Taxes

What are Taxes?

Taxes are mandatory financial contributions to state revenue that are levied by governments on individuals and businesses. They are used to help fund government spending on areas such as health and education, as well as the country’s infrastructure.

Techopedia Explains the Taxes Meaning

The simplest tax definition is that they’re obligatory payments made to the government by individuals and businesses. This money pays for many of the services provided by the state, such as social security payments, defense, education, and transportation.

Most taxes are taken as a percentage of a financial exchange, such as income earned or an item purchased.

How Do Taxes Work?

There are numerous types of taxation, and they will all work in different ways, depending on your circumstances and where you live.

There are taxes on income, the purchase of goods, and the sale of property, as well as levies unique to your local town or city.

For example, in the US, there are federal, state, and municipal taxes to consider. However, the rules in each area may differ, according to PwC, the professional services group.

It stated: “Most states, and a number of municipal authorities, impose income taxes on individuals working or residing within their jurisdictions. Most of the 50 states impose some personal income tax, with the exception of Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, which have no state income tax.”

When Were Taxes Introduced?

Taxes have been around for a long time. In fact, the original tax concept dates back around 5,000 years to ancient Egypt. According to the Tax Foundation, the Pharaoh collected a tax equivalent to 20 percent of all grain harvests. The idea was then developed by the Greeks.

“Julius Caesar was the first to implement a sales tax,” it stated. “A one percent flat rate that was applied across the entire Empire. Under Caesar Augustus, the sales tax was 4 percent, closer to a rate we see today in many US state sales taxes.”

What are Taxes Used For?

Taxes help fund the services provided by governments in countries around the world, which can run into trillions of dollars every year. For example, the US federal government is estimated to have spent $6.3trn in fiscal year 2023, according to the Center on Budget and Policy Priorities.

Of that figure, more than $4.8trn is expected to have been financed by federal revenues, with the remainder coming from borrowing.

What is the Impact of Taxation?

The payment of taxes can be a substantial burden on individuals.

For example, those in the UK have to effectively work for 169 days on behalf of the government, according to the Adam Smith Institute, an economic think tank. This means they didn’t start working for themselves until 18 June last year. As a result, this date is known as ‘Tax Freedom Day’. This date has been getting later for years.

The Institute has calculated that UK Taxpayers will fork out more than ￡901.8bn in taxes in 2023, equating to 46.25% of net national income.

Matthew Lesh, director of public policy and communications at the Institute of Economics Affairs, said: “Tax Freedom Day is horrifyingly late this year, with the state gobbling up almost half of our national income.”

When are Taxes Due?

This depends on the type of tax being paid and the country in which you live. Some taxes will be paid immediately while others won’t come due for almost a year.

For example, in the UK, self-assessment tax returns must be filed and the money paid by the end of January. Failure to meet that deadline results in a ￡100 fine.

You will need to find out a list of deadlines for these tax bills so you don’t inadvertently pay late and risk being landed with a penalty.

Some, such as Council Tax in the UK (which helps pay for localized services), can be taken straight out of your bank account each month.

Types of Taxes

There are many different types of taxation. Here we outline some of the most common.

Tax Classes

Taxes can be divided into classes and rates. For example, in the UK there are a number of vehicle tax classes that will affect how much an owner/driver has to pay.

For example, there are separate classes for petrol vehicles, diesel cars, and those running on alternative fuels.

They will also be divided by the size of the vehicle and its use. This means that someone with a private car will pay a different rate for light goods and heavy goods vehicles.

Tax Delinquency

This refers to a missed tax payment deadline. There can be serious consequences for those who find they have an overdue debt.

For example, they can be hit with a financial penalty charge and/or face interest being placed on the amount owed until it’s settled.

In more extreme cases, an individual can be denied further services while the debt is outstanding, as well as potentially having their property seized.

Tax Evasion vs. Tax Avoidance

One of these is illegal, and the other is acceptable – within reason.

Let’s start with tax evasion. This is when individuals or businesses deliberately choose not to declare and pay the taxes they owe. It’s always illegal.

Tax avoidance, meanwhile, is when they work within the confines of the law, albeit potentially bending the rules of the tax system.

According to the UK’s House of Commons, Treasury Minister David Gauke drew the following distinction back in July 2010.

“Tax evasion occurs when someone acts against the law,” he stated. “Tax avoidance involves compliance with the letter but not the spirit of the law, and it is right that the Government seeks to minimize that.”

A better approach is proper tax planning. This means working with the right combination of allowances, limits, and thresholds to ensure you’re minimizing the tax paid – but legally.

The Bottom Line

Benjamin Franklin, one of the Founding Fathers of the US, is quoted as saying: “Nothing is certain except death and taxes.”

It’s true. You can’t evade taxes, and if you try to, you’ll likely end up with a hefty fine or even jail time.

Of course, no one likes paying taxes. Seeing your hard-earned money disappear into the government’s coffers can be depressing, particularly during a cost-of-living crisis.

However, taxes also help pay for many essential services, such as our roads, education, and emergency services.

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