A tax is a compulsory levies on income, goods, or services by government entities in order to raise funds for governmental operations. Taxes are the main source of government revenue, used for funding everything from public infrastructure to welfare programs. In most markets, taxes are levied in a way that minimizes their impact on individual taxpayers. Ideally, taxpayers aren’t aware of which taxes they pay because taxes are embedded within the prices of goods and services.
In practice, however, the impact of a tax can be felt by all parties involved in production and consumption. Depending on the elasticities of supply and demand, taxes can be absorbed by businesses (in the form of lower pre-tax prices), customers (in the form of higher post-tax prices), or workers (in the form of lower wages).
Some governments also create special levies on certain goods to discourage activity or curb consumption, for example taxes on energy sources like fossil fuels or pollution. These taxes are known as indirect taxes.
A taxpayer’s tax liability is determined by calculating the amount of their taxable income and applying the appropriate tax rate based on their tax bracket, then subtracting relevant deductions, exemptions, and tax credits. Taxable income is comprised of a wide range of sources including wages, salaries, interest and dividends, alimony, rental income, and business profits. Each type of income has its own unique tax implications and must be carefully accounted for when determining a taxpayer’s tax liability.
About the Author
