Classification of Taxes

Classification of Taxes

As to subject matter or object

1. Personal, poll or capitation tax

 Tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the occupation or business in which they may be engaged, i.e. community tax.

2. Property tax

 Tax imposed on property, real or personal, in proportion to its value or in accordance with some other reasonable method of apportionment.

3. Excise tax

  A charge imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation.

 As to purpose

1. General/fiscal/revenue tax

 A general/fiscal/revenue tax is that imposed for the purpose of raising public funds for the service of the government. 

2. Special/regulatory tax

 A special or regulatory tax is imposed primarily for the regulation of useful or non-useful occupation or enterprises and secondarily only for the purpose of raising public funds.

 As to who bears the burden

1. Direct tax

 A direct tax is demanded from the person who also shoulders the burden of the tax.  It is a tax which the taxpayer is directly or primarily liable and which he or she cannot shift to another.

2. Indirect tax

An indirect tax is demanded from a person in the expectation and intention that he or she shall indemnify himself or herself at the expense of another, falling finally upon the ultimate purchaser or consumer.  A tax which the taxpayer can shift to another.

 As to scope of the tax

1. National tax

 A national tax is imposed by the national government.

2. Local tax

 A local tax is imposed by municipal corporations or local government units (LGUs).

As to the determination of amount

1.  Specific tax

 A specific tax is a tax of a fixed amount imposed by the head or number or by some other standard of weight or measurement.  It requires no assessment other than the listing or classification of the objects to be taxed. 

2.  Ad valorem tax

 An ad valorem tax is a tax of a fixed proportion of the value of the property with respect to which the tax is assessed.   It requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined.

 

As to gradation or rate

1. Proportional tax

 Tax based on a fixed percentage of the amount of the property receipts or other basis to be taxed. Example: real estate tax.

2. Progressive or graduated tax

 Tax the rate of which increases as the tax base or bracket increases. Example: income tax  Digressive tax rate: progressive rate stops at a certain point. Progression halts at a particular stage.

3. Regressive tax

 Tax the rate of which decreases as the tax base or bracket increases. There is no such tax in the Philippines.

Direct and indirect taxes

A direct tax is one that is paid directly by the individual worker or firm. Income tax is the best example, usually being paid directly through PAYE. Firms pay corporation tax on their profits, which is a bit like an income tax for business. Others include Capital Gains tax, Inheritance tax and Stamp duty (paid when buying a house) .

 An indirect tax is one that is only paid indirectly through a third party. Consumers pay Value Added Tax (VAT), for example, but only if they actually buy the good or service in question. The retailer officially pays the tax, although it is likely that the price is raised to reflect the tax, so, effectively, the consumer ends up paying. Others include tobacco and alcohol duties, fuel duties (on petrol) and betting duties.

Progressive, regressive and proportional taxes

These terms are important when assessing whether a tax is fair or unfair. They are important concepts to understand as they relate to whether or not a tax is redistributive or not.

Progressive taxes

A progressive tax is one where, as one's income rises, one pays more tax as a percentage of one's income. The percentage part is important. Obviously higher income earners pay more tax than those on low incomes. Income tax is the best example of a progressive tax.

Regressive taxes

A regressive tax is one where, as one's income rises, the amount that is paid as a percentage of one's income falls. Notice, though, that a higher earner may be paying more of the tax in absolute terms, but as a percentage of their income, the amount is falling. These taxes are, obviously, considered to be unfair as they redistribute money from the poor to the rich (in relative terms).

Most indirect taxes are regressive. Let's take the example of fuel duty (the tax on a litre of petrol). A rich person might have a big expensive car that only does 20 miles per gallon. A poorer person might have a standard saloon that does 40 miles per gallon. They both drive to work and do the same sort of mileage each week. The richer person earns £100,000 a year and the poorer person earns £10,000 a year. The richer person will have to buy twice as much petrol because his car is twice as thirsty. Both drivers pay the same amount of fuel duty on each litre of petrol purchased, so the richer person pays twice as much fuel duty. But he earns 10 times as much money. Even allowing for the more progressive income taxes that the richer person has to pay, the tax he pays on his petrol as a percentage of his income is smaller than for the poorer person.

Proportional taxes

A proportional tax is one where, as one's income rises, one pays more tax, but the amount that is paid as percentage of one's income remains unchanged.

If there were no allowances in the tax system, and there was only one income tax rate of, say, 30%, then higher earners would pay more tax than low earners, but the amount they pay expressed as a percentage of their income would always remain the same (i.e. 30%). Someone earning £50,000 a year would pay £15,000 income tax, and someone on £10,000 a year would pay £3,000 tax. The high earner is paying much more tax, but in both cases, the amount paid is exactly 30% of one's income

PRINCIPLES OF TAXATION

GENERAL PRINCIPLES OF TAXATION

FUNDAMENTAL PRINCIPLES IN TAXATION
1. Taxation is the inherent power of the sovereign, exercised through the legislature, to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government.
 2. It is also defined as the act of levying a tax, i.e. the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government. It is a method of apportioning the cost of government among those who, in some measure, are privileged to enjoy its benefits and must therefore bear its burdens. Taxes are the enforced proportional contributions from persons and property levied by the law-making body of the State by virtue of its sovereignty for the support of the government and all public needs.
 Essential elements of a tax
 1. It is an enforced contribution.
2. It is generally payable in money.
 3. It is proportionate in character.
4. It is levied on persons, property, or the exercise of a right or privilege.
 5. It is levied by the State which has jurisdiction over the subject or object of taxation.
6. It is levied by the law-making body of the State.
7. It is levied for public purpose or purposes.
  Purposes of taxation
1. Revenue or fiscal: The primary purpose of taxation on the part of the government is to provide funds or property with which to promote the general welfare and the protection of its citizens and to enable it to finance its multifarious activities.
 2. Non-revenue or regulatory: Taxation may also be employed for purposes of regulation or control. a) Imposition of tariffs on imported goods to protect local industries. b) The adoption of progressively higher tax rates to reduce inequalities in wealth and income. c) The increase or decrease of taxes to prevent inflation or ward off depression.
  Three basic principles of a sound tax system
1. Fiscal adequacy It means that the sources of revenue should be sufficient to meet the demands of public expenditures. 2
. Equality or theoretical justice It means that the tax burden should be proportionate to the taxpayer’s ability to pay. This is the so-called “ability to pay principle.”
3. Administrative feasibility It means that tax laws should be capable of convenient, just and effective administration. Basic Principles of Taxation Fiscal policy refers to any policy of the government that involves taxation or government spending. In this and the next two Learn-Its, we look at taxation. In the final two Learn-Its of this topic we look at government spending.
  Why do governments impose taxes?
1. Raising money for government spending. The most obvious reason is to raise money for all the expenditure that is required. Hospitals, schools, the defence system, the welfare state; these things do not come cheaply. Local taxes also have to be levied to help pay for libraries, cleaning the roads, local parks and the local council administration to name just a few items.
2. Redistributing income. This is a bit of an old fashioned objective of taxation nowadays. If the system used is progressive (see later in this Learn-It), then the tax system will be helping the relatively less well off at the expense of the better off. Socialist governments of the past were very keen on this. Certainly the Conservative governments of the 80s and 90s were less bothered. Although there is a lot of press about the increase in the tax burden under the new Labour government, they have actually been redistributing income to the poorer households in the UK, through such measures as the National Minimum Wage, the New Deal and the Working Families Tax Credit.
3. Demand management. It is the government's responsibility to create the necessary demand to resurrect the economy. This can be done by increasing government spending and/or reducing taxes.
 4. Correcting market failure. Governments can use taxes to force the firms to produce the socially optimal level of output. We all know about the tax on petrol. Some items that are thought of as 'good' may be exempt from taxes that most other goods attract. A few goods are 'zero-rated', meaning they attract no Value Added Tax (VAT). Books are a good example. What is the definition of a 'good' tax? The only reason that a parliament was first formed in the thirteenth century was because the King at the time was short of money. He convened a meeting of some of the Lords of the time so that he could get some money from them. They, in turn, raised money from the peasants in their 'manor'. And so tax was invented. By the time that the first book was written (in 1776) that dealt with economic issues, "The Wealth of Nations" by Adam Smith, taxation was already quite a big part of peoples' lives. Smith discusses the 'cannons' of taxation. These were characteristics that all good taxes should have:
 1. Fairness. A tax should always consider the taxpayers' 'ability to pay'.
 2. Cost. The cost of collection (for the government) should not be too high. In particular, the cost should be a relatively small proportion of the tax yield.
 3. Convenience. It should be as easy as possible for the taxpayer to pay the tax (in terms of means and timing of payment). Note that the Pay As You Earn (PAYE) method of tax collection on most peoples' income is very good here.
 4. Certainty. The timing, method and amount due should be absolutely clear. There should be no excuses for tax evaders.