Universal Types of Taxes

Taxes are essential for governments globally. They provide the funds needed to run public services, and manage economic activities. Tax systems differ across countries, but they all aim to achieve these goals. This article explores the common principles and types of taxes used worldwide.

About Taxation

Taxation essentially means charging individuals, businesses, and transactions. These charges then go to fund important services like education, healthcare, infrastructure, and the army. Another function of taxes is that they help redistribute income, which makes society fairer and reduces inequalities. All people and businesses are supposed to pay some taxes. Whether it’s casinos that accept PayPal, ice cream sellers, NGOs, or McDonald’s — everyone, if they work legally, pays money into the country’s budget. Although tax systems vary, some types of taxes are common worldwide.

Income Tax

 Income tax is money that individuals and businesses pay to the government based on the money they earn from their jobs, investments, or other sources of income. It’s calculated as a percentage of total income. The rate depends on how much you earn and your country of residence. Some countries have progressive income tax systems,  where people have to pay  higher rates for higher incomes. The opposite of a progressive income tax system is the regressive one. This means that people with lower incomes pay a higher proportion of their income in taxes compared to those with higher incomes.

Value Added Tax (VAT) or Goods and Services Tax (GST)

VAT or GST is a tax added to the cost of goods and services at each stage of production or distribution. It’s paid by consumers when they buy products or services. Different countries have different ways of doing VAT/GST. Some have one rate for everyone, while others have different rates. For example, basic necessities may have lower taxes or no taxes at all to keep them affordable for people with lower incomes. Lower tax rates may be applied to goods and services that support environmental sustainability. But a single standard VAT or GST rate has its benefits, it simplifies tax calculations and reduces administrative complexities.

Property Tax

Property tax is a tax that people pay based on the value of their land, buildings, or other real estate property. Property tax is a yearly fee.  Local assessors usually consider factors like location, size, and improvements when they determine the amount of this tax

Excise Tax

Excise taxes focus on certain goods like tobacco, alcohol, fuel, and luxury items, considered harmful. The tax is typically included in the price of the product, with manufacturers or sellers responsible for collecting and remitting the tax to the government. Governments use these taxes to reduce consumption, tackle negative effects, and encourage public health and environmental protection.  However, high excise tax rates may incentivize smuggling and counterfeiting.

Payroll Tax

Payroll taxes are payments made by both employers and employees to support social insurance programs like social security, healthcare, and unemployment benefits. The amount of payroll taxes taken from an employee’s pay can change depending on how much they earn and which programs are funded. But high payroll tax rates can increase labor costs for employers and  reduce hiring or lead to  wage stagnation.

Customs Duties

Customs duties or tariffs,  are taxes charged on goods and services coming into a country from abroad. Governments use these tariffs to control trade, support local industries, and earn money from imports. The rates of these tariffs can change depending on the type of product, trade agreements, and global politics.

Effects of Taxation

Well-designed tax systems encourage efficient use of resources and promote economic growth. Taxes can help reduce income inequality when the government taxes higher-income individuals more and provides welfare programs. This promotes fairness and inclusivity in society. 

Strong enforcement and transparent administration of taxes help ensure everyone pays their fair share. However, there are some universal problems with taxation. Often, people complain that tax laws are complicated, making it hard for them to understand and follow them. Simplifying laws, educating taxpayers, and using technology can make compliance easier. 

Some people simply do not like the concept of taxation and try to avoid paying taxes. They hide assets or transfer them to offshore accounts to conceal income.It’s important for countries to work together to solve these problems and prevent companies from moving profits to avoid taxes. But the reality is that countries do not want to cooperate with each other when it comes to a universal taxation system. And until this issue is resolved, there will be people and businesses who do not pay taxes to their country.