Taxation is a system of raising money to finance government services and activities. Governments at all levels–local, state, and national–require people and businesses to pay taxes. Governments use the tax revenue to pay the cost of police and fire protection, health programs, schools, roads, national defense, and many other public services.
Taxes are as old as government. The general level of taxes has varied through the years, depending on the role of the government. In modern times, many governments–especially in advanced industrial countries–have rapidly expanded their roles and taken on new responsibilities. As a result, their need for tax revenue has become great. Through the years, people have frequently protested against tax increases. In these situations, taxpayers have favored keeping services at current levels or reducing them. Voters have defeated many proposals for tax increases by state and local governments.
Kinds of taxes
Governments levy many kinds of taxes. The most important kinds include property taxes, income taxes, and taxes on transactions.
Property taxes are levied on the value of such property as farms, houses, stores, factories, and business equipment. The property tax first became important in ancient times. Today, it ranks as the chief source of income for local governments in the United States and Canada. Most states of the United States and provinces of Canada also levy property taxes. Property taxes are called direct taxes because they are levied directly on the people expected to pay them.
Income taxes are levied on income from such sources as wages and salaries, dividends, interest, rent, and earnings of corporations. There are two main types of income taxes–individual income taxes and corporate income taxes. Individual income taxes, also called personal income taxes, are applied to the income of individuals and families. Corporate income taxes are levied on corporate earnings. Income taxes may also be levied on the earnings of estates and trusts. Income taxes generally are considered to be direct taxes.
Most nations in the world levy income taxes. In the United States, income taxes are levied by the federal government, most state governments, and some local governments. Many people and businesses in the United States also pay special income taxes that help fund Social Security programs. These taxes are known as Social Security contributions or payroll taxes. In Canada, income taxes are levied by the federal government and by the country’s 10 provincial governments.
Taxes on transactions are levied on sales of goods and services and on privileges. There are three main types–general sales taxes, excise taxes, and tariffs. General sales taxes apply one rate to the sales of many different items. Such taxes include state sales taxes in the United States and the federal sales tax in Canada. The value-added tax is a general sales tax levied in France, the United Kingdom, and other European countries. It is applied to the increase in value of a product at each stage in its manufacture and distribution.
Excise taxes are levied on the sales of specific products and on privileges. They include taxes on the sales of such items as gasoline, tobacco, and alcoholic beverages. Other excise taxes are the license tax, the franchise tax, and the severance tax. The license tax is levied on the right to participate in an activity, such as selling liquor, getting married, or going hunting or fishing. The franchise tax is a payment for the right to carry on a certain kind of business, such as operating a bus line or a public utility. The severance tax is levied on the processing of natural resources, such as timber, natural gas, or petroleum.
Tariffs are taxes on imported goods. Countries can use tariffs to protect their own industries from foreign competition. Tariffs provide protection by raising the price of imported goods, making the imported goods more expensive than domestic products.