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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.


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.


  1. Income Tax

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

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  4. Assessment

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  5. Mill Levy

    The assessed property tax rate used by local governments and ...
  6. Corporate Tax

    A levy placed on the profit of a firm, with different rates used ...
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  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 are the differences between regressive, proportional, and progressive taxes?

    Learn about the three basic types of tax systems, all of which are used in the U.S., and how they affect different income ... Read Answer >>
  3. 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 >>
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