Finance Guide

A sales tax is a tax levied on the purchases of good by consumers. Usually, it is levied at a single rate, rather than a graduated series of increasing rates, although different types of goods may be subject to different rates and some goods may be exempt entirely.

Sales taxes should be applied only to goods purchased by consumers, not by other businesses. For example, if a furniture-making company buys a quantity of lumber for use in manufacturing furniture, it should not have to pay any sales tax on the transaction.

A sales tax is very similar to a value added tax. The key difference is that a sales tax is charged only at the point of final sale of a product to the consumer while value added tax is charged at every stage of the business process when one business trades with another. The business may be entitled to a refund of what it pays other businesses in value added tax but the tax must be levied in the first place before the business applied for a refund to the government. For this reason, value added taxes tend to involve more record-keeping than sales taxes and to impose a significant bureaucratic burden.

In most developed countries, income tax is the primary means governments have of raising revenue for themselves. Since it is paid by almost everyone, it also tends to be the most politically sensitive tax and arguments about its appropriate level frequently feature in political debates.

In almost all cases, income tax is applied in a series of graduated bands, meaning that as a citizen’s income rises, his income above certain threshold values would be taxed at a gradually increasing rate. At very high incomes, it is even possible that the majority of any income gains a person benefits from will go to the government rather than to the income earner.

The existence of income tax necessitates an elaborate system of reporting and checking through which citizens declare their annual income to the government and those declarations are scrutinised to make sure that they are accurate. Penalties for untruthfulness or evasion of tax responsibilities include fines and imprisonment. In some cases, income tax responsibilities are handled by employers, who deduct the appropriate amounts from their employee’s wages before the employee receives them and forward this money to the government. In this context, it may not be necessary for the employee to file a personal tax return with the government because it will all be taken care of automatically.

Property Tax is a tax levied on the value of a property. In many developed countries, property taxes are levied by the local government and used to pay for the local government’s operating expenses while other major taxes, such as income tax, are levied by the central government.

This form of taxation usually requires a system of inspection whereby local government officials grade the property according to its presumed value, so that the property owner can then be charged at the appropriate rate.

Property taxes have been politically controversial for the simple reason that not everyone owns property. Since local governments are elected democratically and since the great bulk of local government expenditures are often financed by property taxes, it is therefore theoretically possible for a non-property owning majority to elect a government which would engage in lavish spending projects financed only by a minority. There is a potential for exploitation here which has been recognized by politicians of some countries, who have moved towards a local government household tax rather than a property tax per se.

Property taxes can also create tension when an area experiences dramatic rises in property values generally. In that case, households which may not be particularly wealthy, and who may have acquired a house when it was inexpensive, may find themselves being charged a very high rate for their home which is now worth much more. In extreme cases, households can find themselves driven out of their own home because of their inability to afford the higher property taxes.

The term tax avoidance is usually used to describe the practice of tax-payers using legitimate means to pay less of their money in tax than they would otherwise have to. It does not usually encompass behaviour which avoids the paying of taxes by means outwith the law, which is more often referred to as tax evasion.

Tax avoidance is extremely widespread, particularly among the wealthy. It is, of course, perfectly natural for tax-payers to wish to keep as much of their own money as possible and to seek out ways to do it. In most cases, tax avoidance will be facilitated by a professional accountant. Few ordinary tax-payers have the expert knowledge required to understand the intricacies of the tax system so well that they can make judgements about the best ways to avoid paying tax. Successful tax avoidance is usually accomplished through figuring out loopholes in the tax system and exploiting them so as to minimize the tax burden. The details of what can be done to avoid taxes naturally vary greatly from one country to another, since each country has its own separate tax system with unique features of its own.

Tax avoidance is not simply a personal thing but can also be performed by corporations.

A Value Added Tax is a form of sales tax. Its key distinguishing feature is that it is charged even on business to business transactions. However, businesses are usually entitled to refunds on value added tax which they have paid on products which could be regarded as inputs to their own business process. Typically, businesses keep careful records of all their transactions and apply for refunds to the government, if they are owed one, on a periodic basis, usually quarterly. If the company sells a large volume of products to consumers rather than businesses, it is possible that the company, on a net basis, will owe the government money rather than the other way around.

Value Added Tax is a major component of taxation in most European countries. In France, where the tax was first invented, it is, in fact, the principal means of raising revenue for the government.

Rates differ between countries but typically value added tax is charged at between 10-25% of the value of a sale. Governments often levy value added tax at a reduced rate on some goods and, in a few cases, goods may be exempt from it entirely.

Sometimes businesses quote product prices in which value added tax has already been factored in; sometimes the VAT amount is shown only when the sale is processed.