America’s Taxation procedure is known to be one of the most complexes in the entire world. As a mistake in a taxation calculation can lead to serious repercussions, most people acquire the aid of Tax Accountants. However, this is not a cheap option. Hence, it is always prudent to understand taxation by segregating it to its different types. The best way to go about this is to understand when and where you are being taxed and on what basis. This will be called “the Taxation Point” and “Taxation base” throughout this article to better understand the technicalities.
Disposable income is the monetary value left in hand after all the deductions for people to spend on essentials and their lifestyles. In essence, it is the money that is disposable for the use of each individual and his or her dependents. Hence, the taxation base is not at the point of earning but at the point of spending. The most common types of Consumption taxes are as detailed below.
Retail Sales Taxes
Sales taxes are taxes imposed on the goods and services that are being sold to customers. hence, the point of taxation here is at the purchase of the good or service. The taxation base in this scenario is the original retail price before taxation. This is categorized as a direct tax as and is passed down to the consumer in almost all instances.
Excise tax is the indirect tax that is charge by the Government on consumption goods or services. Here, the tax is not directly paid by or passed on to the customer. Instead, the Inland Revenue Service (IRS) imposes this tax on the producer or manufacturer of the good or service. This does not mean that the tax is borne by the manufacturer. Instead, the Excise tax is factored into the retail price of the good or service.
The purpose of Excise tax is to either discourage a certain product or related industries. For instance, Fuel prices are being Excised to control the number of vehicles on the road as well as vehicle leases. Excise on goods such as tobacco and alcohol is used as a control mechanism of the negative impact of the goods on society. Here, the tax base is subjective to the political view and orientation of the Government. The taxation point is at the point of Pricing.
Value added tax directly relates to the value chain of the product. The value which is being added at every stage of the value chain is being taxed. The taxation base is indirect costs of manufacturing. The point of taxation here is segregated as it is taxed at different stages.
Use tax is again a consumption tax where the point of taxation is at the point of purchase. However, this tax is only applicable for out-state purchases. The most common example for this is E-Commerce transactions. Here, besides the customer’s state Sales Tax, the Use tax policy of the destination is also applied. Here, the taxation base depends on the customer’s state taxation law as well as the seller’s local taxation laws.
Taxes on gross business receipts
This refers to the tax imposed on Corporates for all of their sales activities through which income is generates. Hence, the taxation base is business income and the point of taxation is at the point of profit generation. Profit after interest is subjected to this tax to form the income tax on corporate bodies.
Import duties are taxes imposed on export and import goods. The point of taxation is at the entry / exit to the relevant port. This is also known as Customs duty. The taxation base is the value of the good. The measurement of the value of a good differs from state to state.
Property taxes are paid for any space that is occupied by an individual or a group of individuals. Hence, the taxation base in the occupied space. This includes homes, real estate properties as well as freehold land and buildings owned or leased by Corporate bodies. Apart from Seniors, Veterans, Disabled people and other exempted groups, every single citizen is to pay Property tax. It can be explained as type of “rent” to the Government for living in the country.
Capital Gains Taxes
Companies do not simply earn income from their sales proceed. Their accumulated earnings which in accounting terms is called Retained Earnings are invested in instruments as per the risk and return appetites of the entity. Returns earned from such investments are used as the base for taxation. These include dividend income as well.
This type of taxes is sometimes called Estate taxes and are paid after the death of a certain individual. A proportion of the net worth of the diseased is to be paid out as taxes. The root purpose here is not to tax the dead but to tax the inheritor for obtaining the hard-earned worth of the diseased person. These are not universal or even Federal within the United States. But some states do impose Inheritance taxes for the aforementioned purpose.
All types of taxes do not follow the same principles and bases of taxation which was evident in the preceding section. Certain taxes are uniform across the tax type whereas certain taxes are different for different income groups. The rationale on which each tax is imposed paves the way for its principle. Detailed below are the different types of tax principles which are used in setting the parameters for each tax policy.
This type of tax charges higher tax proportions from higher income earners. This is basically used for personal income tax. The purpose of this taxation method is Income Re-distribution. Income earned by high-earners are collected by the Government and redistributed among the lesser earners through Welfare and Benefit schemes such as Obama Care Scholarship Programs. In third world countries, this type of taxation is used to provide concessions for Agricultural farmers.
In this Taxation type, the tax rate is flat across each income groups. However, as taxation base is a percentage, lower income earners end up paying a higher proportion of taxes from their disposable income than the higher income earners. This creates a regressive pattern where the proportion of taxes paid out of the disposal income reduces as the income level of the individual increases. This is essentially an unfair taxation principle.
In this taxation principle, each and every income group pays the same proportion of disposable income as taxation. This is the fairest and equitable principle as it is relevant, suitable and just across all income groups.
Even though taxation is seeing as unfair and unjust, it is the main source of income for the Government to run its country or to at least maintain their Imports. If the principle of taxation is fair, then the entire process would not be partial to a certain group of people. Moreover, it is ironic how people incur additional charges on tax accountants to calculate their taxes. Once the bases and the proportions for each base is understood, it can be self-calculated.