Types of Tax Systems Available For Individuals and Businesses


A tax is an obligation or financial burden imposed upon a taxpayer by an administrative body or a government agency, so as to fund governmental spending and various other public expenditures. A person not exempt from taxation is liable to pay the tax. The tax rate may be progressive or regressive. A tax evader is punished by law for evasion or disobedience of tax. He may be fined either individually or jointly by the federal and state governments.

In United States federal system, the government uses direct tax which is mainly based upon the tax base established by the income of the taxpayer. The indirect tax is imposed by the government according to the ability of the person to retain his income. Direct taxes are mainly used to raise revenues while the indirect taxes are used for expenses and income tax relief.

Progressive Tax Systems: Progressive tax system is one of the most popular and common types of taxes throughout the world. It uses a progressive taxation scale, which means that the higher your income is the bigger portion of the taxes you pay will be reduced. The rates start from zero (the highest possible tax rate) and increase according to the income bracket that you fall into. The rates are progressive in nature and may be progressive or proportional in nature.

Distributive Tax Systems: A Distributive tax system puts money directly into the hands of low-income earners. Distributive tax systems give more value to the contributions of the low-income earners than it does to the contributions of higher income earners. Low-income earners will receive the largest portion of the total tax revenues.

Income Tax Systems: The main advantage of the income tax system is that everyone pays the same amount irrespective of their income. This principle is called a progressive tax system. Also known as proportional tax system, this system has very high tax rates for high incomes people. But on the other hand the system has low tax rates for middle-income earners. Because of these the taxes for both high income and low income earners are almost equal in nature.

Taxation Systems: Some countries have direct and indirect taxes. In direct taxation the government directly collects taxes from individuals and collects the money from its own source. These taxes are collected from businesses and organizations through a compulsory levy. On the other hand in indirect taxation, taxes are indirectly collected by the government from businesses and organizations and these taxes are collected through a variety of indirect taxation like sales tax, property tax, income tax and the like.

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