Taxes are every citizen’s obligation to their country; they help a country to operate and provide for its citizens. Taxes are every country’s primary source of income, and hence strict laws have been put in place to ensure that there is no double taxation, tax evasion, and keep the country’s finances in control.
Taxes can also be structured differently in various countries due to various reasons. The reasons may include to control inflation, lower unemployment and encourage job growth through their taxes structure. A country may choose a different tax structure than other countries in order to achieve this.
Taxes are levied on a variety of goods and services, including land, income, and services. The taxes that a country levies on its citizens are different to ensure that every citizen pays their fair share and contributes to the running of their country. Taxes are collected by the revenue authority set up by the government. How much a country collects from its citizens is a result of the tax rate at which taxes are levied; the higher the tax rate, the more money a government collects and the better the services it can provide.
There are many types of taxes imposed by a country. They include;
1. Income Tax
Income tax is a tax levied on the earnings of a person or a business. The income which a person earns is the subject of the tax. However, the rate of tax varies depending on the type of income. For example, those who derive their incomes from sources such as rental property and company shares are subject to a higher tax rate than employees who derive their income from wages and salaries.
There are different types of Income tax, and they include;
i) Individual Income Tax
It is also known as personal income tax and is levied on an individual’s wages or income. It is calculated by subtracting deductions and tax credits from one’s gross income to achieve the taxable income; you then pay tax on the taxable income that you have calculated.
ii) Business Income Tax
It is a tax charged by federal, state, and local governments on the net earnings of most businesses. It is calculated using different methods, such as apportionment or allocation, and it is usually a combination of both. The corporate income tax rate differs from country to country. It may also vary from one state to another within the same country, depending on the industry the business belongs to.
Income tax is collected annually, and citizens are expected to file their tax returns.
2. Corporate Tax
Corporate tax is a tax levied by the government on the profits earned by a business. The tax is paid on a company’s corporate taxable income, which is calculated by subtracting company-specific tax deductions from the company’s gross income. The corporate income tax rate differs from country to country and depends on what industry the business belongs to. Some countries are considered tax havens because they charge minimal corporate tax rates.
The government collects corporate tax annually, and the amount of tax paid is usually disclosed in a company’s annual report, which can be found on its website. This is to ensure accountability and transparency and avoid tax evasion. Corporate taxes contribute immensely to the running of a country.
3. Capital Gains Tax
Capital gains tax is a tax collected by the government on the profits earned from selling an asset (such as shares, property, and mutual fund holdings) that has been held for more than a year (long term) in an individual’s name. Capital is any asset with monetary value that can be traded on an open market. Short-term capital gains tax is paid when an investor sells a capital asset within one year of buying it.
Capital gains tax is calculated by subtracting the asset’s cost when it was first bought from its sale price. The asset’s cost includes brokerage fees and other costs related to buying and selling, such as transfer fees and taxes.
4. Property Tax
Also known as real estate tax, property tax is tax paid on property owned by an individual. For example, a house owner is expected to pay taxes on it, or the owner of a business premises is also expected to pay taxes on it. The lessor may also pay property tax on behalf of the lessee (tenant).
Property tax is calculated based on a percentage rate; that percentage depends on what type of property you own; for example, residential property will attract lower rates compared to commercial property. The rate and amount charged may differ from country to country. It contributes to lower federal revenue than income and corporate tax.
5. VAT
A country commonly levies value-added tax on the total value of goods and services. It is also known as sales tax or national sales tax. A country’s VAT rate varies depending on its gross domestic product (GDP) and size. The higher the GDP or size of the country, the more taxes it contributes. All citizens pay VAT as it is included in the final purchase price of goods or services. The higher the VAT, the higher the cost of items offered in a country.
6. Estate Tax
This is the tax levied on the transfer of an estate when an individual (person) dies and has left behind assets. This kind of tax may also be referred to as ‘inheritance tax.’
Estate tax administration involves recovering taxes from the person who inherits the assets. This is done by deducting a certain percentage from the inheritance that has been left behind and handing it over to the government. The beneficiary is responsible for paying other fees associated with distributing the estate.
As mentioned above, many types of taxes are levied by a country to help raise revenue and fund projects. Every law-abiding citizen must contribute by diligently paying their taxes. However, it is essential to note that not all countries levy the same taxes. Therefore, some countries have lower tax rates compared to others.
