A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law. However, the government can exclude certain individuals, groups or institutions from the burden of taxation by law. Further, there exists no quid pro quo between payment of taxes and provision of public goods and services. Certain vulnerable sections benefit from government expenditure irrespective of their contribution to the tax revenues. Taxes can be broadly classified into three types

• Direct and Indirect Taxes

• Specific and Ad-Valorem Taxes

• Progressive, Regressive and Proportional Taxes

 

Direct and Indirect Taxes

Direct Taxes, as the name suggests, are taxes that are directly paid to the government by the taxpayer. It is a tax applied on individuals and organizations directly by the government e.g. income tax, corporation tax, wealth tax, etc. Indirect tax the burden of taxation falls on the same person over whom the tax is imposed i.e. the burden cannot be shifted. Direct taxes are generally taxes on income and property.

An indirect tax is a tax levied by the Government on goods and services and not on the income, profit or revenue of an individual or institution and its burden can be shifted. In other words, the indirect tax is imposed over someone but its burden falls on someone else. Customs Duty, Service Tax, Goods and Services Tax (GST) are examples of indirect taxes. The Government often increases the tax rate when there is monetary inflation which in turn reduces the demand for goods and services and as a result of descending demand, the inflation is bound to condense.

 

Specific and Ad-Valorem Taxes

Specific tax is a tax imposed on some specific attribute of the good or service irrespective of its value. Like taxes on quantity, weight, length, size, etc are examples of specific taxes. Ad-valorem taxes are taxes imposed on the value (generally taken as money value) of the good or service. The most common ad valorem taxes are property taxes levied on real estate. However, ad valorem taxes may also extend to a number of tax applications, such as import duty taxes on goods from abroad.

 

Progressive, Regressive, and Proportional Taxes

A progressive tax is defined as a tax whose rate increases as the payer’s income increases. That is, individuals who earn high incomes have a greater proportion of their incomes taken to pay the tax. A regressive tax, on the other hand, is one whose rate increases as the payer’s income decreases. In other words under a regressive tax structure as the income increases the burden of taxes decreases.

A proportional tax system also referred to as a flat tax system, assesses the same tax rate on everyone regardless of income or wealth.