. Although it seems intuitively unfair to tax people more when they make less, some people feel that regressive taxation is fair because the actual amount of taxation will be closer to equal across all income levels. It may also encourage people to work harder and move up to higher income brackets. Many people, however, do not think it makes sense or is morally right to tax poor people more.

Proportional Tax

A proportional tax is one that imposes the same relative burden on all taxpayers—i.e., where tax liability and income grow in equal proportion. In simple terms, it imposes an equal burden (relative to resources) on the rich and poor. Proportional taxes maintain equal tax incidence regardless of the ability-to-pay and do not shift the incidence disproportionately to those with a higher or lower economic well-being.

List of taxes

Ad valorem
Capital gains tax
Carbon tax
Carucage
Consumption tax
Corporate tax (including the Excess profits tax, Windfall profits tax)
Corvée
Custom
Danegeld
Development Impact Tax
Direct tax
Duty
Excise (e.g. fuel excise, use tax, blank media tax, natural resources consumption tax)
FairTax
FICA tax
Franchise tax
Gabel
Impost
Income Tax
Indirect tax
Inflation tax
Inheritance tax (cf Allodial, Pigovian tax, Estate tax (United States), Inheritance Tax (United Kingdom).)
Land value tax
Payment in lieu of taxes
Payroll tax
Poll tax
Property tax
Sales tax
Scutage
Seigniorage
Sin tax
Stamp Duty
Subsidy
Tallage
Tariff
Tax Farming
Tithe
Tobin tax
Toll bridge
Toll road
Toll tunnel
Transfer tax
Tribute
Value added tax
Vehicle excise duty
Wealth tax