Understanding the Different Tax Rates

Tax Systems in the U. S. are complex and can be difficult to understand. As a 501(c)(3) nonprofit organization, we rely on the generosity of people like you to help us continue our work.

It's important to remember that every dollar you pay in taxes starts as a dollar earned as income. One of the main differences between the types of taxes is the point of collection, that is, when the tax is paid. To be an educated taxpayer, it's important to have a basic understanding of the main types of taxes. An individual income tax (or personal income tax) applies to salaries, investments, or other forms of income earned by an individual or household.

Many individual income taxes are “progressive”, meaning that tax rates increase as taxpayer income increases, causing people with higher incomes to pay more of their income taxes. In the United States, individual income taxes are based on a progressive tax system. The income ranges to which these rates apply are called tax brackets. All income that falls within each category is taxed at the corresponding rate.

Federal and state governments impose a corporate income tax (CIT) on corporate profits, which is revenue (what a company earns in sales) minus costs (the cost of doing business). While C corporations are required to pay corporate income tax, the burden of the tax falls not only on the company, but also on its consumers and employees through higher prices and lower salaries. Payroll taxes are taxes paid on employees' salaries and salaries to fund social security programs. Most taxpayers will become familiar with payroll taxes by looking at their pay receipt at the end of each pay period, which clearly indicates the amount of payroll tax withheld by their employer from their income.

In the United States, employers and employees each pay half of payroll taxes (7.65 percent). Capital assets generally include everything owned and used for personal purposes, pleasure, or investment, including stocks, bonds, homes, cars, jewelry, and art. Whenever one of those assets increases in value, for example when stocks increase in value due to market forces or when a house increases in value due to inflation or appreciation, capital gains taxes may apply. In jurisdictions with a capital gains tax, when a person “earns a capital gain” that is when they sell an asset for more than they paid for it - they must pay capital gains taxes on those profits.

When applied to profits earned on stocks, capital gains taxes cause the same dollar to be taxed twice, also known as double taxation. This is because corporate profits are already subject to corporate income tax. Sales taxes are a form of consumption tax that applies to retail sales of goods and services. If you live in the U.

S., you're probably familiar with sales taxes - it's one of the few industrialized countries that still depends on traditional retail sales taxes, which are an important source of state and local revenue. States other than Alaska, Delaware, Montana, New Hampshire and Oregon levy state sales taxes, as do localities in 38 states. Sales tax rates can have a significant impact on where consumers choose to shop, but the sales tax base is also important - what goods and services are subject to sales tax and not? Tax experts recommend that sales taxes apply to all goods and services that consumers buy but not to those that businesses buy when they produce their own goods. Gross revenue taxes (GRT) apply to a company's gross sales regardless of profitability and without deductions for business expenses. This is a key difference from other taxes that companies pay such as those based on profits or net revenues such as corporate income tax or final consumption such as a well-constructed sales tax.

Because GRTs are imposed at every stage of the production chain they result in a “fiscal pyramid” in which the tax burden is multiplied along the production chain and eventually is transferred to consumers. GRTs are particularly harmful to start-ups which record losses in the early years and for companies with long production chains. Despite being discarded for decades as an inefficient and weak fiscal policy policymakers have recently begun to consider GRTs again in search of new sources of income. A value added tax (VAT) is a consumption tax that is calculated on the value added at each stage of production of a good or service. The final consumer however pays VAT without being able to deduct the VAT previously paid which makes it a tax on final consumption. This system ensures that only final consumption can be taxed under VAT avoiding the tax pyramid.

More than 140 countries around the world and all OECD countries except the United States levy VAT making it an important source of income and the most common form of consumption taxes. Excise taxes are taxes that are imposed on a specific good or activity usually in addition to a large consumption tax and represent a relatively small and volatile part of total tax revenues. Common examples of excise taxes include taxes on cigarettes alcohol soft drinks gasoline and gambling. Excise taxes can be used as “taxes on sin” to compensate for externalities - side effects or harmful consequences that are not reflected in the cost of something. For example governments can impose a special tax on cigarettes in the hope of reducing consumption and associated health care costs or an additional carbon tax to curb pollution. Excise taxes can also be used as user fees - a good example of this is the gas tax. The amount of gasoline a driver buys generally reflects their contribution to traffic congestion and road wear and tear - so imposing taxes on this purchase places a price on using public roads. Property taxes apply primarily to real property such as land and buildings and are an essential source of revenue for state and local governments in the U.

S. They account for more than 30 percent of total state and local tax revenues and more than 70 percent of total local tax revenues - local governments rely heavily on property taxes for funding public services. It's important for taxpayers to understand all three different types of tax rates: individual income progressive corporate income payroll capital gains sales gross revenue value added excise property - so they can make informed decisions about their finances.

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