A tax is an obligatory financial burden or any sort of levy fixed upon a taxpayer by a government agency in order to support government expenditure and various social, public needs. A person can always be charged with tax irrespective of his wealth, status of life. Evasion of or refusal to pay the tax, and any related offence, is punishable by law across most countries.
Income tax, otherwise known as income taxation, is the main source of revenue for all levels of government in the US. The federal government itself collects this tax through a variety of different methods. These include income taxes collected directly from individuals by virtue of their income and payroll taxes paid by businesses and individuals. Estate taxes imposed by state governments and inheritance taxes imposed by inheritance tax collectors are also a form of income tax.
Income tax itself has several types. The basic one is the graduated tax system where individuals and business establishments are taxed according to their income over a certain period. In the United States, this system is called the progressive tax system. Proportional taxes include value added taxes (VAT), retail sales tax and property tax. The progressive tax system applies to dividends and capital gains derived from the sale or exchange of taxable property and accounts receivable and includes other indirect taxes like estate taxes and corporate taxes. Individual income taxes are based on your net income, and corporate taxes are regressed on the earnings of company owners.
Another important type of income tax is the social security tax. This tax is a specific taxation paid by employers and employees to the social security administration for the support of their working expenses and coverage of their retirement benefits. This is calculated on a monthly basis beginning with the first day of employment and is levied on all salaries, wages and salaries exceeding a prescribed limit. Some states also include disability insurance as an additional social security tax. Several types of taxes are included in the social security tax: Medicare Parts A and B, State disability rates, Medicaid and insurance premiums, cost of living allowances, nursing care, death benefits and disability income.
There are two types of proportional tax: regressive and proportional. A regressive tax system gives tax relief to citizens earning below a defined minimum income level. A proportionate tax system provides tax relief to all taxpayers equal in stature regardless of income. In addition, some states have a proportional tax on dividends and some may even include interest income.
Capital gains tax or wealth tax is usually considered a regressive tax system, because the gains accrue to the wealthy slowly, while the incomes of ordinary people are increasing very fast. This can be confusing to many taxpayers who think that they are paying for capital gains when in reality they are not. If you’re paying for capital gains tax, you’re paying for nothing except the federal tax, which already has been deducted from your earnings. When you make money from investments or dividends, your capital gain amount is added to your taxable income for taxation purposes. Many taxpayers inadvertently pay too much tax because they failed to report dividends and capital gains.
Tax burden can also be confused with direct tax. The word ‘direct’ implies that the taxes fall on the taxpayer directly. Direct taxes include income taxes, estate taxes, inheritance taxes and personal property taxes. All these taxes are levied by government agencies and are collected by state governments.
So which system is better? It’s complicated. It really depends on the circumstances and what you anticipate as your tax liability. A regressive system favors the rich and the super-rich, whereas a progressive tax system favors everyone. If you expect to become poor and end up broke, then you should go for a regressive tax system, as it will definitely put you back in the same boat financially after you pay your tax.