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