Loading the player...

What are 'Taxes'

Taxes are involuntary fees levied on individuals or corporations and 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'

To help fund public works and services and to build and maintain the infrastructures used in a country, the government usually taxes its individual and corporate residents. The tax collected is used for the betterment of the economy and all living in it. In the US and many other countries in the world, taxes are applied to some form of money received by a taxpayer. The money could be income earned from salary, capital gains from investment appreciation, dividends received as additional income, payment made for goods and services, etc. A percentage of the taxpayer’s earnings or money is taken and remitted to the government. 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 (IRS).

There are several very common types of taxes:

  • Income Tax - a percentage of individual earnings filed to the federal government
  • Corporate Tax - a percentage of corporate profits taken as tax by the government to fund federal programs.
  • 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
  • Estate tax - rate applied to the fair market value of a property at the time of death

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.

Taxes are applied through tax rates. Read all about Tax Rates here.

RELATED TERMS
  1. Local Tax

    A local tax is tax assessed and levied by a local authority such ...
  2. Tax Rate

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

    The effective tax rate is the average rate at which an individual ...
  4. Levy

    A levy is the legal seizure of property to satisfy an outstanding ...
  5. Corporate Tax

    A corporate tax is a levy placed on the profit of a firm, with ...
  6. Tax Liability

    A tax liability is the amount an individual, corporation or other ...
Related Articles
  1. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  2. 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.
  3. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  4. 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.
  5. Taxes

    How the GOP Tax Bill Affects You

    Here's how the new tax bill changes the taxes you file in 2018.
  6. Taxes

    What All the Candidates’ Tax Plans Are Missing

    The presidential candidates have starkly different tax-reform proposals – but none of them gets to the real problem of America's tax system.
  7. Taxes

    Could The Fair Tax Movement Ever Replace The IRS?

    Although many taxpayers would love to see the IRS abolished, only a handful of thinkers have come up with any sort of viable replacement plan. The Fair Tax is one such idea that has continued ...
  8. Taxes

    Countries with the Highest Income Taxes

    Before you move to one of these countries with the highest income taxes, think through the overall tax situation - and what you get for your money.
  9. Taxes

    Investment Tax Basics For All Investors

    Nothing can be said to be certain, except death and taxes even in your investments.
  10. Taxes

    9 States Where You'll Pay the Most in Taxes

    Which state you live in can mean thousands of dollars saved or lost in taxes each year. Here's a list of states to avoid when it comes to tax rates.
RELATED FAQS
  1. 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 >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center