All You Need to Know About Different Types and Classes of Taxation

Progressive, Proportional, and Regressive 

The United States tax system can be summarized under three categories: regressive, proportional, and progressive. Proportional taxes affect all individuals in the same way with a flat tax that is proportional to the income an individual earns. Progressive taxes have a more significant impact on high-net-worth individuals, while regressive taxes affect lower-income individuals the greatest. The United States mainly operates under a progressive system where a person’s tax situation is based on the level of income they can provide. The higher the income of an individual, the higher the tax bracket they are in, and the more taxes they pay to the government. Income tax falls under this category. Regressive taxation is also a fairly common taxation method in the United States. Items taxed under regressive taxation include property tax, sales tax on goods, and excise tax on items like gasoline and airfare. Many also consider Social Security tax to be regressive as well. 

Taxes can be divided into three types: taxes on earnings, taxes on purchases, and taxes on ownership. These three types of taxes are all unique and have various rules and regulations surrounding them. One of the main differences can be seen in the point of collection, or the moment in which you pay the tax, and the amount that is required to be paid. This determines if the tax is regressive, progressive, or proportional and which group of people they benefit based on their socioeconomic status and income level. Below is an overview of the different types and classifications of taxes and how they work. 

Individual Income Tax

Individual Income Tax, or personal income tax, is a prevalent form of tax levied on salaries, wages, investments, or other forms of income an individual or household earns. This is a widespread “progressive tax,” meaning that the tax rate increases as a taxpayer’s income increases. This results in larger shares of income going to tax from high-income individuals and families rather than low-income earners. The U.S, for example, levies tax rates from 10 to 37 percent that activate at various income thresholds outlined by the Internal Revenue Service (IRS). These income thresholds, or income ranges, are known as tax brackets, and income that falls within each tax bracket is taxed at its corresponding rate, which is also outlined by the IRS.

Corporate Income Tax

Corporate Income tax is taken by the federal or state government from business income, specifically profits. This income applies to revenue after all costs have been covered. Different tax regulations and rules apply to various business organizations. In the United States, a business can fall under Partnerships, Sole Proprietorship, C Corporation, S Corporation, and Limited Liability Company (LLC). C Corporations pay corporate income tax. While liability does not fall under any individual owners, the burden of the tax falls not only on the business but also on its consumers and employees through lower wages and higher prices. Owners can also be double taxed, where their corporation will get taxed, and any profits they personally receive and pocket can also get double taxed. Due to adverse economic effects, most countries have shifted to taxing their corporations at rates lower than 30 percent. The United States, for example, has lowered its federal corporate income tax rate to 21 percent. On the other hand, S Corporations, LLCs, sole proprietorships, and partnerships all pass their income and profits through their owner’s income tax returns and pay individual income tax. 

Payroll Tax

Payroll taxes are taxes paid on employee wages and salaries to finance various social insurance programs. In the United States, the standard payroll taxes are a 12.4 Social Security tax and a 2.9 percent Medicare tax for a combined rate of 15.3 percent. Roughly half of all payroll taxes are paid by employers. Lower-wage employees mainly take on the economic burden of payroll taxes. 

Capital Gains Tax

Capital assets are usually everything an individual owns for personal purposes, entertainment, or investment value. These assets include stocks, bonds, properties, vehicles, jewelry, art, and more. Whenever these assets increase in value, the difference is called a “capital gain.” When an individual sells an asset and “realizes” those capital gains (receives a profit increase from the purchase and sale of the asset), they are required to pay capital gains tax on the profit they earned. 

Sales Tax

Sales Tax is a common form of tax seen every day through the sale of goods and services. This form of tax can be found on the receipt at every store and restaurant in the United States. The United States is still one of the few industrialized, first-world countries that still rely on traditional retail sales taxes. This tax is a significant source of value for state governmental revenue.