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What Are The Different Types of Taxes?

7 minute read

What are taxes?

Taxes are a mandatory contribution that the government requires individuals and businesses  to pay. These taxes are collected on a national, regional, and local level. They are used to fund Medicare and Social Security programs, public works and services such as roads and schools, and other government activities. It’s essential to be familiar with the different types of taxes you may encounter throughout your lifetime.

What are the Types of Domestic Taxes?

Domestic taxes are a tax charged on profits or gains based on the laws of a territory in which the entity is established. The gains or profits stem from income tax, corporation tax, and capital gains tax and are generated within the geographical confines of a country. Domestic tax systems vary among the different countries to advance the country’s political, social, and economic needs.

Domestic tax systems are based on certain principles.

  • Equity. Equity states that taxes owed should correlate with the ability to pay the tax. 
  • Certainty. The principle of certainty means that the taxpayer should know what is being taxed, how much tax is owed, how the tax is paid, and when the tax is due. 
  • Convenience. Convenient means that the tax owed should be at a convenient time.
  • Economy. Economy means that the collection and enforcement of taxes should be proportionate to the income and the economy.

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What are the Different Tax Systems Used Around the World?

There are four different types of taxation systems. 

  • Citizenship-Based Taxation. Only the US and Eritrea use citizenship-based taxation. These citizens must pay tax on their income no matter where they live. They are taxed on their income earnedworldwide if they are a citizen of one of these countries.
  • Residential Tax System. A residential tax system means you only pay taxes in the country where you reside. This system has unambiguous guidelines as to whether an individual is a tax resident or not. Countries that use residential taxation include most of Europe, New Zealand, Australia, the United Kingdom, Canada, Mexico, and Japan.
  • Territorial Tax System. Territorial tax systems only tax residents on income earned within the borders of the territorial tax country. Some countries that use this tax system are Hong Kong and Malaysia.
  • Zero Taxation. Zero taxation is where, believe it or not, governments don’t charge any tax whatsoever. Countries with zero taxation include the Bahamas, Cayman Islands, Brunei, and Monaco.

US Taxation Basics

US taxation is a very complex system. As mentioned before, the US tax system is citizenship-based, meaning citizens are required to pay tax on their income no matter where they live as long as they are citizens of the US. 

The US imposes taxes at the federal and state level. Each state administers its tax system, so state tax varies considerably. Within the state, there may be various taxing entities. For example there may be local city and school district taxes. 

The Internal Revenue Service enforces the tax code and is responsible for collecting federal taxes in the US. Americans file an annual tax return to determine their tax obligations. Tax obligation, or how much you owe in taxes, is based on income, filing status, and tax brackets. Tax planning can be used to reduce taxes. Tax planning aims to offset income with credits and deductions to help save money on taxes.

What Kind of Taxes Do We Pay?

What are the different types of taxes? Most taxes fall into three categories. The categories are taxes on income, taxes on property, and taxes on goods and services.

  • Personal Income Tax
    Income tax for individuals is based on a percentage of the money earned within the tax year. The income tax rate for individuals between federal and state is usually around 35%. 
  • Business Taxes
    Businesses can pay taxes on their profits at the federal and state level. Business expenses can offset the income, which will lower the amount of income subject to tax.
  • Property Taxes
    Property taxes are local taxes owed on physical property you own. This can include real estate and personal property such as recreational vehicles, automobiles, and boats.
  • Payroll Taxes
    Payroll taxes are taxes that are deducted from employee wages. Some payroll taxes include state withholdings, Medicare, disability insurance, and federal withholdings. Payroll taxes are levied at the federal, state, and local levels.
  • Inheritance Taxes
    Inheritance tax stems from the death of a taxpayer. This state tax applies to the transfer of any property or asset due to death.
  • Capital Gains Tax
    Capital gains tax is paid on profits made from the sale of an asset such as property, bonds, or stocks. It is paid at the federal and state levels.
  • Excise Tax
    Excise tax is charged at the federal, state, and local level on a specific good or activity. Excise taxes are levied on amusement activities, betting, insurance premiums, gas, soda, alcoholic beverages, and cigarettes. This tax is typically levied at the time of production or when the service is performed.
  • Sales Tax
    Sales tax is a portion of the sale of goods or services and is usually charged at the state level. The tax rate varies by location.
  • Gift Tax
    Gift tax is a federal tax based on property transfer from one party to another. The giver receives either nothing or something of less value in return.
  • Retirement Tax
    Retirement taxes are taxes levied at the federal and state levels that provide retired workers' income. The general fund for retirement in the US is Social Security.
  • Tariffs
    Tariffs are taxes paid when moving goods from one country to another. The goal of this federal tax is to encourage the purchase of domestic goods.

Getting the Most Out of Tax Optimization

If you are a taxpayer seeking to understand your tax situation and lower your taxes, Corvee tax planning software can help. It analyzes your unique scenario and searches over 1,600 tax-saving strategies to find the perfect combination to lower your taxes. Get started by requesting a demo today.

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