Taxglosses.com - Tax Information Resource Guide

A tax (also known as a "duty") is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e.g. tribes, secessionist movements or revolutionary movements). Taxes could also be imposed by a subnational entity. Make Money From Home Taxes consist of direct tax or indirect tax, and may be paid in money or as corvée labor. In modern, capitalist taxation systems, taxes are levied in money, but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents. After Surgery Taxes are usually collected by a governmental agency such as the Internal Revenue Service in the United States or HM Revenue and Customs (HMRC) in the UK. When taxes are not paid to a government's satisfaction, civil penalties such as fines or forfeiture are carried out against the non-paying entity or individual. These penalties could also have criminal penalties such as imprisonment enforced by governmental investigators, such as the Federal Bureau of Investigation and the Department of Justice in the US. In most modern industrialized countries, when an individual fails to pay his government the taxes, it will ultimately result in the loss of money and not imprisonment (unless fraud was a serious factor). blepharoplasty The means of taxation, and the uses to which the funds raised through taxation should be put, are a matter of hot dispute in politics and economics, so discussions of taxation are frequently tendentious. Public finance is the field of political science / economics that deals with taxation. Purposes and effects of taxation Funds provided by taxation have been used by states and their functional equivalents throughout history to carry out the functions such as: military defense, enforcement of law and public order, protection of property, redistribution of wealth, economic infrastructure — roads, legal tender, enforcement of contracts, etc., public works, the operation of government itself. Most modern governments also use taxes to fund welfare and public services, such as: education systems, health care systems, pensions for the elderly, unemployment benefits energy, water and waste management systems, public transportation. Colonial states and moderning states have also used cash taxes to draw or force reluctant subsistence producers into cash economies. Governments use different kind of taxes and vary the tax rates: to distribute the tax burden between individuals or classes of the population involved in taxable activities, such as business, to redistribute resources between individuals or classes in the population. Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor, the disabled or the retired by taxes on those who are still working, to fund foreign aid and military aid, to influence the macroeconomic performance of the economy (the government's strategy for doing this is called its fiscal policy) (see also tax exemption), to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less attractive. The resource taken from the public through taxation is always somewhat greater than the amount which can be used by the government. The difference is called compliance cost, and includes for example the labour cost and other expenses incurred in complying with tax laws and rules. The collection of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism rehabilitation centres, is called hypothecation. This practice is often disliked by finance ministers, since it reduces their freedom of action. Some economic theorists consider the concept to be intellectually dishonest since in reality money is fungible. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general fund. In some cases, such taxes are collected in fundamentally inefficient ways, for example highway tolls. Some economists, especially neo-classical economists argue that all taxation distorts the market and results in economic inefficiency. They have therefore sought to identify the kind of tax system that would minimise this distortion. A theory is that the most economically neutral tax is a tax on land. A government's primary duty is to maintain and defend title to land, and therefore it should collect most of its revenues for this unique service. Since governments also resolve commercial disputes, especially in countries with common law, this doctrine is often used to justify a sales tax or value added tax. Others (e.g. libertarians) argue that most or all forms of taxes are immoral due to their involuntary (and therefore eventually coercive/violent) nature. The most extreme anti-tax view is anarcho-capitalism, in which the provision of all social services should be a matter of voluntary private contracts. Tax rates Taxes are most often levied as a percentage, called the tax rate, of a certain value, the tax base (how much income and assets one has, earns, spends, inherits, etcetera). An ad valorem tax is one where the tax base is the value of a good, service, or property. Sales taxes, tariffs, property taxes, inheritance taxes, and value added taxes are different types of ad valorem tax. An ad valorem tax is typically imposed at the time of a transaction (sales tax or value added tax (VAT)) but it may be imposed on an annual basis (property tax) or in connection with another significant event (inheritance tax or tariffs). An alternative to ad valorem taxation is an excise tax, where the tax base is the quantity of something, regardless of its price: for example, in the United Kingdom, a tax is collected on the sale of alcoholic drinks that is calculated by volume and beverage type rather than the price of the drink. An important distinction when talking about tax rates is to distinguish between the marginal rate and the average rate. The average rate is the total tax paid divided by the total amount the tax is paid on, while the marginal rate is the rate paid on the next dollar of income earned. In a “progressive” tax system, these can be very different. For example, if income is taxed on a formula of 5% from $0 up to $49,999, 10% from $50,000 to $99,999, and 15% over $100,000, a taxpayer with income of $175,000 would pay a total of $18,750: ((0.05*50,000) + (0.10*50,000) + (0.15*75,000)) =18,750 His average rate would be 10.7%: (18,750/175,000) = 0.107 However, his marginal rate would be 15%. Direct and indirect taxation Taxes are sometimes referred to as direct tax or indirect tax. The meaning of these terms can vary in different contexts, which can sometimes lead to confusion. In economics, direct taxes refer to those taxes that are collected from the people or organizations on whom they are ostensibly imposed. For example, income taxes are collected from the person who earns the income. By contrast, indirect taxes are collected from someone other than the person ostensibly responsible for paying the taxes. The person or other entity from whom a tax is collected (i.e., the nominal "taxpayer") is a matter of law. However, who "pays" the tax (in the sense of who bears the ultimate economic burden of the tax) is determined by the market place and is found by comparing the price of the good (including tax) after the tax is imposed to the price of the good before the tax was imposed. For example, suppose the price of gas in the U.S., without taxes, were $2.00 per gallon. Suppose the U.S. government imposes a tax of $0.50 per gallon on the gas. Forces of demand and supply will determine how that $0.50 tax burden is distributed among the buyers and sellers. For example, it is possible that the price of gas, after the tax, might be $2.40. In such a case, buyers would be paying $0.40 of the tax while the sellers would be paying $0.10 of the tax. In law, the terms may have different meanings. In US constitutional law, for instance, direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership. Indirect taxes are imposed on rights, privileges, and activities. Thus, a tax on the sale of property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax. The distinction can be subtle, but it is important under US law. Until 1913 the United States Constitution required that all direct taxes be apportioned according to population. That is, if one state had twice the population of another state, then the direct tax revenue from that state had to be exactly twice that from the other state. In 1895, the US Supreme Court interpreted the income tax as a direct tax when applied to income from property, and struck down the tax as a result. (The ruling did not affect the status of income taxes on income from personal services, which continued to be classified as an excise, or indirect tax, not required to be apportioned. However, the Court ruled the entire income tax law invalid, including the tax on income from personal services, reasoning that Congress had not anticipated that only part of that particular law would be deemed enforceable.) The federal government then had no income tax until the Sixteenth Amendment was ratified in 1913. The Sixteenth Amendment removed the apportionment requirement for income taxes (whether considered direct or indirect). The apportionment requirement under the U.S. Constitution remains for other direct taxes, such as taxes on property by reason of ownership. Because there is no such national property tax under U.S. law, however, this legal restriction is not fiscally or politically significant.