Understanding Income Tax – What is Income Tax?

A tax is an obligatory financial burden or any kind of direct levy imposed upon a taxpayer by some governmental entity in return for the payment of government spending and/or various public amenities. Any citizen who has been registered as a taxpayer and has paid his/her taxes, may be charged with tax evasion or tax fraud. Evasion of or disobedience to tax, and, if convicted, shall be punished by law.

In the United States, taxation is imposed by federal and state governments. A graduated system of taxation is applied to different incomes and assets. The highest rate of taxation usually applies to very large estates. Taxation of tangible and intangible personal properties is based on net worth.

A number of indirect taxes are included in the income of taxpayers. These include the Excise Tax, Franchise Tax, Sales Tax, and Value Added Tax. These indirect taxes are not part of the taxable income and are therefore not subjected to federal income taxation. Excise Tax is the most common indirect tax that is derived from the production or sale of products to consumers, while Franchise Tax is applicable to Franchises and S corporations.

The major types of indirect taxes are the Excise Tax, Franchise Tax, and State Sales Tax. The purpose of State sales tax is to provide revenue to state agencies and municipalities. The purpose of Federal income taxation is to provide revenue for the national government. Federal payroll taxes are collected by the employer. Federal payroll taxes cannot be passed directly to the taxpayers.

Proportional taxes include property taxes, value-added taxes, gasoline taxes, and sales taxes. Progressive taxation is one form of proportional taxation where a tax is charged for increasing the taxation levels in line with the increase in the cost of living. In most cases, progressive taxation means that an increase in cost of living automatically charges a higher tax rate. There are also property transfer taxes and franchise taxes that indirectly change prices of goods and services.

The basic difference between direct taxes and indirect taxes is that direct taxes directly come out of the pocket of the taxpayer and the indirect taxes are passed on through the tax collector. It is important to keep in mind that an indirect tax is always added on to the price of an item. The consumer pays the price of taxes and the store or shop does not pass this cost along to the consumer. There are many reasons why we pay taxes; some are necessary to the operation of society and some are merely to ensure the fair distribution of income. Direct taxes are needed to fund public programs and services, while indirect taxes are used for regular business expenses. Both types of taxes should be included in an individual’s income statement and should not be classified as personal income tax.

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