Wednesday, April 17, 2013

5 Types of Income Tax We Pay

At its first inception, many people might have asked the question, "What is income tax?" In 10 AD, when Emperor Wang Mang decided to introduce income tax, it was thought of about the same as stealing. People of that day had no records to show what their true earnings were, so it was easy to be charged too much.
At 10% of profits, the amount was considered extreme. It took a scant 13 years for the Emperor to be overthrown and the taxation to be returned to its former system, which was on property and head (per person) taxes.
Before there was an economy based on money, it was difficult to make the income tax concept work. Even though many nations had some form of tax that was loosely based on what professionals earned, it was not fair or effective until records were kept to determine what people earned after expenses.
Early in the history of taxation it was determined that those who had the most were expected to pay the lion's share of taxes. This established personal income tax as progressive, going up in percentage as income increased. Over time, income tax has developed into a much more diverse factor than just taxing what comes to a person through the paycheck.
The different faces of income tax fall into the following categories:
1. Personal Income - As stated before, tax is applied to the direct earnings of the individual, usually as the money is made. With some deductions that are not concerned taxable, taxpayers only pay tax as they earn money. When income tax returns are filed, those who paid too much tax during the previous year get money back in the form of a refund, and those who paid too little have to make up the difference and make a remittance.
2. Corporate - Taxes become more complicated at the corporate level, but the loose interpretation of corporate taxes applies to profits a company makes after all expenses have been paid.
3. Payroll - Both employee and employer are required to pay tax based on what the employee earns. The amount paid by the employee is personal income tax basically. In the U.S., the employer then remits the taxes collected from the employee to the government, along with an employer match of the FICA portion.
4. Inheritance - There are several variations of the estate tax or death duty, as it is called in some societies. The concept is that upon the death of a person of means, someone is earning what was left behind. This is considered income to that person, who must pay the government a portion of it.
5. Capital Gains - This is subject to much debate because it can be a difficult animal to figure. If a person sells something resulting in more money than was originally paid for the item or property, it is considered a capital gain. The problem is in keeping with inflation or deflation to offset what truly is gained, or loss, during a transaction.
It is easy to see why taxpayers constantly express frustration for the system, because it seems they are taxed in almost every sector of ownership of something of worth, and most likely it will always be this way in some fashion or another.

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