Taxation is one of the three major branches of taxation. A tax is either a mandatory annual financial burden levied on an individual by a government agency in order to fund various public functions and government spending, or an optional personal liability levied on an individual for an entire year, or for part of a year, under special circumstances. Evasion of or refusal to pay tax, and related penalties, is legally punishable by law. There are different types of taxes. Some taxes are progressive, which increase in value over time; others are regressive, which reduce in value over time.
When it comes to the taxation of goods, the major categories are sales tax, import duty, and excise duties. All three combine to determine a basic rate of taxation. Examples of broad categories of excise and customs duties are: alcohol, cigarettes, gasoline, wine, gambling, gas, air conditioning, tobacco, Cologne, perfume, and hair dye. The rates of taxation for many other goods and services are determined by local authorities. A comprehensive list of these categories can be found at the IRS website.
In addition to taxes, there are direct taxes. These include the Excise Tax, Real Estate Excise Tax, Franchise Tax, and Sales Tax. The major source of revenue for the U.S. government (household), is through direct taxes such as income taxes, employment taxes, and sales tax. Among indirect taxes are: customs fees, estate and inheritance taxes, and income earned abroad by corporations. These indirect taxes account for about 15% of gross domestic product (GDP).
There are two basic types of indirect taxes. One type is a consumption tax that only affects the price level directly, while another type is a consumption tax that indirectly changes the price level through the effect it has on demand. Examples of direct taxes are: the Excise tax, the Real Estate Excise Tax, and the Medicare Part B tax. Examples of indirect taxes are: the Corporate Income Tax, the Tariff Tax, the Ethanol Tax, the Stocking Gas Tax, and the Gasoline Tax.
Consumption taxes are imposed to ensure the supply of basic necessities of life. Excise taxes are imposed to reduce demand for goods and services, increase production, or provide revenues for government programs. Tariffs are imposed to protect U.S. industry from foreign competition. Collecting these taxes effectively prevents the abuse of the tax system and makes trading within the country more secure.
As mentioned earlier, U.S. taxation system is based on a progressive tax system. This means that higher level of tax rates result in a greater amount of revenue collected. On the other hand, regressive taxes are regressive in nature; they increase taxes as the income levels decrease. Therefore, it can be concluded that such taxes serve both, the purpose of raising revenue and preventing wage reduction, while revenue raising are efficient at raising revenue but not efficient at preventing the increase in cost of living