How it works
Governments have the unique
privilege of being able to demand
that anyone in their country pay
taxes. These can be divided into
“direct” taxes, which are paid from
earnings, either by people or
institutions, and “indirect” taxes,
which are paid for out of consumer
spending. Taxes can be levied as a
share of spending or income, or as
a flat rate. A progressive tax system
is one in which richer individuals
pay proportionately more tax.
Questions surrounding the level
of taxation are hotly debated. As a
result, levels of taxation, and laws
about who or what pays for which
taxes, vary significantly from
country to country.How tax works
Direct and indirect taxes
People have to pay taxes on either their income, or on
what they spend. Some typical taxes on an individual
in the US are shown below.Taxation is the main way in which governments raise revenue needed
to pay for public spending. Governments may tax the public directly
(for instance, through income tax) or indirectly (via VAT for example).TAXES AND BEHAVIOR
Some taxes are designed to reduce
the amount of revenue that goods
earn. Because a newly-levied or
increased tax on a product puts up
its price, that item becomes less
attractive to buy. Where a product
is harmful, higher taxes—such as on
cigarettes—can be a way to reduce
public consumption. In cases where
consumer behavior does not alter
much in response to higher pricing,
however, the extra tax is likely to
raise much more money. This can
make some taxes very appealing for
governments looking for revenues.D IRE C T TA X E S
FICA tax 15.3%
This tax is a combination of social security tax
(12.4%) and Medicare (2.9%), both half paid by
the employer and half by the employee.Net income
Once taxes on earnings
have been paid out, the
amount remaining is
called “net” income.NET INCOME
$
$
Income tax
Income tax depends
on the filing entity
(individual, corporation,
etc.) and the amount
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