What Are Taxes: Taxes 101

Today, there is a bewildering array of taxes, some of which are highly visible, such as sales and income taxes, while the others are invisible to the consumer because they are imposed on the producers of raw materials and their intermediate products.

Everyone of us is taxed on a multitude of basis: on what we earn, on what and how much we spend, and even on the properties we own. Business establishments and households are also taxed. Aggregate taxes collected by all strata of the government correspond to a huge portion of the source for the national budget. But the question lingers: just exactly what are taxes?

In the U.S., the designation “U.S. tax system” is a misnomer. Taxes are collected by the federal government by each of the 50 states and by cities, towns, counties, and districts. The states for their part collect about twice as much as local government do, for the federal government, income and payroll taxes are the main source of revenue, while for the states, sales taxes is the number one source of income with income taxes coming next.

Different Forms of Taxes

Among the federal taxes, income tax accounts for almost half of the federal revenues. The income tax is paid on all types of income such as wages, salaries, dividends, interests, rents, and capital gains. Most income comes in the form of wages and salaries. Tax on wages and salaries is withheld by employers from employees’ paychecks.

• Federal taxes are progressive kind of tax. This means that the tax for income rises with a rise in income. There are two ways to accomplish this: the first is to exempt minimum income from any tax and secondly, by making the tax rate itself dependent on the amount of income.
• Capital gains taxes are taxes paid for an income gained from the selling of capital or properties such as land, house, and car. If there is a difference in the selling price from the original price of the capital, the difference will be taxed. Although in some countries, it is the entirety that is taxed.
• Property taxes are taxes paid for ownership of real properties, such as parcels of land, house, and vehicles. As long as the property is in your ownership, you are obliged to pay for them. The property tax is different from all other U.S. taxes because taxpayers do not need to buy or sell anything to incur a tax liability. It is the only important U.S. tax that is based on wealth.
• Income taxes are the main source of income through taxation by the federal government. Most income taxes are on wages and salaries. However, a smaller part comes from dividends, interests, rents, and capital gains. In most cases, income tax is regularly deducted from employees’ paychecks while others need to file their taxes on a regularly in an annual manner.
• An excise tax is levied on a particular commodity. As opposed to sales tax which is levied on almost all sales, excise taxes are levied only on those items which poor families would not spend much on. If the tax is on a commodity that eat a large portion of the income of lower-income families, the tax is regressive. However, if it is on a commodity where the rich spends a large portion of their income, the tax is progressive. Sales taxes are regressive because poorer families tend to spend a large portion of their income than rich families do. Of the 50 states, only a few imposes sales taxes. On the other hand, the federal government imposes a number of excise taxes, the most common of which are on cigarettes, alcoholic beverages and gasoline. Alcohol and cigarette taxes are intended to induce people to behave in certain ways as well as to raise revenue.

What Are Taxes For?

Because all governments spend money, they need to raise revenue in order to do so. This is where taxation comes in. The revenues collected from taxation are used for all government activities and projects: for the salary of officials and employees, the maintenance of government services, for infrastructure, for health services, and education of the citizens, even for the maintenance of roads and for national defense. If somebody asks you, “what are taxes?” you won't be too afraid to answer them the definition and use of taxes in our country.