Loading the player...

What are 'Taxes'

Taxes are generally an involuntary fee levied on individuals or corporations that is enforced by a government entity, whether local, regional or national in order to finance government activities. In economics, taxes fall on whomever pays the burden of the tax, whether this is the entity being taxed, like a business, or the end consumers of the business's goods.

BREAKING DOWN 'Taxes'

Taxes are levied by states upon their citizens and corporations to fund public works and services. Payment of taxes at rates levied by the state is compulsory, and tax evasion, the deliberate failure to pay one's full tax liabilities, is punishable by law. Most governments utilize an agency or department to collect taxes; in the United States, this function is performed by the Internal Revenue Service.

There are several very common types of taxes:

  • Income Tax (a percentage of individual or corporate earnings filed to the federal government)
  • Sales Tax (taxes levied on certain goods and services) 
  • Property Tax (based on the value of land and property assets) 
  • Tariff (taxes on imported goods imposed in the aim of strengthening internal businesses).  

However, tax systems vary widely among nations, and it is important for individuals and corporations to carefully study a new locale's tax laws before earning income or doing business there.  

Like many developed nations, the United States has a progressive tax system by which a higher percentage of tax revenues are collected from high-income individuals or corporations rather than from low-income individual earners. Taxes are imposed at federal, state and local levels. Generally speaking, the federal government levies income, corporate and payroll taxes, the state levies sales taxes, and municipalities or other local governments levy property taxes. Tax revenues are used for public services and the operation of the government, as well as the Social Security and Medicare programs. As baby boomer populations have aged, Social Security and Medicare have claimed increasingly high proportions of the total federal expenditure of tax revenue. Throughout United States history, tax policy has been a consistent source of political debate.

Capital gains taxes are of particular relevance for investors. Levied and enforced at the federal level, these are taxes on income that results from the sale of assets in which the sale price was higher than the purchasing price. These are taxed at both short-term and long-term rates. Short-term capital gains (on assets sold less than a year after they were acquired) are taxed at the owner's normal income rate, but long-term gains on assets held for more than a year are taxed at a lower rate, on the rationale that lower taxes will encourage high levels of capital investment.

 

RELATED TERMS
  1. Income Tax

    A tax that governments impose on financial income generated by ...
  2. Federal Income Tax

    A federal income tax is levied by the United States Internal ...
  3. Tax Rate

    A tax rate is the percentage at which an individual or corporation ...
  4. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  5. Levy

    The legal seizure of property to satisfy a debt. In the U.S., ...
  6. Hidden Taxes

    Taxes that are indirectly assessed upon consumer goods without ...
Related Articles
  1. Taxes

    Understanding Taxes

    Taxes are mandatory fees that individuals and corporations must pay to their governments.
  2. Taxes

    Understanding Income Tax

    Income tax is a levy many governments place on revenue of entities within their jurisdiction.
  3. Taxes

    5 States Without Sales Tax

    Learn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
  4. Taxes

    Taxes: Who Pays And How Much?

    When it comes to taxes, the debate is endless on who pays what, especially in Congress. With no new initiatives in sight, let's take a look at who is paying now.
  5. Taxes

    5 State Tax Issues For When You Leave the Military

    When you're budgeting for post-military life, certain state tax issues need to be considered.
  6. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  7. Taxes

    10 States With High Sales Taxes

    Most states have sales taxes of some kind for goods and services. Here's a rundown of the states that have the highest sales taxes.
  8. Taxes

    Explaining Progressive Tax

    A progressive tax is a levy in a tax system where the tax rate increases as the taxable base increases.
  9. Taxes

    What is a Direct Tax?

    Governments and taxing entities impose direct taxes directly on individuals and businesses.
  10. Taxes

    3 Ways Tax Haven Governments Make Money

    If the governments of tax haven countries impose little, or no, income taxes, how exactly do these nations generate revenue?
RELATED FAQS
  1. Who first came up with the idea of a progressive tax?

    Learn how the progressive income tax system developed in the United States and became the federal government's primary revenue ... Read Answer >>
  2. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
  3. How does the effective tax rate for an individual differ from that of a corporation?

    Read about the effective tax rate for individuals when compared with the effective tax rate for corporations, including how ... Read Answer >>
  4. What are the best and worst states to pay taxes in?

    Explore and compare the wide variations that exist in the overall tax burden imposed by different states, including which ... Read Answer >>
  5. What's the difference between the marginal tax rate system and a flat tax?

    Find out about the difference between marginal tax rates and flat taxes. Gain insights on both systems and the arguments ... Read Answer >>
Hot Definitions
  1. Investing

    The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
  2. Stagflation

    A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, ...
  3. Notional Value

    The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets ...
  4. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
Trading Center