12. Types of taxes

Governments impose many types of taxes. In most developed countries, individuals pay income taxes, payroll taxes, consumption taxes, property taxes, and in some cases estate taxes. Taxes on people’s incomes play critical roles in the revenue system of all developed countries. Payroll taxes, which are used to finance social programmes such as security and medicare, account for more than a third of federal revenues.

An individual income tax, also called a personal income tax, is a tax on a person's income. Income includes wages, salaries, and other earnings, interest earned by savings accounts; rents, royalties. Income also includes capital gains, which are profits from the sale of stock, real estate, or other investments. The national governments of the United States, Canada, and many other countries require citizens to file an individual income tax return each year. Each taxpayer must compute his or her tax liability – the amount of money he or she owes the government.

All corporations in the United States and Canada must pay tax on their net income (profits) to the federal government and also to most state or provincial governments.

A payroll tax applies only to wages and salaries. Employers automatically withhold payroll taxes from employees' wages and forward them to the government. Payroll taxes are the main sources of funding for various social insurance programmes, such as those that provide benefits to the poor, elderly, unemployed, and disabled.

A consumption tax is a tax levied on sales of goods or services. The most important kinds of consumption taxes are general sales taxes, excise taxes, value-added taxes (VAT), and tariffs. In the United States, consumption taxes account for only 17 per cent of all tax revenues. This is lower than in most other countries.

In Canada, the figure is 27 per cent, and in the United Kingdom it is 35 per cent.

Another type of excise tax is the license tax. Most states require people to buy licences to engage in certain activities, such as hunting and fishing, operating a motor vehicle, owning a business, and selling alcoholic beverages.

In Canada and Europe the favoured form of consumption taxation is a value-added tax. The seller pays the government a percentage of the value added to goods or services at each stage of production.

Tariffs, also called duties or customs duties, are taxes on imported or exported goods.

A property tax is a tax on an individual's wealth – the value of all of the person's assets, both financial (such as stocks and bonds) and real (such as houses, cars, and artwork). In the United States, state and local governments generally levy property taxes on buildings – such as homes, office buildings, and factories – and on land.

When a person dies, the property that he or she leaves for others may be subject to tax. An estate tax is a tax on the deceased person's estate, which includes everything the person owned at the time of death – money, real estate, stock, bonds, proceeds from insurance policies, and material possessions. An inheritance tax also taxes the value of the deceased person's estate, but after the estate passes to heirs. The inheritors pay the tax. Estate and inheritance taxes are sometimes collectively called death taxes.

A gift tax is a federal tax on transfers of property by gift. Gifts to charitable organizations, schools, churches, government bodies, are exempt. A gift of any amount used to pay medical expenses or tuition at an educational institution is also exempt from taxation.

Comprehension:

1. What types of taxes do governments impose?

2. What taxes are the main sources of funding for various social insurance programmes?

3. What is an individual income tax?

4. What does a person’s income include?

5. Does a payroll tax apply to a person’s income or only to wages and salaries?

6. What is a consumption tax levied on?

7. What gifts are tax-exempt?

Text organization.

The statements below express the main ideas of the text. Number them so that they are in the same order as the ideas in the text. The first one is given for you:

Viewpoint:

Do you think it is fair to impose a tax on gifts?