types of taxes essay

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• Introduction

Purposes of taxation

• Classes of taxes
• History of taxation
• Principles of taxation
• Shifting and incidence

What is taxation?

How does taxation relate to government revenue, what type of taxation is a direct tax, what type of taxation is an indirect tax, what kind of taxation is vat (value-added tax), should u.s. churches remain tax-exempt, should the federal corporate income tax rate be raised.

taxation , imposition of compulsory levies on individuals or entities by governments. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well.

This article is concerned with taxation in general, its principles, its objectives, and its effects; specifically, the article discusses the nature and purposes of taxation, whether taxes should be classified as direct or indirect, the history of taxation, canons and criteria of taxation, and economic effects of taxation, including shifting and incidence (identifying who bears the ultimate burden of taxes when that burden is passed from the person or entity deemed legally responsible for it to another). For further discussion of taxation’s role in fiscal policy , see government economic policy . In addition, see international trade for information on tariffs .

In modern economies taxes are the most important source of governmental revenue . Taxes differ from other sources of revenue in that they are compulsory levies and are unrequited—i.e., they are generally not paid in exchange for some specific thing, such as a particular public service, the sale of public property , or the issuance of public debt . While taxes are presumably collected for the welfare of taxpayers as a whole, the individual taxpayer’s liability is independent of any specific benefit received. There are, however, important exceptions: payroll taxes , for example, are commonly levied on labour income in order to finance retirement benefits, medical payments, and other social security programs—all of which are likely to benefit the taxpayer. Because of the likely link between taxes paid and benefits received, payroll taxes are sometimes called “contributions” (as in the United States ). Nevertheless, the payments are commonly compulsory, and the link to benefits is sometimes quite weak. Another example of a tax that is linked to benefits received, if only loosely, is the use of taxes on motor fuels to finance the construction and maintenance of roads and highways, whose services can be enjoyed only by consuming taxed motor fuels.

During the 19th century the prevalent idea was that taxes should serve mainly to finance the government . In earlier times, and again today, governments have utilized taxation for other than merely fiscal purposes. One useful way to view the purpose of taxation, attributable to American economist Richard A. Musgrave , is to distinguish between objectives of resource allocation, income redistribution, and economic stability. (Economic growth or development and international competitiveness are sometimes listed as separate goals, but they can generally be subsumed under the other three.) In the absence of a strong reason for interference, such as the need to reduce pollution , the first objective, resource allocation, is furthered if tax policy does not interfere with market-determined allocations. The second objective, income redistribution, is meant to lessen inequalities in the distribution of income and wealth. The objective of stabilization—implemented through tax policy, government expenditure policy, monetary policy , and debt management—is that of maintaining high employment and price stability.

There are likely to be conflicts among these three objectives. For example, resource allocation might require changes in the level or composition (or both) of taxes, but those changes might bear heavily on low-income families—thus upsetting redistributive goals. As another example, taxes that are highly redistributive may conflict with the efficient allocation of resources required to achieve the goal of economic neutrality.

Free Taxation Essay Examples & Topics

Writing an essay on taxes can be a chore. Yet, it will seem much more manageable once you sort out the details. So, let’s explore some definitions:

Taxation refers to the situation when an authority, such as the government, imposes a financial charge on individuals or businesses. In exchange, it delivers various public provisions. They include infrastructure development, security, etc. Since the dawn of civilization, this process has been a part of human society.

The importance of taxation lies in it being the primary source of revenue for governmental institutions. Locally, taxes account for running and maintaining services (e.g., the fire department or public libraries). They also fund transit systems and institutions such as schools at the state level. Federally, the government uses taxes to run the welfare system and redistribute income.

In your tax essay, you have the opportunity to discuss and highlight topics that are important to you and your community. Here, our experts have gathered some advice that will help you begin your work. Furthermore, you will also find tax essay topics and samples below.

An essay about taxes will require a significant amount of research and analysis. You will also have to follow the rules of the academic writing style. In this section, we’ve explained which tips can assist you in your writing.

To compose a successful tax essay, rely on this advice:

• Take the time to familiarize yourself with the topic. Regardless of whether it is given or chosen, explore it in detail. Establish which country’s laws you are analyzing or whether you are contrasting differences in taxation systems. Keep in mind that various areas will have different legislations.
• Conduct your research thoroughly. Once you have an idea of what to look for, take the time to delve into the relevant laws. You can always find or get a summary to read first to save yourself some time. Some texts may have references to particular articles of the source law. These can guide you to the key materials immediately.
• Make sure you have all your resources in order. Double-check everything you’ve gathered so far. Think of what you are trying to accomplish and whether your information is enough. For example, if you are writing a comparative paper. Then, you will need to gather data sets that are notably different.
• Work on your essay structure . Any essay will include the basic elements: an introduction, a thesis statement, body paragraphs, and a conclusion. Jot down the arguments you will be providing and where they will go in the paper.
• Be clear with your terminology. Legal jargon can be overwhelming. Thus, clarify all the concepts that may be unfamiliar for your readers. Laws rely on exact wording to avoid misinterpretation. Take extra care when choosing your phrasing not to make any mistakes.
• Use evidence and citations wherever necessary. Depending on your essay type, you may need to use more or less proof to support your claims. You can make assumptions about your topic. However, make sure they are not baseless. Provide ample citations and add a formatted bibliography in the end.

Once you have sorted through our writing tips, feel free to look for the right idea. Over here, you will find taxation essay topics for your assignment. And if you realize that these are not enough, you can always use our title generator . It will create an original title for an essay about taxes.

• Studying how to counter tax evasion of multinational corporations.
• Comparing income tax revenue between the US and the UK.
• How can we counter the phenomenon of pink tax?
• Examining Adam Smith’s four principles of taxes.
• Do we really need to tax rich people? Pros and cons of income tax for billionaires.
• Appropriate strategies for deciding taxation levels for goods and services.
• How feasible is the optimal tax theory in practice?
• Exploring the differences between tax avoidance and tax evasion.
• Mexico and the fast-food tax – a case study.
• Outlining the long-term benefits of paying taxes.
• Analyzing the impacts of the 2017 US tax reform.
• Principles of the budgeting process behind the federal income tax.
• How can tax money be extracted from cryptocurrency?
• Exploring the key differences in tax systems of China and Japan.
• Why do we pay taxes? A brief history of taxation leading back to Ancient Egypt.
• Is there a need to tax cigarettes and alcohol more heavily than other products?
• Evaluating the Tyco accounting scandal and the many iterations of tax fraud.

Thank you for reading through our article! We hope that these tips and topics will be of use to you. Now, you can proceed to browse through our selection of taxation essay examples.

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What Is Income Tax?

• How It Works

History of Income Tax

Types of income tax, the bottom line, what is income tax and how are different types calculated.

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Income tax is a type of tax governments impose on the income that businesses and individuals generate. By law, taxpayers must file an income tax return annually to determine their tax obligations.

Income taxes are a source of revenue for governments. They are used to fund public services and pay government obligations. In addition to the federal government, many states and local jurisdictions also levy income taxes.

Certain investments, like housing authority bonds , are exempt from income taxes in some cases.

Key Takeaways

• Income tax is a type of tax governments impose on income generated by businesses and individuals within their jurisdiction.
• Income tax is used to fund public services, pay government obligations, and provide goods for citizens.
• The federal government and many states, as well as local jurisdictions, levy their own income taxes.
• Personal income tax is a type of income tax levied on an individual’s wages, salaries, and other types of income.
• Business income taxes apply to corporations, partnerships, small businesses, and the self-employed.

Mira Norian / Investopedia

How Income Tax Works

The Internal Revenue Service (IRS) collects taxes and enforces tax laws in the United States. The IRS employs a complex set of rules and regulations regarding reportable and taxable income, deductions, credits, etc. The agency collects taxes on all forms of income, such as wages, salaries, commissions, investments, and business earnings.

The personal income tax that the government collects can help fund government programs and services, such as Social Security, national security, schools, and roads.

The United States imposed the nation’s first income tax in 1862 to help finance the Civil War. After the war, the tax was repealed, but it was reinstated after the passage of the Revenue Act of 1913. That same year, Form 1040 was introduced.

Most countries, including the U.S., employ a progressive income tax system in which higher-income earners pay a higher tax rate compared with their lower-income counterparts. The idea behind progressive tax is that those who earn high incomes can afford to pay more tax. For 2023 and 2024, federal income tax rates range from 10% to 37%.

Individual Income Tax

Individual income tax is also referred to as personal income tax. This type of income tax is levied on an individual’s wages, salaries, and other types of income. This tax is usually a tax that the state imposes. Because of exemptions, deductions, and credits , most individuals do not pay taxes on all of their income.

The IRS offers a series of income tax deductions and tax credits taxpayers can use to reduce their taxable income. While a deduction can lower your taxable income and the tax rate used to calculate your tax, a tax credit reduces your income tax obligation.

The IRS offers tax deductions for healthcare expenses, investments, and certain education expenses. For example, if a taxpayer earns $100,000 in income and qualifies for $20,000 in deductions, the taxable income reduces to $80,000 ($100,000 - $20,000 = $80,000).

Tax credits help reduce the taxpayer’s tax obligation or amount owed. They were created primarily for middle-income and lower-income households. To illustrate, if an individual owes $20,000 in taxes but qualifies for $4,500 in credits, their tax obligation reduces to $15,500 ($20,000 - $4,500 = $15,500).

Taxable income is your adjusted gross income (AGI) minus any itemized deductions or your standard deduction .

Business Income Tax

Businesses also pay income taxes on their earnings; the IRS taxes income from corporations, partnerships, self-employed contractors, and small businesses.

Depending on the business structure, the corporation, its owners, or shareholders report their business income and then deduct their operating and capital expenses. Generally, the difference between their business income and their operating and capital expenses is considered their taxable business income.

State and Local Income Tax

All but nine U.S. states impose personal income taxes on their residents. The ones that don't are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Keep in mind, though, that it may not necessarily be cheaper to live in a state that does not levy income taxes. This is because states often make up the lost revenue with other taxes or reduced services.

What's more, other factors determine the affordability of living in a state, including healthcare, cost of living, and job opportunities. For instance, Florida residents pay a 6% sales tax on goods and services, while the state sales tax in Tennessee is 7%.

If you don’t have a complicated tax situation, a tax calculator can give you an idea of how much income tax you might owe.

To further complicate matters, states continually adjust their tax systems in ways both large and small, making it impossible to predict what sort of tax burden their residents will face in the years to come.

What Percent of Income Is Taxed?

The percent of your income that is taxed depends on how much you earn and your filing status . In theory, the more you earn, the more you pay. The federal income tax rate ranges from 10% to 37%.

How Can I Calculate Income Tax?

To calculate income tax, you’ll need to add up all sources of taxable income earned in a tax year. The next step is calculating your adjusted gross income (AGI) . Once you have done this, subtract any deductions for which you are eligible from your AGI.

Which States Have No Income Tax?

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming do not collect state income taxes .

All taxpayers pay federal income tax. Depending on where you live, you may have to pay state and local income taxes, too. The U.S. has a progressive income tax system, which means that higher-income earners pay a higher tax rate than those with lower incomes. Most taxpayers do not pay taxes on all of their income, thanks to exemptions and deductions.

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Internal Revenue Service. " IRS Provides Tax Inflation Adjustments for Tax Year 2024 ."

Internal Revenue Service. " Federal Income Tax Rates and Brackets ."

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Types of Taxes: the US Tax System Explained

“The hardest thing in the world to understand is the income tax,”

…said Albert Einstein.

So, what are the chances of understanding for the rest of us mortals then?

With the right guide, a bit better!

So, stay with us and learn all you need to know about:

• what is taxation
• how do taxes work, and what are they used for
• the types of taxes in the United States

What Are Taxes — Tax Definition and Historical Facts

Tax is a compulsory financial contribution of any individual, association, or institution that supports government projects and public expenditures . These payments are imposed and supervised by the official authorities.

And so, any failure to fulfill this legal obligation, including tax evasion and resistance, leads to strict law punishments.

Although new types of tax seem to be appearing every day, taxes are, in fact, nothing new.

The first confirmed example of taxation dates all the way back to ancient Egypt , somewhere around 3000 BC . Although, the chances are some older civilizations probably had different forms of tax collection even before that. Claims exist that Mesopotamian people paid taxes in the form of livestock starting from 4500 BC.

In the US, Abraham Lincoln was the first to introduce the income tax within the Revenue Act of 1861 . The income tax collection was supposed to help the Civil War efforts . And so, as soon as the war ended in 1872, the practice became unjustified, and it got aborted.

Tax in independent America got overturned a couple of more times after that and was, in general, hard to establish. Mainly because the nation still suffered the consequences of heavy Great Britain tax demands from colonial times.

Finally, at the beginning of 1913 , the idea of tax system implementation received the needed support and became a part of the Sixteenth Amendment .

Since then, the system evolved dramatically, and different types of taxes emerged. The latest Federal tax reform happened in 2020.

How Do Taxes Work?

If you’d look at the world’s tax map or chart, you’d get to see a very colorful picture.

Tax collection works differently around the world. Also, tax rates differ significantly by country , from Aruba and Chad with close to 60% individual income tax rate to the Cayman Islands and Qatar with 0%.

The US stands somewhere in between with its seven different income tax brackets . The lowest being 10% and the highest 37% .

But before you pack your bags and start looking for your passport, let’s see how taxes work in the US and why they are necessary.

First of all, how are taxes paid?

There are three ways in which one can make their tax payment. These are:

• through tax expenditures

Direct taxes — as the name suggests, these are the taxes that a person or association pays directly to the government entity that levies it. Individual income tax, corporate taxes, and property taxes are all examples of direct tax.

Indirect taxes — are all taxes we pay on goods and services, including those of importing gas, alcohol, and tobacco. They are named indirect because you’re not directly paying them to the government or any of its entities. Instead, you give a set amount of tax money to a merchant who then settles tax with the government. Indirect taxes include sales taxes, value-added taxes, tariffs, and excise taxes .

Tax expenditures — Whenever you donate to charity or buy a house, you’re, sort of, helping your government. To repay you, the government then forgoes a chunk of your tax. These are tax expenditures in simplest terms. Or in other words, tax expenditures are the activities that you can perform to benefit the community. And, the government promotes these activities by offering tax deductions and tax credits in exchange.

How you pay your tax will define the tax rate.

• And so, for taxes paid directly, you will follow your tax bracket and pay the percentage of the whole taxable amount as defined by that tax bracket.
• Indirect taxes, on the other hand, are the same for everyone.
• With tax expenditures, you get to decide on the value and type of your contribution.

Who collects taxes in the States?

The United States collects taxes on three different levels.

The biggest chunk of the total tax amount goes to the federal government that collects income tax, excise taxes, custom duty taxes, tariffs, and similar. All these add to over two-thirds of the total tax deduction in the US.

Precisely, who collects income tax for the US government?

Governments typically hire different agencies or commissions to collect their income taxes. In the US, the Internal Revenue Service (IRS) is in charge of this formal duty .

State governments collect around 20% of all tax, mainly through sales and some excise taxes.

Local governments collect the rest. Most of the time, they impose taxes on property, land value taxes, and a part of taxes from sales.

Unfortunately, very often, tax collection jurisdictions are not clear-cut . Same property, income, or service can sometimes be taxed at a few different government levels without the taxes offsetting each other.

What Do Taxes Pay for?

So far, it seems like taxes are just a lot of expenses. But in reality, they are designed to support the society.

Various types of taxes exist to improve different segments of life. Those usually include healthcare, infrastructure, social security funds, and similar.

Also, by sparing a fragment of your salary, sales, or possession for tax purposes, you’re helping gross domestic product (GDP) rise. And this, in turn, promotes the economic growth of your country. Finally, new job opportunities appear, salaries increase, and an altogether better standard of life generates.

All in all, wisely used government taxes can create a ripple effect with numerous social and economic benefits.

All this being said, let’s now see how your tax money gets spent in the States.

What are taxes used for in the US?

You know that feeling of thrill when the salary arrives?

And then the disappointment when you realize that the government gets to spend over one-third of it…

Would it make you feel any better if you’d known that, at least, that money ends up well-spent?

Well, let’s see if that’s the case.

Leading health programs

Did you know that about 18% of your tax bill goes to funding leading national health programs?

Medicaid, Medicare, and the Children’s Health Insurance Program (CHIP) all receive support from different types of taxes and taxpayers around the country.

Not too bad, right?

Social security

Social security has been one of the principal motives for tax collection since the beginning of the practice. Retirements, survivors’ benefits, and disability support all make a return from the social security treasury.

You work and contribute to the national budget through different tax types while you are young and healthy so that you don’t have to work when you reach the greater age.

With almost 23% of federal budget investments , social security is a mandatory segment of tax expenditures.

National defense and security

National security presents one of the major concerns of the government.

Then, it doesn’t surprise that the government reserves almost 16% of the federal budget to support the Department of Defense and Homeland Security Agency.

And so you follow and respect the long list of taxes daily.

But at least you sleep peacefully at night.

Safety net programs

Why do we pay taxes if not to help those in need?

Not everyone is in a position to enjoy different health programs and social security benefits. Unemployed citizens, low-income and some mid-income families, as well as underprivileged kids, often need additional assistance.

This aid is ensured by the government, with:

• unemployment insurance
• housing assistance
• food stamps
• underprivileged children programs

Around 9% of all federal taxes reach those who need help the most, one way or another.

Other expenditures

But this is not all.

Taxing in America ultimately serves many other purposes.

It helps take care of the interest on the national debt, benefits for federal retirees and veterans, and similar.

Furthermore, most infrastructural, educational, and scientific projects wouldn’t be possible without the government’s financial support.

So what makes the USA the way it is — it’s all of us!

Types of Taxes in the USA

For a while in US history, the only taxes that the government collected were import taxes or tariffs.

Imagine living in those times!

Instead, we have a quite complex tax structure — that even the brightest among us can’t follow at times without professional advisors or tax software.

Still, the better our understanding of that structure and our obligations as US citizens, the lesser the chances of unintended tax breaches and evasions.

So let’s now see — what are the different types of tax currently in force in the USA?

1. Income tax

Income tax statistics show that over 70% of US citizens don’t pay taxes on, at least, a portion of their income.

Some taxpayers accidentally forget to file it. Others do intentional evasions or are not fully aware of how it works.

To lessen this confusion, let’s first dig into what income taxes are and how they are categorized.

As their name suggests, income taxes are taxes that each individual or corporation needs to pay on their earnings or income . Different rules and regulations apply to each type of income tax. However, the common thing for most of these taxes is that they are marginal and progressive.

Marginal — means that there are different tax brackets or categories based on one’s taxable income amount. They are expressed in percentages.

Progressive — means that as your income increases, your taxes will increase too.

The two main types of income tax are the following:

Personal income tax

This is a tax that each citizen pays on their individual or household income that comes from wages, salaries, or investments.

Currently there are seven tax brackets for personal income in the States. They are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Here’s an income tax example:

If your taxable annual income is between $0 and $9,950 and you are a single person filing individually, your tax bracket is the lowest one of 10%. The same goes for married couples filing individually. Married couples filing together will fall under the same bracket with a combined income of up to $19,900.

As your single earnings rise above $9,951 to up to $40,525 or combined ones exceed $19,901 but not $81,051, you will move to the next tax bracket (22%), and so on.

However, as we work on understanding tax brackets, you should remember the following:

Moving to the next tax bracket doesn’t mean that all your taxable income will undergo that bracket. Instead, for your first $9,950, you will still have to pay only 10% of tax. And then, for the remaining of your total income between $9,951 and $40,525, the tax will rise to 12%.

The trend will continue until some of your income, currently above $523,601, reaches the 37% tax bracket.

Corporate income tax

A corporate income tax is usually a federally or state-imposed tax on all corporate revenues , excluding the costs of managing and executing the business .

Currently, more and more countries around the globe are lowering their corporate income taxes to support their corporations.

In the US, the federal corporate tax rate got lowered to 21%. That is thanks to the Tax Cuts and Jobs Act of 2017.

However, in some US states, some additional corporate tax rates by state apply.

2. Payroll taxes

These are also types of taxes deducted from your salary. However, they have the specific purpose of covering your social security and medical insurance expenses .

In some cases, your employer will take care of your payroll taxation, and in others, you will have to do it yourself.

And then, we have payroll taxes under the Federal Insurance Contribution Act, or FICA taxes — shared between the employer and the employee.

In any case, the combined payroll taxes in the USA rarely exceed 15%.

3. Capital gains tax

Once your investments pay off, the earnings become taxable. These types of taxes we pay on profit from investments are known as capital gains taxes.

Capital gains taxes, therefore, apply to dividends and interests. Likewise, they’re imposed on stocks and bonds earnings but only once realized.

The rate of the tax you’ll have to pay will depend on several factors, but mostly on your tax bracket and the duration of your investment.

And so, in the US, short-term capital gains taxes match the regular income taxes. However, the long-term ones have much more favorable rates.

4. Property tax

To have a nice house in a good neighborhood is pretty much everyone’s dream.

Until they get the property taxes explained.

Basically, the more valuable your house and the better its area — the higher your taxes will be . And if you don’t have the adequate income or savings to support that, your unpaid property taxes could diminish your house value and sale chances.

Your property tax debt could turn into a tax lien and your dream into a nightmare.

But, how do you pay property taxes?

You pay property taxes to your local government. To calculate your tax rate, they multiply the fair market price of your property and the tax rate of your area. The results are the taxes that typically range from 0.50% to 4% of the property value.

As an owner, you have the right to declare the property value, which then a professional tax assessor may accept or alter.

5. Sales tax

In simplest terms, the sales tax is what you see at the bottom of your receipt every time you visit a store. It’s a tax on things you buy .

Sales tax falls under the category of consumption tax . Unlike income or capital gain tax, consumption tax is imposed on people’s spendings and not on their earnings.

It is also an indirect tax because the consumer pays for it, but the merchant is responsible for money reaching the government.

The two main types of sales taxes are:

General sales tax

Each of the US states applies the general sales taxes. To calculate them, one should multiply the purchase value with the effective tax rate in that state.

Usually, it’s the state government that imposes the official tax rates. Alaska, Delaware, Montana, New Hampshire, and Oregon are exemptions here since they entrust this responsibility to their local governments.

Sometimes the state and the city taxes both apply, leading to higher total sales tax.

Excise taxes or sin taxes

You must’ve heard of another type of compulsory taxation called sin taxes.

Sin or excise taxes are also consumption taxes which, most of the time, consumers settle indirectly.

The name itself suggests that these are the taxes that apply to specific, often harmful, goods. These include tobacco, alcohol, cigarettes, casino gains , and similar.

The taxes, usually, get levied on both federal and state levels. Besides, the rates of these taxes are among the highest, with the obvious intention of discouraging consumers. Sin taxes are either charged as:

• Ad valorem tax — expressed in percentages so they can vary.
• Fixed tax rates — flat fees added to the regular cost of an item.

6. Estate tax and inheritance tax

People often mix up and interchange these two different kinds of taxes. And although they share the settlement of taxes on assets inherited from a deceased person , this is how they differ:

Estate taxes — are covered by the estate itself before its assets even reach the heirs. Inheritance taxes — are left for heirs to settle upon the inheritance receipt.

Both of these types of taxation could be difficult to implement and complex to administer. On top of that, they often lead to unsatisfactory economic outcomes such as poor estate planning or altogether abandonment.

As a consequence, more and more states are dropping the estate and inheritance taxes.

7. Gift tax

Yes, you read it well.

You need to pay taxes on gifts too!

Or, to be precise, if you’re the donor of the gift, you will need to report it and settle the gift tax. The recipients usually don’t pay for these types of taxes in the USA.

Gift taxes have been created on a federal level to minimize income and capital gains tax avoidance . Namely, taxpayers realized, at some point, that by transferring some of their profit to their friends or relatives, they can steer clear of paying most of their income taxes.

By introducing gift taxes, the country got a better insight into its investors’ actions.

Gifts, in this case, are only the contributions of financial value that the receiver doesn’t cover in total. Partial payments are allowed for the contribution to remain a gift.

Although these types of federal tax can turn out to be quite high, 18% to 40%, they are usually still lower than capital gains taxes. Besides, there are a few tax gift exemptions that make gifting away some of your assets worth considering.

• One can give an unlimited asset amount tax-free to their US citizen spouse (or up to $159,000 if the spouse is not a citizen of the US).
• Gifts for educational and medical purposes to a person or institutions are tax-free.
• That applies to the gifts to charitable and political organizations too.
• Gifts that don’t exceed in value the annual gift-tax exclusion rate are free of tax.

8. Tariff taxes

Also known as import duty, custom duty, or import tax , these types of taxes in the US have the following aims:

• to raise funds for local governments
• to promote locally-grown food and locally-produced goods by giving them the tariff-free advantage
• at times, tariffs may even serve for restricting certain countries from importing their products (by applying high tariff rates on those products)

In the USA, Congress determines the tariff rates.

Most often, these rates are based on:

• the imported good’s value
• and the importing country’s relationship with the USA.

Special rates for underdeveloped countries apply. The same goes for the countries that are under the international trade program.

To sum everything up:

• Whether we like it or not, taxes are present in almost every sphere of our lives.
• Different types of federal taxes can take more than one-third of all your assets each year.
• The more you learn about tax, the lesser chances for potential fines and losses.
• The crucial purpose of taxation is funding major public programs and projects and, ultimately, a GDP rise.
• Besides, paying taxes is everyone’s legal obligation. And, failure to do so can lead to a lot of problems.

Federal taxes are the money that the government collects from individuals and companies to invest in healthcare, social security, infrastructure, education, and similar. Examples of federal taxes are income taxes, property taxes, and sale taxes.

Taxes in the US are collected on federal, state, and local levels. The government hires trusted professional agencies to do the tax collection. On a federal level, that is the IRS.

We pay different types of taxes on most of our earnings, our purchases, and our property. The list goes on, but these are the main segments of our tax obligations.

Yes, paying taxes is everyone’s law obligation. Failing to do so may lead to severe financial penalties or even jail time.

The main difference is that tax evasion is an illegal practice of concealing tax obligations and information from the authorities, while tax avoidance is completely legal. Tax avoidance merely represents one’s righteous methods for taxable income reduction.

A direct tax is every tax that you pay directly to a government body. And indirect taxes are those you pay to a merchant or service provider as a mediator between you and the government.

The main types of taxes are: income taxes, capital gains taxes, property taxes, sales taxes, estate taxes, gift taxes, payroll taxes, and tariff taxes.

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Reviewing Recent Evidence of the Effect of Taxes on Economic Growth

With the Biden administration proposing a variety of new taxes, it is worth revisiting the literature on how taxes impact economic growth. In 2012, we published a review of the evidence , noting that most studies find negative impacts. However, many papers have been written since, some using more sophisticated empirical methods to identify a causal impact of tax A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es on economic growth. Below we review this new evidence, again confirming our original findings: Taxes, particularly on corporate and individual income, harm economic growth.

The economic impacts of tax changes on economic growth, measured as a change in real GDP or the components of GDP such as consumption and investment, are difficult to measure. Some tax changes occur as a response to economic growth, and looking at a tax cut at a certain point in time could lead to the mistaken conclusion that tax cuts are bad for growth, since tax cuts are often enacted during economic downturns. For this reason, most of the literature in recent years, and reviewed below, has followed the methodology developed in Romer and Romer (2010) : Looking at unanticipated changes in tax policy, which economists refer to as “exogenous shocks.”

There are other methodological challenges as well. Failure to control for other factors that impact economic growth, such as government spending and monetary policy, could understate or overstate the impact of taxes on growth. Some tax changes in particular may have stronger long-run impacts relative to the short run, such as corporate tax changes, and a study with only a limited time series would miss this effect. Finally, tax reforms involve many moving parts: Certain taxes may go up, while others may drop. This can make it difficult to characterize certain reforms as net tax increases or decreases, leading to mistaken interpretations of how taxes impact growth.

We investigate papers in top economics journals and National Bureau of Economic Research (NBER) working papers over the past few years, considering both U.S. and international evidence. This research covers a wide variety of taxes, including income, consumption, and corporate taxation. All seven papers reviewed here find that tax cuts have positive effects on growth, although some papers note that the strength of this effect depends on which taxes are cut, for whom, and when.

Mertens and Olea (2018) used time series data from 1946 to 2012 to estimate the impacts of marginal tax rates on individual income. They found that marginal rate cuts led to both increases in real GDP and declines in unemployment. A 1 percentage-point decrease in the tax rate increases real GDP by 0.78 percent by the third year after the tax change. Importantly, they find that changes in income following a tax change are responsive to the marginal rate change regardless of the change in the average tax rate The average tax rate is the total tax paid divided by taxable income . While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. . This illustrates that the positive GDP changes the authors find are the response to changes in the incentives, rather than due to an increase aggregate demand through the consumption channel. Cuts in tax rates for the top 1 percent also have positive impacts on other income groups, consistent with a supply-side narrative of how reductions in top marginal rates can increase incomes for other groups over time. However, tax cuts for the top 1 percent do increase inequality.

Zidar (2019) examines the impact of federal tax burdens on economic growth and labor supply across different income groups and states from 1950-2011. He finds positive impacts of tax cuts on economic growth following two years after the change in policy but finds that tax cuts for low- and moderate-income taxpayers affect growth more than tax cuts for high-income taxpayers. The paper finds that a 1 percent of state GDP tax decrease for the bottom 90 percent of earners increases state GDP by 6.6 percent. Looking at labor supply effects in particular, he finds that a 1 percent of state GDP tax decrease increases labor force participation for the bottom 90 percent of earners by 3.5 percentage points and hours worked by 2 percent. He does not find any significant impact on labor force participation rates, hours worked, or GDP growth for the top 10 percent of earners from a similarly sized tax change, somewhat in contrast to the results found in Mertens and Olea (2018) for top earners.

This result may lead some to assume that Zidar is identifying “Keynesian” effects of tax changes, or aggregate demand effects. However, the paper finds strong effects of tax cuts on real wages as well. As Zidar notes, “the increase in real wages suggests that supply-side responses are important and may exceed demand-side responses to tax changes for the bottom 90%.” Additionally, some may go further and argue that this paper shows that tax cuts for top earners have no impact on growth. However, this paper only looks at short-run impacts of tax changes on GDP and does not consider the broader implication of tax policy on long-run growth, human capital, or innovation. Nonetheless, the paper provides compelling evidence of tax cuts impacting growth through the supply side, consistent with neoclassical economic theory.

Ljungvist and Smolyansky (2018) look at 250 state corporate tax changes from 1970-2010 to assess their impact on employment and income. By comparing nearby counties across states, this allows the authors to isolate the impacts of corporate tax changes relative to other policies that might affect economic growth. They find that a 1 percentage-point cut in statutory corporate tax rates leads to a 0.2 percent increase in employment and a 0.3 percent increase in wages. They find that tax increases are almost uniformly harmful, while tax cuts seem to have their strongest positive impact during recessionary environments. As with some of the other studies discussed here, the paper mainly examines short-runs effects, and it is possible that these positive effects could grow over a longer time horizon.

Gunter et al. (2019) use a data set of 51 countries from 1970-2014 to examine the impacts of value-added taxes (VAT) on economic growth. They find that the effect of taxes on growth are highly non-linear: At low rates with small changes, the effects are essentially zero, but the economic damage grows with a higher initial tax rate and larger rate changes. For this reason, increases in the VAT in countries with high VAT rates, such as much of industrialized Europe, will have more significant impacts on GDP than increases in countries with low VAT rates. These non-linearities imply strong Laffer curve effects: At certain tax rates, further increases beyond that point will actually reduce federal tax revenues. For European industrialized countries, the authors estimate a tax multiplier of -3.6 for two years after a tax change, suggesting that tax cuts strongly stimulate economic activity in these countries.

Nguyen et al. (2021) examine the effects of individual income, corporate, and consumption taxes in the United Kingdom from 1973-2009. They find that income tax cuts, defined in their paper as an aggregate of individual and corporate income, have large effects on GDP, private consumption, and investment. A percentage-point cut in the average income tax rate raises GDP by 0.78 percent. The effects of consumption tax A consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes , excise taxes , tariffs , value-added taxes (VAT) , or an income tax where all savings is tax- deductible . cuts are comparatively smaller and did not produce statistically significant effects, but the paper finds that switching from an income to a consumption tax base The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. has positive effects on growth. Consumption taxes are generally viewed as less distortionary than other forms of taxation, as they do not significantly impact incentives to work and invest that are essential for ensuring long-run economic growth.

Cloyne et al. (2018) study the interwar period of the UK, 1918-1939, a period of high debt and low interest rates, to understand the impact of taxes on economic growth. The British tax system at this time consisted largely of excise tax An excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda , gasoline , insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es on alcohol, tobacco, and motor vehicles, and to a lesser degree taxes on income and corporate profits. As this time period predates the development of Keynesian macroeconomic theory, tax changes were generally not designed to be countercyclical, but rather focused on balancing the budget, inequality, or enhancing productivity. The authors find that a 1 percentage-point reduction in taxes as a share of GDP increased GDP between 0.5 to 1 percent, rising to 2 percent after one year. While the British economy of a century ago vastly differs from modern economies, this paper does provide compelling evidence of how taxes impact growth in high debt and low interest rate environments.

Alinaghi and Reed (2021) conduct a meta-analysis on the effects of taxes on growth for OECD countries. Their sample includes 979 estimates from 49 studies. Unlike other papers discussed in this review, this paper considers both the effects of taxes and spending on growth. The authors disaggregate policy changes into three categories: tax negative fiscal policies, tax positive fiscal policies, and tax ambiguous fiscal policies. Tax negative fiscal policies include increases to fund unproductive investments, or increases in distortionary taxes combined with a decrease in non-distortionary taxes. Tax positive fiscal policies include tax increases to fund productive investment, decreases in distortionary taxation combined with increases in non-distortionary taxation, or tax increases to reduce the deficit. Tax ambiguous fiscal policies are those where the overall economic effect is unclear. Using these classifications, the authors find a 10 percent decrease in taxes of a tax negative fiscal package increases GDP growth by 0.2 percent. The same sized tax decrease for tax positive fiscal policies reduces GDP growth by 0.2 percent.

Home — Essay Samples — Economics — Taxation — Review of Taxes: Definition, History and Different Kinds

Review of Taxes: Definition, History and Different Kinds

• Categories: Tax Taxation

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Published: Jan 29, 2019

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• Taxes that are based on how much money a company earns are called corporate taxes
• Taxes that are based on how much money a person earns are called income taxes.
• Taxes that are based on how much a person buys are called sales taxes.
• Taxes that are based on how much a person owns are called a property taxes. Things like houses have a property tax on them.
• Taxes that are paid when official document are approved are called stamp duties (because in the past the document would have a stamp put on it). Changing who owns a house will often need a document approving.
• Taxes that are paid when somebody dies are called inheritance or estate taxes.
• Flat taxes: Everybody pays the same percentage. Russia has a flat income tax and everybody in Russia has to pay 13% of the income.
• Progressive taxes: The more money a person makes, the higher percentage of their income they have to pay. Most countries have progressive income taxes.
• Regressive taxes: The less money a person makes, the higher percentage of their income they have to pay. Sales taxes are usually called regressive as poor people spend a higher percentage of their money, than rich people.

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Taxes are the most important source of government revenue. Who is paying how much and how do tax systems differ?

By: Esteban Ortiz-Ospina and Max Roser

This page was first published in September 2016 and last revised in March 2023.

Taxation is, by and large, the most important source of government revenue in nearly all countries.

We begin this topic page by providing an overview of historical changes in taxation patterns, and then move on to an analysis of available data from the last couple of decades, discussing trends and patterns in taxation around the world.

From a historical perspective, the growth of governments and the extent to which they are able to collect revenues from their citizens is a striking economic feature of the last two centuries. The available long-run data shows that in the process of development, states have increased the levels of taxation, while at the same time changing the patterns of taxation, mainly by providing an increasing emphasis on broader tax bases.

Taxation patterns around the world today reveal large cross-country differences, especially between developed and developing countries. In particular, developed countries today collect a much larger share of their national output in taxes than do developing countries; and they tend to rely more on income taxation to do so. Developing countries, in contrast, rely more heavily on trade taxes, as well as taxes on consumption.

Moreover, the data shows that developed countries actually collect much higher tax revenue than developing countries despite comparable statutory taxation rates, even after controlling for underlying differences in economic activity. This suggests that cross-country heterogeneity in fiscal capacity is largely determined by differences in compliance and efficiency of tax collection mechanisms. Both of these factors seem to be affected by the strength of political institutions.

In the last part of this topic page, we provide an overview of empirical evidence regarding the equity and efficiency implications of taxation. In particular, we show that taxation does have a powerful redistributive effect, but it is important to consider how taxation also affects the behavior of individuals, by changing economic incentives.

Related topics

Government Spending

What do governments spend their financial resources on?

State Capacity

Do governments worldwide have the ability to implement their policies? How is this changing over time? Explore research and data on state capacity.

How common is corruption? What impact does it have? And what can be done to reduce it?

See all interactive charts on taxation ↓

History of taxation

Taxes started growing in early-industrialized countries after the first world war.

The visualization shows the evolution of tax revenues, as a share of national income, for a selection of early-industrialized countries.

As we can see, until 1920 tax revenues were low across all these countries. Indeed, until 1910 less than 10% of national income was collected by these governments through taxation – just enough for them to fulfill basic functions, such as maintaining order and enforcing property rights.

After the First World War, however, taxation started growing considerably. In the period 1920-1980 taxation as a share of national income increased drastically, more than doubling across all countries in the chart. These increases in taxation went together with more government expenditure on public services, particularly education and healthcare .

After 1980, tax revenues started stabilizing, albeit with marked differences in levels for each country. Today these differences remain significant.

Income taxation played a fundamental role in the historical expansion of tax revenues

The growth of tax revenues that took place in early-industrialized countries after the First World War was largely supported by the extension of income taxes. This required states to build tax administration systems and implement tax withholding at source, in order to effectively raise compliance.

The visualization from Besley and Persson (2013) 1 tracks a group of 18 countries, in order to show how different taxation instruments became increasingly more common during the 20th century.

The vertical axis shows the relative frequency of taxation instruments within the sample of countries, and the horizontal axis shows time. 2 The red line plots the share of countries with income taxation, the blue line plots the share with income-tax withholding, and the green line plots the share with value-added taxation.

As we can see, income taxes began appearing around 1850, with direct withholding following about 25 years later; and VAT again somewhat later. By 1950 all countries in the sample had already both income taxation and direct withholding.

In this interactive chart , you can see in detail how VAT, specifically, has spread around the world in the last few decades.

In the 20th century, European countries expanded revenues from direct taxation faster than other sources of government revenue

As pointed out above, early-industrialized countries increased tax revenues after the First World War specifically by increasing direct forms of taxation. Here we provide further evidence of this and show how the taxation of incomes became increasingly important to collect revenues in these countries, also in relation to other sources of revenue.

The graph shows the proportion of total government revenue that is accounted for by income taxation. The data plotted corresponds to historical estimates from Flora (1983) 4 up until 1975, and more recent estimates, starting 1980, from the International Centre for Tax and Development .

As we can see, the relative importance of income tax within government budgets fluctuates with time, but there is a clear positive trend in all cases.

Revenue structure and government structure in the US are historically interdependent

The experience of government expansion in the US shows that there is a link between tax revenues, and government structure more generally.

As Wallis (2000) points out, the US has passed through three distinct systems of government finance in the last two centuries. 5 In the first financial system, lasting from 1790 until about 1842, state governments played an important role in raising government revenue, mainly by generating 'asset income' through activities such as the sale of land. In the second financial system, starting around 1840, local governments became more important, contributing an increasing share of government revenue from property taxes. In the third system, starting with the Great Depression, the federal government became more important, generating increasingly larger revenues through the collection of income taxes.

The visualization shows how this transition took place. It provides details regarding the evolution of government revenues by level of government, expressed as a share of national income.

As can be seen in the chart, the implementation of new forms of taxation during the 20th century in the US was associated with underlying changes in the structure of the government. By displaying relative values in ‘Settings’, you can see how the share of national revenues rose sharply after the Second World War. This is when income tax revenues started expanding.

In the process of development, middle-income countries have increased tax revenues

The evidence that we have discussed so far is mainly from high-income countries. However, the available long-run data from Latin America suggests that middle-income countries have also expanded tax revenues in the process of development – albeit later, and with some differences in the relative importance of specific tax instruments.

The visualization, using data from Arroyo-Abad and Lindert (2016) 6 , shows the composition of tax revenues for Colombia. These estimates correspond to central government revenues and are expressed as a share of national income – specifically GDP. Comparable data, from the same source, is also available for Peru; you can see the corresponding figures by clicking on ‘Edit countries' and selecting Peru.

As we can see, tax revenues started growing noticeably in the 1960s, mainly through the collection of consumption taxes. By displaying relative values in ‘Settings’, you can see the relative importance of the different tax instruments.

As can be seen, income taxation became an important source of revenue in the second half of the 20th century, although consumption taxation grew faster than income taxation throughout this period.

Taxation today

What are the main instruments used by governments to collect revenue.

In the preceding section, we discussed the historical evolution of government revenues and provided evidence of the important role that taxes, specifically, played in the expansion of governments. But what is the full menu of instruments that governments have to collect revenues?

Roughly speaking, governments finance policy from taxes, grants (typically in the form of 'development assistance' transfers), and debt (more precisely budget deficits, or reductions of budget surpluses).

The diagram, from Prichard et al. (2014) 7 , provides a conceptual classification of revenues other than debt.

As we can see, these revenues include grants, direct taxes (such as taxes on income, profits, property, etc.), indirect taxes (such as taxes on consumption, sales, trade, etc.), and social contributions.

How much tax revenue do countries collect today?

The visualization shows a map of total tax revenues, expressed as a share of GDP.

As we can see from the most recent data, at one extreme of the spectrum we have countries where total tax revenues are higher than 40%. At the other extreme, we have countries where taxes account for only a few percent of national income.

More generally, this map shows that there is a clear correlation between GDP and tax revenues – richer countries tend to collect through taxes a much larger share of their domestic production. This is a remark that we address in more detail in the following sections.

The next visualization uses the same data but plots the evolution of tax revenues for individual countries.

The time series shows that most high-income countries have had relatively stable levels of tax revenues in the last decade; while trends and patterns are less clear across the developing world. In some cases, tax revenues have been going up consistently.

In any case, differences today remain large and there is no clear evidence of global convergence. In many developing countries levels are very low and trends have not been persistently going up by a significant margin.

How do developing and developed countries compare in terms of tax revenue?

The table, from Jha (2008) 8 , shows differences in tax revenues as a share of GDP for various country groups. The table pools countries within groups, across two periods of time: 1990-1995 and 1996-2002. For each time-group pool of countries, the author ranks countries by tax revenue as a share of national income and reports the level for the country in the middle (i.e. the median tax revenue within that time-group pool). This gives us an idea of the 'typical' country in that region, at that point in time.

As we can see, developed countries collect almost twice as much as developing countries in tax revenue. And developing countries, in turn, collect almost half as much as transition economies. Also, we can see that developed countries had little change in tax-to-GDP ratios in the second half of the 20th century, whereas in developing countries there seems to be a broad negative trend.

Which forms of taxation dominate revenues in different world regions?

We have already discussed the fact that levels of taxation differ greatly across world regions – both in levels and trends. Now we focus on differences in the composition of tax revenues.

The visualization presents a breakdown of tax revenue sources, comparing figures from 1986 and 1996. The estimates are provided for a selection of country groups (you can switch country groups by clicking on the option 'change country group'), and are expressed as a share of GDP. The data comes from Todaro and Smith (2014) 9 , and includes direct taxes (corporate and income taxes), as well as indirect taxes (general, commodity, and excise taxes) and social security contributions.

Although these estimates are somewhat dated, they do provide a rough idea of taxation patterns by world regions. As it can be seen, developing countries depend significantly on indirect taxes, particularly taxes on trade and consumption. This can be contrasted with the case of OECD countries, where direct taxation – especially personal income taxation – is comparatively more important.

It is also worth noting the important role of social security revenues in advanced economies: at 10% of GDP in 1996, social security revenues are almost 10 times larger than in developing countries.

More recent data suggests that direct taxation, and specifically income taxation, remains more important in developed countries than in developing countries.

The next visualization plots total revenue from taxes on income and profits (horizontal axis) against revenue from taxes on goods and services (vertical axis), both expressed as a share of GDP.

As we can see, there is a positive correlation on the aggregate, and European countries are consistently located further towards the top right.

It can also be checked that most countries in the OECD are close, or below a hypothetical line with a slope equal to one (i.e. feature higher income tax revenues than commodity tax revenues).

Taxation of incomes

How have income tax revenues evolved around the world.

The next visualization provides an overview of revenues from income taxation (specifically taxes on incomes, profits, and capital gains) over recent decades. The estimates correspond to direct taxation of individuals and corporations and are expressed as a share of GDP.

The data shows large and persistent cross-country heterogeneity, even within relatively similar countries, such as those in the OECD.

In comparison to developing countries, the data also shows that in developed countries the direct taxation of corporations and individuals accounts for a larger share of national production. And this has been consistently the case throughout the last couple of decades.

As noted before, an important part of government revenue in developed countries comes from direct forms of taxation, so it is not surprising that the evolution of income taxation tracks closely the stable evolution of tax revenues that we discuss above.

Marginal income tax rates from a historical perspective

One important feature of income tax systems is the statutory rate of taxation that applies to the highest bracket of income. This measure, usually known as the 'top marginal rate of taxation', corresponds to the tax rate that applies to the 'last dollar' of income earned by the rich.

The chart here gives us an idea of how income taxation has changed in rich countries, by plotting trends in top marginal rates across France, Germany, the UK, the US, and Japan, over more than the last century.

As we can see, at the turn of the 20th century the top earners in these countries faced almost zero taxation on the last part of their incomes; but this changed drastically around 1910-1930, when high top marginal rates were introduced. Interestingly, however, this lasted only until about 1980, when again all countries substantially reduced rates. Today the levels are about half of what they used to be at the highest point.

How have statutory tax rates for the rich evolved in the last few decades?

The chart here shows the sharp trend of reducing top marginal tax rates after the 1980s, as a global phenomenon expanding both developed and developing countries.

The interpretation of this graph often leads to confusion. A common mistake is to interpret the top marginal tax rate as the effective rate of taxation applied to the rich. This is incorrect because the top marginal rate applies (as the 'marginal' name suggests) only to the last portion of income earned by the rich. By implication, lower marginal rates at the top do not directly imply lower economic incidence of taxation for the rich.

Having said that, additional evidence does seem to suggest that the reduction of top marginal income tax rates has been one of the ingredients contributing to lower effective tax rates for the rich. We discuss this additional evidence in the next section.

How do marginal rates of taxation compare to average rates of taxation?

The marginal rate of taxation is defined as the rate of tax that is applied to the ‘last dollar’ added to the taxable income. This means that marginal rates apply only to the portion of taxable income that exceeds the lower income threshold for that marginal rate.

In contrast, the average, or effective rate of taxation is defined as the ratio of total taxes paid by total income earned – that is, the share of income that is paid in income taxes.

The distinction between these two concepts is important because for many people, a portion of their income is taxed at one rate, and the rest is taxed at another rate. In the US, for example, if a married couple earns $40,000 a year, they pay federal income taxes at a rate of 10% on the first $18,500 or so, and at a rate of 15% on the rest. Hence, while the marginal rate applied to the last dollar earned is 15%, the effective income tax rate is lower.

Using the US federal income tax schedule, the visualization shows the marginal and average rates for the income of married couples (filing jointly). These figures use estimated tax brackets for 2016 from the Tax Foundation .

This visualization shows that average and marginal income tax rates are clearly different. Specifically, while both average and marginal rates are increasing, average rates are smoother and generally lower.

A similar chart showing marginal and average rates for the income of single individuals – as opposed to married couples filing jointly – can be found here .

Taxation of consumption

How is consumption taxed.

We have already outlined above the main instruments used by governments to collect revenue. Here we want to provide more detail regarding different forms of 'commodity taxation', in particular consumption taxes.

In the OECD nomenclature, consumption taxes (taxes on production, sale, transfer, leasing, and delivery of goods and rendering of services) include two sub-categories: general taxes on goods and services (taxes on general consumption including VAT, sales taxes, and other general taxes on goods and services) as well as taxes on specific goods and services consisting primarily of excise taxes (as well as customs and import duties and taxes on specific services, such as taxes on insurance premiums and financial services). For more details see OECD (2016). 10

The key distinction between VAT and excise taxes is that VAT is paid by consumers, while excise taxes are paid by producers. In other words, they have a different statutory burden. As we discuss below, the statutory burden of a tax does not necessarily describe who really bears the economic burden of the tax .

How has the taxation of goods and services evolved around the world?

The visualization provides an overview of revenues from the taxation of goods and services over recent decades. The estimates account for sales taxes, value-added taxes, and excise duties; and are expressed as a share of GDP.

The data shows some cross-country heterogeneity although, relative to revenue from income taxation, heterogeneity in commodity taxation is smaller, especially among high-income countries.

How important are different forms of commodity taxation in OECD countries?

We have already noted that taxes on goods and services tend to be less important in high-income countries than in low-income countries. Here we want to focus on the relative importance of different forms of commodity taxation.

The visualization plots the evolution of VAT and excise taxes in the OECD. The figures correspond to OECD averages and all values are expressed as a percentage of total taxation. These figures give us an idea of the evolution of the importance of different forms of commodity taxation in OECD countries.

As we can see, the composition of consumption taxes has fundamentally changed in the OECD over the last few decades: the weight of consumption taxes has been stable because the substantially increased importance of VAT has been effectively balanced by a reduction in the importance of other taxes on specific goods and services, the bulk of which are excise taxes.

How do statutory consumption tax rates compare across countries?

The next visualization shows how value-added tax rates compare between world regions. These figures come from the World Development Report (2005) , and include corporate tax rates as a benchmark.

This visualization shows that value-added tax rates are similar in developed and developing countries, which suggests that the differences we observe in revenue between regions are likely due to differences in compliance. In fact, this is not only specific to commodity taxation – Besley and Persson (2013) 1 show that developed countries tend to raise much more income-tax revenue than developing countries with comparable statutory rates, which suggests that the tax base in low-income countries is more strongly affected by compliance difficulties.

In summary, the evidence suggests that fiscal capacity (i.e. the extent to which countries can extract revenues through taxation at any given level of economic activity) is considerably less developed in poor countries.

How common are VAT exceptions?

Most VAT systems around the world adopt multi-rate systems with one or more reduced rates applying to particular goods. The chart, from OECD-KIPF (2014), 11 shows the goods and services that are most commonly subject to reduced VAT rates in OECD countries.

As can be seen, in most countries that use VAT exceptions, reduced rates tend to apply to basic products in which low-income households spend a larger share of their income (such as food); as well as to products with perceived positive social spillovers (such as newspapers, books and medicines).

Many countries also use reduced rates for other reasons. From this chart, it seems like providing support to specific industries, such as tourism, is another important factor considered by governments.

Recent trends in the incidence of taxation

Taxes affect market prices, so the statutory burden of a tax does not describe who really bears the tax.

Taxes affect economic interactions by changing the relative prices of goods and services in the economy. This implies that to assess who bears the burden of a tax, it is not sufficient to look at statutory tax rates. For example, if a tax is imposed on producers, in a competitive market they will raise prices to some extent to offset this tax burden – so the producers’ income will not fall by the full amount of the tax. A similar argument can be made if the tax is levied on consumers, since in a market economy the tax will lower demand, and this will have a consequence also for producers.

The key point is that, in order to analyze the economic incidence of taxation in a market economy, we need to look beyond statutory tax rates. Below we provide concrete examples of how economists try to estimate the economic incidence of taxation.

How much taxes do rich households pay in the US?

In the US, the Congressional Budget Office (CBO) produces estimates of the incidence of taxation across the population. To do this, they make the following assumptions: (i) Taxes on earnings are borne by workers; (ii) Taxes on individual income are borne by the households that pay them; (iii) Taxes on corporate income are borne by individuals in proportion to their capital income; (iv) Taxes on consumption are borne by individuals in proportion to their consumption. 12

Based on these assumptions, the CBO calculates total tax contributions as a share of pre-tax income for different segments of the pre-tax income distribution. 13 These estimates, often referred to as 'average tax rates', can be interpreted as the effective rates of taxation that apply to individuals with different incomes, after accounting for government transfers (specifically cash payments and in-kind benefits from social insurance and other government assistance programs).

The visualization, plotting CBO estimates of average tax rates, shows that the federal tax system in the US has been generally progressive: those located higher in the ranking of incomes, pay a higher share of their income in taxes.

Across time, we can also see that progressivity has not been constant – the period 1980-1990 saw important reductions in tax rates for the rich, without comparable reductions for the poor.

The hike in tax rates towards the end corresponds primarily to significant changes in tax rules in 2012. Up until that point, and since around 1995, tax rates for the richest 1% went down every year (although they also went down for the lower-income groups in the same period).

How progressive is taxation at the top of the income distribution in developed countries?

The visualization above shows that, according to the estimates from the Congressional Budget Office , richer individuals in the US generally tend to bear a larger burden of taxation than the poor. Here we examine whether this is also true within the top of the income distribution – that is, whether the 'ultra-rich' shoulder a larger tax burden than the 'rich'.

The next visualization, from Piketty and Saez (2007) 15 shows estimated average tax rates in France, the US, and the UK, at two points in time: 1970 and 2005. Notice that these are average rates (i.e. total tax contributions as a share of pre-tax income), which are different from marginal tax rates .

Displayed are rates for the bottom 90% of the income distribution, as well as higher percentiles. Again, we can see in these estimates that the systems in question are progressive – increasingly higher percentiles in the income distribution pay increasingly higher effective rates of taxation. However, the lines are much flatter in 2005, which shows that the systems have become less progressive at the top: the average share of income paid by those at the very top of the income distribution has dropped substantially since 1970. This is important because, as the authors of the figure point out, over the same period pre-tax income inequality grew significantly: a few very rich individuals at the very top are accumulating an increasingly large share of national incomes.

An important point that should be kept in mind is that these estimates are not directly comparable to those from the Congressional Budget Office discussed above, because they do not take into account government transfers, and rely on different methodological assumptions – for example, they do not consider excise taxes (but they do consider estate taxes). For more details see Piketty and Saez (2007). 15

The drivers of tax revenues

Rising gdp is associated with rising tax revenues.

We have already pointed out that rich countries tend to collect much higher tax revenues than poor countries. The visualization provides further evidence of the extent of this correlation.

The vertical axis measures tax revenues as a share of GDP, while the horizontal axis measures GDP per capita (after accounting for differences in purchasing power across countries). The horizontal axis is expressed by default in a logarithmic scale, so that the correlation is easier to appreciate – you can change to a linear scale by clicking the ‘Settings' button.

We can see that there is a strong positive correlation: richer countries tend to have higher tax revenues as a share of their GDP. And this is also true within world regions (represented here with different colors).

Early-industrialized countries became better at collecting revenue as they developed

We argued above that the efficiency of tax collection is a strong predictor of cross-country differences in tax revenues – rich countries have more capacity to extract revenues. As historical data shows, this capacity was largely possible because, throughout the 19th century and up until the first half of the 20th century, these countries found increasingly cheaper ways to collect taxes.

The visualization, from Lindert (2012) 17 , shows that the US and the UK saw steep declines in the administrative cost shares of indirect tax collection across the 19th century and the early 20th. As we can see, the cost of collections dropped, from over 4.5% of the amounts collected in the mid-19th century to 2% since the middle of the 20th century.

Tax collection relates to the strength of political institutions

Cross-country differences in tax revenues are linked to the capacity of countries to implement efficient tax collection systems. Here we provide evidence suggesting that political factors – such as the extent of institutionalized constraints on the decision-making powers of policymakers – help shape the level and evolution of the fiscal capacity of countries.

The chart, from Besley and Persson (2013) 1 , plots the cross-country relationship between political institutions and tax revenues. The authors approximate the strength of political institutions by calculating the proportion of years since independence (or since 1800 if independence is earlier) that a country had strong constraints on the executive. Having 'strong constraints on the executive', in turn, is measured with data from the Polity IV database . In essence, this variable aims to capture the extent to which accountability groups impose institutionalized constraints on the decision-making powers of policymakers.

The scatter plot controls for baseline differences in GDP – that is, what we observe is the correlation between tax revenues and political institutions conditional on GDP levels. As we can see, countries with strong executive constraints collect higher tax revenues, when income per capita is held constant, than do countries with weak executive constraints.

Some studies suggest that, under weak accountability, countries may not only have generally weak taxation systems but may also be subject to ‘political budget cycles' whereby tax collection declines prior to elections, as politicians seek to secure short-term political support. 18

Aid correlates negatively with tax revenue, but the link does not seem to be causal

A large body of academic literature has studied the relationship between revenue from development assistance ('foreign aid') and revenue from taxation. The hypothesis supporting this strand of literature is straightforward: foreign assistance may 'crowd out' domestic tax revenues, as it reduces the incentives for policy-makers to pursue politically costly tax collection.

This hypothesis seems to be supported by raw correlations. The plot, from Benedek et al. (2014) 19 , shows the evolution of tax revenues and foreign aid (Overseas Development Assistance – ODA). It shows a broad negative association: between 1980 and 1995, when foreign aid as a share of GDP was increasing, average tax revenue in relation to GDP decreased slightly. Post-1995, a decline in the share of total net ODA to GDP was accompanied by higher tax revenues as a percentage of GDP.

This relationship cannot be interpreted causally, as there are many factors that simultaneously drive ODA flows and tax revenues. More complex econometric studies that try to account for further sources of bias find that there is no consistently significant relationship between aid and tax collection. 20

The consequences of taxation

Taxation is an important instrument for reducing inequality.

One way to gauge the extent to which taxation redistributes resources between individuals in a country is by looking at how the distribution of incomes change before and after taxes. The visualization does this, showing the reduction of inequality that different OECD countries achieve through taxes and transfers.

The estimates correspond to the percentage point reduction in inequality, as measured by changes in the Gini coefficients of income, before and after taxes and transfers. In a nutshell, income 'before taxes' corresponds to what is usually known as market income (wages and salaries, self-employment income, capital and property income); while income after taxes and transfers corresponds to disposable income (market income, plus social security, cash transfers and private transfers, minus income taxes).

The data shows that across the countries covered, taxes and transfers lower income inequality by around one-third on average (equivalent to around 0.15 Gini points). Yet cross-country differences are substantial.

Generally speaking, countries that achieve the largest redistribution through taxes and transfers tend to be those with the lowest after-tax inequality.

While informative for the purpose of cross-country comparisons, these results have to be interpreted carefully, since the before-tax distribution of incomes is already the result of choices made by individuals who take taxes and transfers into consideration. Put simply, the before-tax distributions of incomes are likely to be different to the actual distributions of incomes that would be in place if there were no taxes or transfers. This can be clearly explained in the context of pensions: individuals receiving state pensions appear in the data as poor before transfers; but many of them would of course have private pensions if they lived in a country without state transfers.

The extent to which taxes affect behavior is discussed in more detail next.

Taxation can lead to efficiency losses

In market economies, consumers and producers change their behavior in response to taxes. For example, if a taxed good has a substitute that is not taxed, some consumers will shift to the substitute to avoid the tax. These changes in behavior can lead to inefficiencies. For example, high tax rates may discourage labor supply; and in the case of very rich individuals, they may even induce migration of talent to countries where the tax burden is lower. In both cases, the 'size of the pie' would be reduced by taxation. So how large are these behavioral responses?

Using data from the European football market, Kleven et al (2013) 22 find evidence of strong mobility responses to taxation for 'superstars'. The scatterplots support this.

The two plots correspond to different time periods. The vertical axis represents the fraction of all top-league professional football players who are foreign nationals in the country where they play, and the horizontal axis shows the average top earnings tax rate for foreign players in that country.

As we can see, in the period 1985-1995 there was no correlation between migration and tax rates; yet in the period 1996-2008, after the Bosman ruling on free mobility was enacted, the correlation became strongly negative: the countries with higher top earnings tax rates became less likely to have foreign players. 23

The authors also show that the mobility of players had a negative impact on the performance of football clubs in countries with high tax rates.

This evidence, suggesting that 'superstars' are very responsive to taxation, contrasts with the available evidence for typical individuals – while still highly debated, most empirical estimates suggest that for the majority of the population, labor supply choices are not very responsive to changes in income tax rates. 24

Interactive Charts on Taxation

Besley T. and Persson T. Taxation and Development. Handbook of Public Economics, Volume 5, Pages 1-474 (2013), vol. 5

The countries in the sample are Argentina, Australia, Brazil, Canada, Chile, Colombia, Denmark, Finland, Ireland, Japan, Mexico, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States.

The source is Besley T. and Persson T. Taxation and Development. Handbook of Public Economics, Volume 5, Pages 1-474 (2013), vol. 5

Flora, Peter et al. 1983. State, Economy and Society in Western Europe, 1815-1975. Frankfurt: Campus Verlag

Wallis, J. J. (2000). American government finance in the long run: 1790 to 1990 . The Journal of Economic Perspectives, 14(1), 61-82.

Arroyo Abad, L. and P. Lindert. "Fiscal Redistribution in the Americas since the Mid-Nineteenth Century" in Latin American Inequality in the Long Run, edited by L. Bertola and J. Williamson, 2016.

Prichard, W., Cobham, A., & Goodall, A. (2014). ICTD Government Revenue Dataset ICTD working paper 19 . Institute of Development Studies, Brighton.

Jha, Raghbendra. (2008). Chapter 55, International Handbook of Development Economics, Volume 1. Edward Elgar Publishing, Incorporated, 2008.

Todaro, M. and Smith, S. (2014) Economic Development, 12th Edition. Pearson. ISBN: 1292002972

OECD (2016) Consumption Tax Trends 2016, OECD Publishing, Paris.

OECD/KIPF (2014), The Distributional Effects of Consumption Taxes in OECD Countries, OECD Publishing, Paris.

For more details see Congressional Budget Office (2016). The Distribution of Household Income and Federal Taxes, 2013 .

Pre-tax income corresponds to 'market income'. This includes labor income, business income, capital gains (profits realized from the sale of assets), capital income excluding capital gains, income received in retirement for past services, and other sources of income.

Congressional Budget Office (2016). The Distribution of Household Income and Federal Taxes, 2013 .

Piketty, T., & Saez, E. (2007). How Progressive Is the U.S. Federal Tax System? A Historical and International Perspective . The Journal of Economic Perspectives, 21(1), 3-24.

Piketty, T., & Saez, E. (2007). How Progressive Is the U.S. Federal Tax System? A Historical and International Perspective . The Journal of Economic Perspectives, 21(1), 3-24. Retrieved from http://www.jstor.org/stable/30033699

Lindert, P. H. (2012). Social Contract Budgeting: Prescriptions from Economics and History . Renewing the American Social Contract policy papers. New American Foundation.

Prichard, W. (2016). Reassessing Tax and Development Research: A New Dataset, New Findings, and Lessons for Research . World Development, 80, 48-60.

Benedek, D., Crivelli, E., Gupta, S., & Muthoora, P. (2014). Foreign aid and revenue: Still a crowding-out effect? . FinanzArchiv: Public Finance Analysis, 70(1), 67-96.

Kleven, H. J., Landais, C., & Saez, E. (2013). Taxation and international migration of superstars: Evidence from the European football market . The American Economic Review, 103(5), 1892-1924.

The Bosman ruling banned restrictions on foreign EU players within national leagues and allowed players in the EU to move to another club at the end of a contract without a transfer fee being paid.

Saez, E., Slemrod, J., & Giertz, S. H. (2012). The elasticity of taxable income with respect to marginal tax rates: A critical review . Journal of economic literature, 50(1), 3-50.

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Types of Taxes in India

Last updated on March 11, 2024 by ClearIAS Team

The Central Government and the State Governments each levy their different types of taxes in India under India’s system of taxation. Local governments like the Municipality and Local Governments also impose a few small levies.

Money is needed to handle a state’s business and administer its government. Therefore, the government levies taxes in many different ways on the revenues of people and businesses.

Let’s see what are the different types of taxes in India.

Table of Contents

What is Tax?

The cost of some transactions, goods, and services is increased by types of tax in India, which the Indian government imposes on corporate profits and worker income in addition to other costs.

To raise money for commercial endeavors that would boost the nation’s economy and elevate citizens’ quality of living, the government levies taxes on its constituents.

The Indian Constitution, which gives the State and Central governments equal authority to impose different types of taxes in India, is the source of our nation’s right to taxation. Every tax levied within the nation must be supported by a law established by the State Legislature or the Parliament.

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Different types of taxes in India are broadly classified into two types:

• Direct Taxes
• Indirect Taxes

A direct tax is imposed directly upon the taxpayer and is paid by individuals who are subject to it by the government. Levying and collecting direct taxes as well as developing other direct tax regulations fall within the purview of the Central Board of Direct Taxes.

A taxpayer may be required to pay a direct tax to the government for several different reasons, including real estate taxes, personal property taxes, income taxes, asset taxes, gift taxes, capital gains taxes, and others. One of the government’s two primary sources of income is direct taxation.

The other is indirect tax. Direct taxes generate around half of the government’s revenue each fiscal year. The government sets fiscal year-specific goals for direct tax collection to raise income.

Examples of Direct Tax

Examples of direct tax include Income tax, corporation tax, minimum alternate tax, capital gain tax, securities transaction tax, commodities transaction tax, alternate minimum tax, estate duty, wealth tax, gift tax, and fringe benefit tax.

• Income tax is levied on individuals, Hindu undivided families, unregistered firms, and other groups of people.
• In India, the income tax system is progressive.
• All forms of income are aggregated and taxed by the individual’s income tax brackets.
• Depending on the amount of net income, different rates of income tax are applied. For instance, if net taxable income is between Rs. 5 and 7.5 lakhs, an income tax of 10% is levied.
• There is a 10% surcharge on income tax in cases when the total income is greater than Rs 50 lakh but not greater than Rs 1 crore.

Note: Agricultural income is not subject to tax.

Corporation Tax

• It is a tax levied against the earnings of businesses and corporations. Additionally known as corporate tax .
• A company must pay a separate tax from its owner’s income tax since it is recognized as a separate entity for tax purposes.
• Both public and private companies that are registered in India under the Companies Act 1956 are required to pay corporation tax.
• All domestic enterprises must pay corporation tax at a rate of 22% as of January 2022.

Minimum Alternate Tax

• By utilizing the various incentives and exemptions made available by the Income-tax Act, businesses with high profits and sizable dividends to shareholders who were not paying corporate tax to the government were required to pay a set percentage of book profit as minimum alternate tax, according to the concept of Minimum Alternate Tax (MAT).
• As a result, the government levies an advance tax on these companies called the Minimum Alternate Tax, or MAT. Businesses must therefore pay at least a specified amount of tax.
• According to the Income Tax Act, a portion of a company’s booked earnings is automatically deemed taxable income, and tax is required if the company’s taxable income is less than a specific percentage of those profits.
• The rate of MAT is 15% as of January 2022.

Capital Gain Tax

• Any profit or gain realized from the sale of a capital asset is referred to as a capital gain.
• Taxation is imposed on capital sale profits.
• Capital assets include things like land, structures, homes, jewelry, patents, and copyrights.
• A capital asset held for less than 36 months is referred to as a short-term capital asset.
• Long-term capital asset – An asset that has been held for longer than 36 months is referred to be a long-term capital asset.
• The 36-month minimum for immovable property (land, buildings, and houses) has been lowered to 24 months as of FY 2017–18.
• For instance, if you sell a house after owning it for 24 months, any income you receive if you do so after March 31, 2017, will be regarded as a long-term capital gain.
• Transportable items are free from this adjustment, though, including jewelry and mutual funds that invest in debt.
• They will be categorized as long-term capital assets if held for some time greater than 36 months.
• Depending on the amount of income received, different capital gains taxes are applied to short- and long-term profits.

Securities Transaction Tax

• Gains on securities including shares, options, and futures traded on the domestic stock exchange are subject to a tax known as the securities transaction tax.
• It is a direct tax that the federal government imposes and collects.
• During his tenure as finance minister, P. Chidambaram introduced the Securities Transaction Tax (STT) first in 2004.

Commodities Transaction Tax

• In India, the exchange-traded non-agricultural commodity derivatives buyers and sellers are both subject to the commodity transaction tax.
• Based on the size of the contract, it is determined.
• Commodities covered by CTT include non-farm items including metals (gold, silver, and copper) and energy products (crude oil and natural gas).

Alternate Minimum Tax

• Alternate Minimum Tax (AMT) is to limited liability partnerships what Minimum Alternate Tax (MAT) is to corporations.
• Other commercial entities, such as sole proprietorships, partnerships, and associations of people, are exempt from this tax.

Estate Duty

• It was initially presented in 1953. When a person passes away, it is imposed on all of their possessions.
• The entire estate of the decedent is regarded as his wealth and is taxable.
• The tax hasn’t been in place since 1985.
• It was initially shown in 1957.
• Individuals, combined Hindu families, and companies with a surplus of net value were subject to it.
• Wef 2015, the tax was abolished.
• It was initially released in 1958.
• The only donations exempt from the gift tax were those made by public and private organizations that support charitable institutions.
• The tax hasn’t been collected since 1998.

Fringe Benefits Tax

• To reduce the profit on booked entries, many businesses provide their staff with various bonuses and maintain them below their input cost.
• As a result, there is less profit, which lowers government taxation.
• The Fringe Benefits Tax (FBT), which is effectively a tax that an employer must pay instead of the benefits granted to his or her employees, was enacted by the government as a response to this.
• It was an effort to tax all perks that were being used to avoid paying taxes.
• The fringe benefits tax was eliminated in India’s Union budget for 2009.

Advantages of Direct Tax

• Economic Balance: To achieve economic and social balance, the government establishes tax brackets based on an individual’s income and age. The tax rate is determined by the nation’s economic situation. People are given exceptions to balance out economic inequalities.
• Ensures equality: For the government to help the poor and vulnerable in society, higher taxes must be paid by people and enterprises with higher profits. This keeps the economy in balance.
• Gives Certainty: The direct tax gives both the government and the taxpayers confidence because both parties are aware of the exact amount of tax that must be paid and collected.
• Addresses inflation issues: In times of high inflation, the government boosts taxes to reduce demand for goods and services, which causes inflation to decline.
• Makes Government Accountable: People are aware that paying taxes is necessary. As a result, he or she is involved in the government’s use of taxes and is aware of his or her rights. By doing this, accountability for the government is ensured.

Disadvantages of Direct Tax

• Can be easily evaded: Not everybody wants to pay taxes. Some people are willing to file a false tax return to avoid paying taxes. These people can simply conceal their income since they are not subject to state law.
• Tax slabs are arbitrary: If taxes are progressive, they are set at the Finance Minister’s discretion. If it is proportional, it significantly burdens the underprivileged.
• Obstructs growth: High taxes discourage people from investing and saving, which hurts the nation’s economy. It harms enterprises and industries by impeding their expansion.
• Inconvenience: A direct tax’s major drawback is that it hurts the taxpayer. He senses that his hard-earned money has been stolen away when a large sum is taken from his pocket. Direct tax payment is therefore rather inconvenient.

Indirect Tax

• Indirect taxes are levied against the party who will ultimately bear the financial burden of the tax through the use of an intermediary.
• The taxpayer has the option to transfer it to another party.
• The middleman creates a tax return and sends the government’s tax revenue with it.
• In this regard, an indirect tax is distinct from a direct tax, which is paid by the government directly to the people (whether legal or natural) who are subject to it.
• Instead of using a person’s income, indirect taxes are calculated using their expenses.
• Suppliers of products and services are subject to indirect taxes, but consumers are ultimately responsible for paying them.

Examples of Indirect Tax

Examples of Indirect tax include customs duty, sales tax, excise duty, service tax, value-added tax, and dividend distribution tax.

Customs Duty

• Customs duties are imposed as a tariff or fee when goods are transported across international borders.
• Its objective is to protect the nation’s economy.
• Under customs regulations, several different types of duties are levied, including Basic Duty, Countervailing Duty, Protective Duty, Anti-Dumping Duty, and Export Duty.
• Import taxes are used to control business as well as to bring in money for the government.
• Ad valorem calculations are used in India to determine import taxes.
• A national indirect tax known as GST ( Goods and Services Tax ) is levied on the production, sale, and consumption of goods and services.
• All indirect taxes imposed on products and services by the federal and state governments have been replaced by it.
• A sales tax in India is a sort of tax that the government imposes on the sale or purchase of a certain good inside the nation.
• Both the federal government and the state governments impose a sales tax.
• IGST has since taken its place.

Excise Duty

• Excise duty is a commodities tax in the true sense of the word because it is levied on the production of goods rather than their sale in India.
• The federal government levies a clear excise duty on all goods except alcoholic beverages and illegal drugs.
• CGST has since taken its position.

Service Tax

• All rendered services in India are subject to a service tax.
• A service tax was introduced in 1994–1995 on three services: stockbroking, general insurance, and telephone services.
• Since then, the service net has been wider as new services are added every year. We now have an exclusion criterion known as a “negative list,” where certain services are not included in the tax net.
• Before being replaced by the Goods and Services Tax, the service tax rate in India was 15%.

Value Added Tax

• Because of the way it is designed, the VAT does away with distortions.
• As a result, VAT has been imposed in all of India’s states and union territories (except UTs of Andaman Nicobar and Lakshadweep).
• The state determines the amount of the tax, which is levied on a range of goods sold in the state.
• State Sales Tax had been replaced with State VAT, which was in effect until July 1, 2017.
• SGST has since taken its position.

Dividend Distribution Tax

• A dividend is a payment made from a company’s profits in a certain year to its stockholders. Dividends are income in the eyes of the shareholders, hence they ought should ideally be taxable.
• The amount of dividends given to shareholders is the basis for the tax that the Indian government imposes on Indian firms.
• When DDT was originally made available in 1997, it was governed under Section 115 O of the Income Tax Act.
• In Budget 2020, the Finance Minister got rid of the Dividend Distribution Tax.
• Now that corporations are no longer required to pay dividend taxes, individuals must.

Advantages of Indirect Tax

• Everyone can contribute: Indirect taxes are levied on everyone who purchases a product, unlike income taxes, which are paid by some income groups but not by others. Tourists and persons from lower socioeconomic backgrounds who are not employed in India must pay it because they will buy items in some capacity.
• Indirect Taxes are convenient: They are quite practical when it comes to collecting indirect taxes. Customers do not feel forced to spend such small amounts even though taxes may be extremely cheap. Additionally, they are an affordable fee that is included in the cost of the goods sold.
• They are unavoidable: Indirect taxes cannot be avoided because they are part of the product’s price. Anyone who buys the good will therefore be liable for the tax.
• They cover a wide range: The consumer will notice and suffer greatly if a service or product is heavily taxed on only one characteristic. Because they are applied to more products and are paid in smaller sums in this situation, indirect taxes may be favorable.

Disadvantages of Indirect Taxes

• Indirect taxes have the potential to be regressive: It can be argued that it is unfair to the poor because everyone pays the same indirect tax. Indirect tax is imposed on all purchases, and while the wealthy may be able to pay it, the poor will also be responsible for it. Indirect taxes may therefore be viewed as regressive.
• They are inflationary in effect: The precise percentage of tax that applies to every item that a seller sells might not always be possible to calculate and collect. To ensure that every customer pays the indirect tax, they purposely charge more than the tax amount. But over time, this drives up the cost of commodities.
• They do not raise civic consciousness: Because they are buried in the price, millions of people who pay indirect taxes aren’t even aware that they are doing it, which lowers civic consciousness.

Also read: Tax buoyancy

Difference Between Direct and Indirect Taxes

Cess and Surcharge

The Union Government imposes cess and surcharges as taxes to generate revenue for administrative costs. Even though cess and surcharge increase the government’s revenue, they differ in many ways.

• In its most basic form, a cess is a levy on tax.
• It is crucial to keep in mind that a cess may only be used for the intended purpose.
• For instance, the Indian government only utilizes money collected from an education cess for education.
• Furthermore, all taxpayers must pay this tax.
• To the Consolidated Fund of India, cess taxes are paid.
• In general, cess is anticipated to be levied up until the government has a strong enough reason to do so and to disappear after that reason has been achieved.
• Since a cess is imposed in addition to the present tax, it differs from other taxes like excise duty and income tax (tax on tax).
• For instance, adding a 5% education tax to a 20% income tax will increase the entire tax to 21%. (20% base tax + an additional 5% cess).
• The main cesses that are currently in effect are those for education, roads, infrastructure, clean energy, Krishi Kalyan, and Swachh Bharat .
• Individuals with net taxable salaries of more than Rs 1 crore are subject to a 10% surcharge on their tax obligations.
• If net income is between Rs 1 crore and Rs 10 crore, domestic corporations must pay a surcharge of 5%. 10% of the net revenue over Rs 10 crore is subject to a surcharge.
• If the net income is between Rs 1 crore and Rs 10 crore, a 2% surcharge is imposed on international firms.
• The surcharge is raised to 5% if the net income surpasses Rs 10 cr. If the net income surpasses Rs 1 crore and Rs 10 crore, both domestic and foreign enterprises receive a margin of relief.
• A tax surcharge on income is a significant source of funding for the state.
• The Union Government may use this money for any purpose it sees fit.
• It’s important to note that just the tax that must be paid, not the entire income, is covered.
• The Consolidated Fund of India receives this payment, which may be used for any purpose.

A 10 percent surcharge on a 30 percent income tax rate, for example, brings the tax burden to 33 percent.

Benefits of Taxes

Different types of taxes in India are intended to give the government money for expenditure while preventing inflation. Various types of income, including wages, business profits, rental income from real estate, and others, are subject to taxation.

Wealth taxes, sales taxes, property taxes, payroll taxes, value-added taxes, service taxes, and so on are additional taxes.

Types of taxes in India are used by the government for several things, including:

• Public sector investment for infrastructure
• projects for welfare and development
• Defense budget
• Using data from scientific studies, public insurance
• Government and state workers get a range of pay.
• the running of the public transportation network of the government
• Unemployment benefits
• pension schemes
• the application of the law

Examples of public utilities include systems for managing garbage, water, electricity, and public health.

Different types of taxes in India therefore have both benefits and drawbacks, but there is no denying that they are necessary to raise money. While the wealthy can pay direct taxes, the poor have the chance to make a small contribution through indirect taxes.

There is a lot of potential to change things by controlling these tax systems. These factors make a nation’s taxation system crucial to its economy.

Read:  Tax buoyancy

Article written by: Remya

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Aug. 1, 2024

If you get an unexpected letter, email or text that claims to be from the IRS or another trusted source – like a bank, credit company or tax software provider – here are some tell-tale signs that it’s a scam:

• Spelling errors or incorrect grammar.
• A link or attachment with a slightly misspelled URL or an unusual one, such as irs. com . All trusted IRS links go to irs. gov .
• A threatening or urgent request to pay now, follow a link or open an attachment.

If you receive a request from the IRS in the mail or by phone, log in to your IRS Online Account to find a copy of the notice or letter, or contact IRS customer service to authenticate it.

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Opinion David Wallace-Wells

Food as You Know It Is About to Change

Credit... Alma Haser

Supported by

By David Wallace-Wells

Opinion Writer

• July 28, 2024

This essay is part of What to Eat on a Burning Planet, a series exploring bold ideas to secure our food supply. Read more about this project in a note from Eliza Barclay, Opinion’s climate editor.

From the vantage of the American supermarket aisle, the modern food system looks like a kind of miracle. Everything has been carefully cultivated for taste and convenience — even those foods billed as organic or heirloom — and produce regarded as exotic luxuries just a few generations ago now seems more like staples, available on demand: avocados, mangoes, out-of-season blueberries imported from Uruguay.

But the supermarket is also increasingly a diorama of the fragility of a system — disrupted in recent years by the pandemic, conflict and, increasingly, climate change. What comes next? Almost certainly, more disruptions and more hazards, enough to remake the whole future of food.

The world as a whole is already facing what the Cornell agricultural economist Chris Barrett calls a “food polycrisis.” Over the past decade, he says, what had long been reliable global patterns of year-on-year improvements in hunger first stalled and then reversed. Rates of undernourishment have grown 21 percent since 2017. Agricultural yields are still growing, but not as quickly as they used to and not as quickly as demand is booming. Obesity has continued to rise, and the average micronutrient content of dozens of popular vegetables has continued to fall . The food system is contributing to the growing burden of diabetes and heart disease and to new spillovers of infectious diseases from animals to humans as well.

And then there are prices. Worldwide, wholesale food prices, adjusted for inflation, have grown about 50 percent since 1999, and those prices have also grown considerably more volatile, making not just markets but the whole agricultural Rube Goldberg network less reliable. Overall, American grocery prices have grown by almost 21 percen t since President Biden took office, a phenomenon central to the widespread perception that the cost of living has exploded on his watch. Between 2020 and 2023, the wholesale price of olive oil tripled ; the price of cocoa delivered to American ports jumped by even more in less than two years. The economist Isabella Weber has proposed maintaining the food equivalent of a strategic petroleum reserve, to buffer against shortages and ease inevitable bursts of market chaos.

Price spikes are like seismographs for the food system, registering much larger drama elsewhere — and sometimes suggesting more tectonic changes underway as well. More than three-quarters of the population of Africa, which has already surpassed one billion, cannot today afford a healthy diet; this is where most of our global population growth is expected to happen this century, and there has been little agricultural productivity growth there for 20 years. Over the same time period, there hasn’t been much growth in the United States either.

How climate change could transform yields of two major crops

Projected change in corn and wheat yields in 2050, based on an upper-middle scenario for global warming.

Change in crop yield in 2050

Corn production in 2050

Drought conditions have already led Mexico to import a record amount

of corn in recent years. Climate change could further decrease its yields.

China is the world’s second-largest

producer of corn, but yields are projected to decrease across most of the country.

Wheat production in 2050

Pakistan, where wheat accounts for nearly two-thirds

of all calories

consumed, could

see sharp declines.

The U.S., one of the largest exporters of wheat, could see increased yields, especially in more northern latitudes.

Drought conditions have already led Mexico to import a record amount of corn in recent years. Climate change could further decrease its yields.

Rising temperatures could make the highlands of Peru

a more productive area for corn.

Pakistan, where wheat accounts for nearly two-thirds of all calories consumed, could see sharp declines.

producer of corn,

but yields are

projected to decrease across most of the country.

consumed, could see sharp declines.

Sources: Jägermeyr et al. (2021) “ Climate Impacts on Global Agriculture Emerge Earlier in New Generation of Climate and Crop Models ,” Nature Food ; World Bank; U.S.D.A.

Note: Yields shown are for the SSP370 middle-upper warming scenario and are compared with a 1983-2013 baseline.

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Social Security

Frequently asked questions, what happens if i work and get social security retirement benefits.

You can get Social Security retirement benefits and work at the same time. However, if you are younger than full retirement age and make more than the yearly earnings limit, we will reduce your benefits. Starting with the month you reach full retirement age, we will not reduce your benefits no matter how much you earn.

We use the following earnings limits to reduce your benefits:

• If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit.

For 2024 that limit is $22,320.

• In the year you reach full retirement age , we deduct $1 in benefits for every $3 you earn above a different limit, but we only count earnings before the month you reach your full retirement age.

If you will reach full retirement age in 2024, the limit on your earnings for the months before full retirement age is $59,520.

Starting with the month you reach full retirement age, you can get your benefits with no limit on your earnings.

Use our Retirement Age Calculator to find your full retirement age based on your date of birth.

Use our Retirement Earnings Test Calculator to find out how much your benefits will be reduced.

What counts as earnings:

When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net earnings if you're self-employed. We include bonuses, commissions, and vacation pay. We don't count pensions, annuities, investment income, interest , veterans benefits, or other government or military retirement benefits.

Your benefits may increase when you work:

As long as you continue to work, even if you are receiving benefits, you will continue to pay Social Security taxes on your earnings. However, we will check your record every year to see whether the additional earnings you had will increase your monthly benefit. If there is an increase, we will send you a letter telling you of your new benefit amount.

When you’re ready to apply for retirement benefits, use our online retirement application , the quickest, easiest, and most convenient way to apply. If you need to report a change in your earnings after you begin receiving benefits: If you receive benefits and are under full retirement age and you think your earnings will be different than what you originally told us, let us know right away. You cannot report a change of earnings online. Please call us at 1-800-772-1213 (TTY 1-800-325-0778), 8:00 a.m.  – 7:00 p.m., Monday through Friday, or contact your local Social Security office .

There is a different work test for beneficiaries working outside of the United States. If you live outside of the United States, visit the Social Security Office of Earnings & International Operations page to find the office that serves your country of residence.

More Information How Work Affects Your Benefits Examples: How We Deduct Earnings From Benefits

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Backdoor Roth IRA What it is and how to set it up

"Backdoor Roth IRA" is simply a term to describe a strategy used by high-income earners who can't contribute to a Roth IRA because their income is above certain limits. Rather than contribute directly to a Roth, you contribute to a traditional IRA, and then convert it to a Roth.

A Roth IRA is a popular retirement savings account to which you contribute after-tax dollars, and if you meet certain requirements, you can withdraw both the invested money (principal) and earnings accrued on the money tax-free in the future. You might be a good candidate if you think you'll be in a higher tax bracket when you retire. The benefit of a Roth IRA is that it offers tax-free growth. 

Backdoor Roth IRA income limits

If your modified adjusted gross income (MAGI) is above certain income limits , then the amount you can contribute to a Roth IRA is phased out. The phaseout occurs between $146,000 and $161,000 for single filers and $230,000 and $240,000 for joint filers in 2024. The backdoor method allows those with higher incomes who can't contribute in the typical manner to still take advantage of a Roth IRA.

How to set up a backdoor Roth IRA

There are 2 ways to set up a backdoor roth ira:.

1. Contribute money to an IRA, and then roll over the money to a Roth IRA. For this strategy to work, you should contribute to a traditional IRA with no balance. If there's a balance in the IRA, there could be a taxable event when you convert. Once you contribute to the account and wait for any required holding period, you'll then convert the account to a Roth IRA. Any money earned due to market performance before the conversion takes place is subject to taxes. The contribution is considered nondeductible once you fill out IRS Form 8606 and complete your tax return. Note that there's no tax benefit for the year you establish a backdoor Roth IRA.

2. If your 401(k) plan allows, you may be able to do a mega backdoor Roth conversion. Some 401(k) plans permit automatic Roth conversions, which means you can make after-tax contributions and have them automatically convert to Roth within their accounts. Check with your plan to see if this option is available to you. 

When should you not consider this strategy?

A backdoor Roth IRA doesn’t make sense for everyone. If you're able to make a Roth IRA contribution the standard way, then you don't need to use the backdoor method.

If you have a balance in a rollover IRA and plan to contribute to that account, you may not want to make a backdoor Roth conversion because of the "pro rata" rule. This rule requires all IRA distributions to be taken proportionally from your pre-tax and after-tax contribution sources. This could limit the tax benefits you'd receive from a Roth conversion. For example, if you have a total of $1 million in IRA assets, and $100,000—or 10%—is after-tax money, then 10% of any withdrawal must be taken from after-tax money. For a $10,000 withdrawal, $1,000 would have to be after-tax money.

It's important to keep in mind when you plan to use the money. If you're looking to withdraw the money within 5 years, you may not receive all the Roth tax benefits.* Also, when creating a backdoor Roth IRA, you'll have to work with an accountant to file tax forms to ensure you complete it accurately.

What makes a backdoor Roth IRA different?

The difference is the way you make your contribution. High-income earners use the backdoor technique to establish a Roth IRA since they're unable to contribute in the standard way because of the Roth IRA income limits.

Do you pay taxes on backdoor Roth IRAs?

If you contribute money to an investment that accrues earnings before you complete the conversion, then you'll have to pay taxes on those earnings. Once the money is in a Roth IRA, your withdrawals will be tax-free if you meet certain requirements. If you're subject to the pro rata rule, your IRA distributions must be taken proportionally from your pre-tax and after-tax contribution sources.

Are backdoor Roth IRAs worth it?

You should consult with an advisor or tax professional to discuss your personal situation. It's best to sit down with an advisor who can help you determine if a backdoor Roth IRA would be beneficial to your situation.

How much can I contribute?

You can contribute up to $7,000 ($8,000 if age 50 and older) to a Roth IRA in 2024, if your income is below the phaseout amounts.

What are alternatives to backdoor Roth IRAs?

If your income is above the phaseout amount and you don't want to complete a backdoor Roth conversion, then your alternative is to invest in taxable accounts. They won't offer the same tax benefits but will give you an opportunity to diversify your investments. 

Questions? If you have additional questions about setting up a Roth IRA, call us at 888-476-1936 .

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*The 5-year holding period for Roth IRAs starts on the earlier of: (1) the date you first contributed directly to the IRA, (2) the date you rolled over a Roth 401(k) or Roth 403(b) to the Roth IRA, or (3) the date you converted a traditional IRA to the Roth IRA. If you're under age 59½ and you have one Roth IRA that holds proceeds from multiple conversions, you're required to keep track of the 5-year holding period for each conversion separately.

Withdrawals from a Roth IRA are tax free if you are over age 59½ and have met the 5-yar holding period requirement; withdrawals taken prior to age 59½ or 5 years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate 5-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).

Neither Vanguard nor its financial advisors provide tax and/or legal advice. This information is general and educational in nature and should not be considered tax and/or legal advice. Any tax-related information discussed herein is based on tax laws, regulations, judicial opinions and other guidance that are complex and subject to change.  Additional tax rules not discussed herein may also be applicable to your situation. Vanguard makes no warranties with regard to such information, or the results obtained by its use, and disclaims any liability for positions taken in reliance on, such information. We recommend you consult a tax and/or legal adviser about your individual situation.

The IRS has not officially commented or provided formal guidance on the “Backdoor Roth IRA” strategy. If the IRS decides that the loophole is a violation, you could owe a 6% excise tax for overfunding your Roth. And if restrictions do come into play at some point, they could require backdoor Roth converters to pay a penalty, or they might include a grandfather clause. 

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

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One of the main objectives of the reform is to substitute current tax structures for a dual Value-Added Tax (VAT) composed of the Goods and Services Tax (IBS) and the Contribution on Goods and Services (CBS). Indeed, survey respondents said that the replacement of old taxes by IBS and CBS would have the greatest impact on their organizations, and they also identified ICMS tax incentives as an important development brought by the reform.

According to the report, some of the changes to the tax system are seen as beneficial, while others are perceived as obstacles. In fact, many corporate professionals said they anticipated more simplified ancillary obligations and reduced tax complexity in their work processes. However, the greatest difficulties identified by respondents were an increase in tax burdens and higher costs associated with adapting to the new rules, including system changes and the necessary learning curve. Another important concern among respondents turned out to be a potential workload increase caused by the transition between the old and new systems.

You can access the Thomson Reuters Institute’s “Brazil Tax Reform: Insights, challenges and opportunities for corporate tax professionals” report here.

Most respondents said they expect their organization to increase investment in talent training over the coming six months, indicating that organizations will probably focus on improving the skills and quality of personnel managing the transition. Yet, while corporate tax departments should definitely consider talent training as a key strategy for the transition, headcount expansion might also be a smart move because organizations’ team size in planning for the transition surfaced as one of the areas with lowest satisfaction among respondents.

Finally, corporate tax departments are considering leveraging technology tools and systems to optimize time and cost in the transition. Professionals highlighted the importance of tax management solutions, emphasizing the need for these tools to be continuously updated with new rules and increasing the pace of automation of their processes. As for financial planning, respondents said that investment in these solutions is projected to be the top spending priority in their departments over the next six months to two years.

This newly published report explores the impact that the new rules in the tax system in Brazil will have on corporate tax departments. According to many tax industry professionals, some strategies that these tax departments intend to carry out for a successful transition include staying informed of new regulation developments, leveraging technology and automation, and adjusting investment in areas like talent training and tax management systems, among others.

By designing a structured plan of action, corporate tax professionals should be able to adapt to Brazil’s new tax system and secure compliance and efficiency.

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