Mr Hafiz Muhammad Qasim Lecturer Department of Economics, Lahore Leads University

1. Taxes and Its
Different Types
PUBLIC SECTOR ECONOMICS
MR HAFIZ MUHAMMAD QASIM

2. Taxes and Its Different Types
 What is Tax?
 Tax is compulsory contribution to state revenue, levied by the
government on workers' income and business profits, or added to the
cost of some goods, services, and transactions.
 Tax is money that people have to pay to the government

3. The Main Types of Taxes
 Direct vs Indirect Taxes
 Progressive vs Regressive Taxes
 Proportional and flat Taxes

4. Direct vs Indirect Taxes
 Taxes can be either direct or indirect.
 A direct tax is one that the taxpayer pays directly to the government.
These taxes cannot be shifted to any other person or group.
 An indirect tax is one that can be passed on-or shifted-to another
person or group by the person or business that owes it.

5. Progressive vs Regressive Tax
 A progressive tax is defined as a tax whose rate increases as the payer's
income increases. That is, individuals who earn high incomes have a
greater proportion of their incomes taken to pay the tax.
 A regressive tax, on the other hand, is one whose rate increases as the
payer's income decreases

6. Proportional and Flat Taxes
 A proportional tax is one where the amount you pay is proportional to
how much you have. You will also hear people refer to this as a flat tax.
For example, imagine you live in a state with a flat income tax of 5%. Each
taxpayer will pay 5% of his or her taxable income. Since everyone is
paying a proportional amount of their income, this is a proportional tax.

7. Taxes on Income and Earnings
 The three types of taxes above describe systems of taxation. The
following are examples of the taxes you may actually pay in your daily life.
 Federal income tax
 Income tax is a tax on your income, wages and earnings. The federal
government uses a progressive tax with seven marginal tax rates. It
collects income tax over the course of the year. For most people, income
tax comes out of your paycheck. If you are self-employed or a freelancer,
you will probably need to make estimated tax payments each quarter.

8. Wealth Taxes
 A wealth tax is a tax on a person’s entire net worth. Your net worth is the
combined value of your annual income, personal savings, investment
accounts, property, real estate, and other belongings, like jewelry or
collectibles.

9. Ad Valorem Taxes
An ad valorem tax is based directly on the value of a good, service or
property. One of the most common ad valorem taxes in the U.S. is property
tax.
 Property taxes
 When you buy a home, in addition to your mortgage and homeowners
insurance, you will have to pay property taxes. This is an ad valorem tax
based on the value of your property. City or county governments usually
collect property taxes. Some areas also levy taxes by school district or
according to other local districts.

10. Consumption Taxes
 A consumption tax applies when you purchase certain goods and services. These are
often indirect taxes because even though the government is collecting the tax from a
retailer, the person who buys the good is the one who pays the tax. (A direct tax applies
not to goods or transactions but to someone’s income, profit or assets. Federal income
tax and property taxes are direct taxes.)
 Two common types of consumption taxes are sales tax and value-added tax.

11. Sales Tax
 Sales tax applies to goods and services you buy. You pay them at the
point of sale. There is no sales tax at the federal level, but states, cities
and local districts may all have their own taxes.
 Not all places collect sales tax and different areas charge different rates,
based on what you’re buying. For example, a state may collect a 2% tax
on groceries but a 4% tax on all other goods.
 Sales tax is also a type of ad valorem tax; the amount you pay depends
directly on the value of what you’re buying.

12. Value-Added Tax
 A value-added tax (VAT) applies to goods you purchase. It’s similar to a
sales tax in that sense, but it’s different because a VAT isn’t just applied to
the final sale price of a product. It applies at each stage of the production
process, based on the value that has been added to the product.
 Since the product is taxed throughout production, the price you see in a
store already includes the VAT. This is different from sales tax, which you
pay in addition to a retailer’s price.

13. Excise Taxes
 An excise tax applies to particular goods, services and activities. This is
different from a sales tax because it applies only to specific transactions.
 Excise taxes are usually included in the price you see for a product. Some
excise taxes are ad valorem: When you buy an airline ticket, there is a
7.5% excise tax included in the ticket price.
 Other excise taxes are the same no matter the value of the product. For
example, the federal government levies an excise tax of 18.4 cents on
each gallon of regular gasoline. Whether a specific company was
planning to sell you gasoline for $2 or $3 per gallon, the excise tax is still
18.4 cents per gallon. Each state also has its own excise tax for gasoline.

14. Excise Taxes Continue
 Excise taxes are a very popular way for federal and state governments to
raise revenue. According to the Urban-Brookings Tax Policy Center, federal
excise tax revenue in 2017 was more than $83 billion.
 Common excise taxes you’ll see at either the federal or state level are on
alcohol, tobacco, fuel, airfare and telecommunications services.
 There are also health-related taxes, like the Affordable Care Act’s individual
mandate, and environmental taxes on pollution or gas emissions.
 While a bit outdated, you may also see the term “sin tax.” This refers to taxes
on products or activities that are considered harmful to individuals or to
society as a whole. The excise taxes on alcohol and tobacco are considered
sin taxes, as are those on sugary drinks, gambling, and indoor tanning.

15. Other Types of Taxes Worth Mentioning
 Surtax
 A surtax is a tax on something that is already taxed. Surtaxes usually
apply only to individuals who are above a certain threshold. For example,
all taxpayers contribute to Medicare through a Medicare tax. Single-filers
who earn more than $200,000 also have to pay a surtax of 0.9% (the
Additional Medicare Tax) on all wages that exceed $200,000.

16. Other Types Continue
 Business and corporate taxes
 With individual income taxes, you generally pay tax based on the total
amount you made (revenue). Corporate taxes typically apply to a
company’s profit, which is its revenue minus expenses.
 Corporate tax rates are also different from individual tax rates. Instead of
the seven marginal rates, the federal corporate tax rate is a flat 21%. Many
states also have rates that are different from their regular income tax rates.
 For example, Maine’s personal income tax rates start at 5.8% and go up to
7.15% across three income brackets. The corporate tax rates range from
3.5% up to 8.93% across four brackets.

17. Other Types Continue
 Tariffs
 A tariff is a tax on goods that cross national borders. The country
importing a good collects the tariff. In many cases, tariffs are a way for a
government to bolster local businesses or to level the playing field with
foreign competition.
 For a real-life example, here’s a look at tariffs the Trump administration
imposed on Chinese goods.

18. Thank You