Taxes - Understanding Taxes and its types

Taxes are expenses that are impossible to avoid. They are compulsory for almost everyone. Taxes are different in amount, nature, and purpose. Most of the taxes go to the government budget. They are then used to pay public and common charges, such as improving the infrastructure of the country, paying the city’s electricity, paying different types of pensions, funding some projects, and so on.

There are a few types of taxes. Most common are income tax, sales tax, property tax, profit tax, VAT(value-added tax), excise tax, import tax, etc.

The most common tax is income tax, which is used in every country, though different countries have different rates. Income tax could be fixed and could be variable according to the amount of a person’s income. For example, in the USA there is a 10%, 12%, 22%, 24%, 32%, 35% and 37% tax rate according to your income. Let’s say, if you are single and your income is between 0 to 9000$, you will be charged 10%, if your income is between 40000$ and 86000$ your income tax rate will be 22%, and so on. The amounts are changed according to your family status (single, head of household, married filing jointly or qualifying widow, married filing separately).

The amounts at which tax rates work are changed annually. Below you can see the 2022-2023 years tax brackets.

Tax rate	Single	Head of household	Married filing jointly or qualifying widow	married filing separately
10%	$0 to $10,275	$0 to $14,650	$0 to $20,550	$0 to $10,275
12%	$10,276 to $41,775	$14,651 to $55,900	$20,551 to $83,550	$10,276 to $41,775
22%	$10,276 to $41,775	$55,901 to $89,050	$83,551 to $178,150	$41,776 to $89,075
24%	$89,076 to $170,050	$89,051 to $170,050	$178,151 to $340,100	$89,076 to $170,050
32%	$170,051 to $215,950	$170,051 to $215,950	$340,101 to $431,900	$170,051 to $215,950
35%	$215,951 to $539,900	$215,951 to $539,900	$431,901 to $647,850	$215,951 to $323,925
37%	$539,901 or more	$539,901 or more	$647,851 or more	$323,926 or more

Source: IRS

Some countries, mostly under-developed and developing, have fixed income rates. It could be 20%, 23%, 35% etc. For example, if your income tax rate is 20% and your gross (before taxing) salary is 1000$, then your net salary (after taxing) will be 1000-1000X20%=800$. It means that after paying the income tax rate, your income will be 800$.

Another type of tax is sales tax. This tax is charged when you buy some goods. In the USA the sales tax rate is 7.25%, but it could vary from state to state by a little bit. This tax is not included in the price of the goods and services. It means that when you see a price on the shelves, it will be a little higher at the counter.

Property tax is levied on tangible properties that are movable (vehicles, equipment) and immovable (buildings, land, etc). The largest part of the budget of the USA must be gathered from property tax, which then is used for building roads, financing the country’s police, and funding schools and other services. The rate is different according to state, starting from 0.37% in Hawaii and ending with 2.2% in New Jersey.

Not every country uses property tax or some of them have too low tax rates. Some of the examples are Georgia, Malta, Kenya, Dominica, Saudi Arabia, Monaco, Fiji, etc.

Another common tax is profit tax, which is levied on profit-making organizations. In the USA it is called business tax and the rate of it is 21%. Before 2017 the rate on corporate income tax was 35%, but then it was reduced. Dividends that are distributed to the shareholders of the corporation are being taxed without any deduction, creating a double tax.

VAT which means value-added tax is very important for the government budget. However, the USA is one of the countries which does not have this kind of tax. VAT is a non-direct type of tax, which is finally levied on a customer but indirectly. For example, if a company has produced a phone that is worth 1000$, and it has to pay value-added tax with the rate of 20%, instead of selling it for 1000$, it will add the value to the price and sell the phone for 1200$. It means that the VAT is paid by a customer, instead of the company.

Excise tax is levied on a certain type of product. Such products include alcohol, tobacco, cars, fuel, etc. The excise tax is usually imposed during import, sale by the retailer or manufacturer, and during use of the product by consumer or manufacturer. This kind of tax is not international, meaning that governments could define the tax rate for their countries. It is another form of indirect taxes because the price is increased by manufacturers and retailers to cover the tax rate, which is different in every state of the USA. The highest excise tax rate imposed is in Hawaii and equals 6.36%.

Import tax, which is also known as a duty rate, is a type of tax imposed when certain goods cross the borders of a country. Usually, there are some limits, under which, importing some goods are duty-free, but if you exceed the limit, then you have to pay a tax rate. Also, there might be some countries from which you won’t be levied import tax because of the agreement between governments. In the USA Customs and Border Protection is responsible for collecting imported goods and import taxes as well.

Taxes are liabilities that every person encounters during their lives when they become financially independent. It is something that can not be avoided, but we have to understand that the taxes paid by us have a positive effect on society. The budget of the country is fully compiled by money paid as taxes. When we see a city with nice infrastructure, which was built by a government, we should know that we also have a contribution to it. When we go and enjoy free events that were held by the government, we have to acknowledge that we also have contributed to that.

Besides, the government’s budget is also used for health insurance, which is very important, it is used to finance social events, social security, etc. and without taxes, it would be impossible.