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. Direct Tax

    A tax that is paid directly by an individual or organization ...
  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. Local Tax

    A tax assessed and levied by a local authority such as a county ...
Related Articles
  1. Taxes

    Understanding Taxes

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

    Explaining Corporate Tax

    A corporate tax is a tax levied on the profits a corporation generates.
  3. Taxes

    Understanding Income Tax

    Income tax is a levy many governments place on revenue of entities within their jurisdiction.
  4. 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.
  5. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  6. 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.
  7. Taxes

    Which Countries Have the Highest Taxes on High Incomes?

    These countries charge the highest taxes on high incomes.
  8. 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.
  9. 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.
  10. Taxes

    What's an Indirect Tax?

    An indirect tax is levied on goods or services rather than on an individual or a company.
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. What are the differences between regressive, proportional and progressive taxes?

    Regressive taxes are those that have a greater impact on low-income individuals. A proportional tax or flat tax impacts low-, ... Read Answer >>
Hot Definitions
  1. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  2. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  3. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  4. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  5. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  6. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
Trading Center