Taxes are collected by governments, both national and local, for the support of the infrastructure and development of the country. A tax is any direct financial burden or some kind of levy levied on a person by a government agency in order to finance public expenditure and government spending. Evasion of or refusal to pay tax, and related offences, is therefore punishable by law. The tax system is complex and dynamic, constantly changing and requiring adaptation to current circumstances and situations. If properly administered, taxes can substantially improve the quality of life for the citizens of a country.
The most basic function of taxes is to provide the revenue that is required to finance public services and programs. The costs of such programs, including the revenue generated from taxes, are considered the proceeds of public revenue. The amount of taxes required to finance public services varies from one region or country to another. Generally speaking, the taxes required to finance health care, education, social security, public works and highways are higher than those required to finance businesses and other forms of private income. In most industrialized countries, the taxation of corporations and business income is exceptionally high.
There are basically two types of taxes: regressive and proportional. Regressive tax systems take income gains or increase in income over a period of time and distribute them through deductions or exemptions to all citizens. Pertinent taxation is proportional in nature; it is measured according to how much income is lost or increased by someone through his effort in paying taxes. In most countries, the progressive taxation system is more progressive than the proportional system. Generally, progressive taxes are balanced through indirect means (the fair price rule, loss prevention schemes, etc. ).
Both regressive and proportional taxes can be characterized as “source-based” taxes. A source-based tax is one in which a portion of the sale proceeds directly flows from the producer’s price in the market to the ultimate user or consumer, and another portion flows from the producer’s price to the retailer or dealer and then again to the ultimate user or consumer. In such a system, the tax on sales is called a direct tax. An indirect tax, however, arises through the process of price formation. For instance, sales tax revenues usually come from a tax on production. The price structure distributes profits among the producers, distributors, and retailers in a complex manner.
Taxation is not a progressive or regressive tax system. Neither is it based on wealth or income level. Individual income is not taxable nor does taxes apply to dividends and interest paid by the employer. Income from the business itself is neither taxable nor exempt. All other taxes levied by governments levied by legislation are based on individual income tax rates and are regressive in nature.
Generally speaking, indirect taxes are regressive and progressive in nature. They are influenced by changes in prices, production and distribution, and exchange rates. Examples include personal and corporate taxes, sales taxes, estate and gift taxes, and property taxes. While most taxes are property taxes, personal and corporate taxes can be based on the performance of individuals and corporations, while the estate and gift taxes are imposed for specific purposes.