Taxes are mandatory payments or charges that local, state, and national governments collect from individuals to cover the costs of government services, goods, and activities.
There are three primary goals of tax policy–resource allocation, income redistribution, and economic stability. To further these objectives, taxation must not generate allocational inefficiencies.
Definition of Taxes
A tax is a charge imposed by government on individuals or legal entities. The funds collected are used to pay for governmental operations, transfers, and capital asset purchases and maintenance.
The term tax is often used to refer to taxes on income, purchases, imported goods, the value of property, an estate or gifts. It may also refer to other taxes, such as imposts, customs or duties.
Generally, economists believe that taxes are an important source of revenue for most national governments. They also argue that tax systems should be fair, economical and certain.
Critics of taxes have argued that they are regressive, unjustly take money from citizens, and waste time. This argument is particularly valid for tax compliance, which takes up a significant portion of the lives of taxpayers. In addition, critics of taxes say that marginal tax rates tend to decrease savings, which can have a negative impact on economic growth and development. This is because it reduces the ability of people to invest in the economy.
Types of Taxes
There are several types of taxes. They include direct taxation, which is paid straight to the government by an individual. This type of tax is computed based on the individual’s capability to pay.
There is also indirect taxation. Indirect taxes include wealth, property and personal income tax.
Indirect taxes are a major source of revenue for governments, and are usually used to fund various services. These include roads, water and waste management systems, energy and education.
Developed countries tend to use higher levels of individual and corporate income taxes than do developing nations. They also rely on trade and consumption taxes more than do less-developed nations.
The government imposes taxes on a wide variety of goods and services. These include income, property, and purchases of goods.
Federal tax rates are progressive, meaning they get higher as your income rises. Marginal tax rates are a measure of the incentive to earn, save, invest, or spend.
State and local tax systems can be regressive or proportional depending on the way that the marginal tax rate one pays changes at different income levels.
For example, many states rely heavily on consumption taxes to generate revenue. This results in high taxes on poor families, as illustrated by Arizona and Texas, which tie for sixth highest tax on the poor at 13.0 percent.
They are levied to help fund public services and infrastructure, and are paid in advance as a percentage of a monetary exchange (for example, when income is earned or sales are made).
The tax collection process involves agencies and agencies at the national level (i.e., the IRS in the US, the Australian Taxation Office, HM Revenue and Customs in the UK, the Tax Administration Service in Mexico). They collect income taxes, property taxes, sales tax, and excise taxes on goods and services.
To increase tax revenues, countries should implement a broad social and political commitment to tax reform. It also requires smart use of information management systems to improve compliance and fight corruption.