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.

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.

Taxes represent a transfer of wealth from the citizens of a country to the ruling power of that country. As such, they have existed since ancient times. The Bible speaks of them and it is clear from the biblical text that tax collectors were generally reviled. Almost anything can be taxed and there are various ways in which taxes can be applied.

The first taxes of which we have a documentary record were applied in ancient Egypt. In ancient times, it is clear that taxpayers were expected to offer up a portion of the agricultural produce they raised from the land to the ruling power of the day.

As economies have evolved, governments and rulers have chosen to raise taxes in different ways. For a long time, many countries raised revenue primarily through taxing imports into the country. In modern times, the income tax, which is charged as a percentage of all income earned in a period of time has become the most popular method by which governments in developed countries raise revenue. Corporation tax, a tax charged as a percentage of the profits made by incorporated companies, is also significant. Many countries also have sales taxes, or value added taxes, which are charged as a percentage of the selling price of a product or service.

Most countries have classes of organization or individual which they deem to be exempt from normal taxation. These vary from country to country. It is often the case that charitable organizations are exempted from tax. The definition of what constitutes a legitimate charity is open to debate and usually there will some government agency set up to make judgements about this and to monitor the conduct of the charitable organizations.

In addition, it is very common that religious institutions are exempted from tax. Naturally, this gives rise to the question of what constitutes an actual religion which, in some cases, is not always clear. The tax exemption given to organizations such as charities or religious institutions may carry with it certain obligations too. For example, tax exemption may be a requirement that the organizations refrain from political campaigning.

It is also common for educational institutions such as schools and universities to be exempted from tax. In some countries, some or all of the employees of the government or of other governments may be exempted from tax.

In the case of sales or value added taxes, many countries declare certain types of good to be exempt from the tax. For example, it is common for books to be declared free of such taxes.