Types of Tax in USA: Features & Advantages

The US taxation system is regulated by the federal, state, and local governments. Each level of government levies its own unique taxation methods to fulfill its different financial obligations. The Internal Revenue Service (IRS), which has a monopoly on federal taxation, checks income taxes, while the state and local governments are the authorities that collect the sales taxes, and property taxes among other imposts specific to their areas.

Income taxes in the US are mandatorily collected from businesses and citizens upon their incomes. They can be progressive or proportional, based on your location you might enjoy federal, state or local rate of taxation. Income tax is the most reliable government income source thus supporting government programs aimed at enhancing the wellbeing of citizens and also encouraging people to comply and pay tax according to their paying abilities.

Features:

• Progressive or Flat: Earnings taxes have a progressive feature, where tax rates are growing as income level is increasing, as well as simplified charge rates are flat, which are constant and equally applied in any income level.
• Levied on Individuals and Businesses: Income tax is a charge on an individual and company based on their incomes if they are making profit.
• Federal, State, and Local Levels: People have to pay income tax on the federal, state and occasionally local basis upon the rate and law of each taxation system.

Advantages:

• Stable Revenue Stream: A government receives enough revenue that can be used in ensuring that there are social services as well as public amenities by setting taxes for its citizens and the levels being based on their income.
• Progressive Taxation: That income taxes are important and related to progressive taxation and fair distribution of earnings are more their end is the eradication of income inequality.
• Funding Social Programs: Funds complement the incoming stream of tax revenue, which in return promote the funding of other important programs, such as Social Security, Medicare, and Medicaid.

Disadvantages:

• Incentive Challenges: The high income tax rates by presenting work, investment, and entrepreneurship deterrent, might mean that people will not work, invest and be entrepreneurs.
• Complexity: It could be a tedious and wearisome exercise for the taxpayers, businesses and tax officials if the codes and laws are too complex.
• Tax Avoidance: Nevertheless, some individuals and traders will possibly escape from income tax through legal loopholes, or by applying complex tax planning techniques.

Examples: Federal income tax, state income tax, and local income tax (in some areas).

US sales tax is a kind of indirect tax which is imposed on the sale of goods and services. It is collected by the business enterprises from the customers they sell to at the market. These taxes are not only state specific but also city-based and bring a large revenue contribution, which allows the local governments to continue their activities. If rate-based sales taxes are being used, they could be unfavorably overburdening consumers with lower incomes while the issue like tax pyramiding may occur.

Features:

• Consumption-Based: As for the sales taxes, some individuals may buy more goods or more expensive ones because they know that they are paying taxes on money that has already been made or that is the expense that comes with the luxury.
• Imposed on Businesses: Administration of sales taxes is mainly done by businesses which add it into the cost of the products at the time of sale to customers from where it is collected.
• Varied Rates: The sales tax rate is usually different in one state as compared to another, prompting consumers to have more or less tax obligations everywhere in the county.

Advantages:

• Significant Revenue Generation: Sales tax yields a huge amount of profit, especially in the case of countries that are driven by the consumers market, where transaction volume is higher.
• Tailored Taxation: The consumers` need for essential goods` ascertainment can be made possible while reducing the rates of individual products, hence, ensuring fairness.
• Local Funding: The attention the cities receive is usually reverberated in various activities that are conducted: public events, artists’ lectures and conferences, public art.

Disadvantages:

• Regressive Nature: Sales taxes are considered regressive for there is more burden on cheaper items which are frequently bought by low-income individuals whose income is spent mostly on taxable goods.
• Tax Pyramiding: Sales tax, especially, can result in multi-tiered tax burden during the manufacturing, thus, initiating a tax pyramiding and raising the final price for the consumer.
• Compliance Challenges: Businesses may face challenges in precisely calculating and collecting sales tax, especially when dealing with regional tax regulations of varying tax laws.

Examples: State sales tax, local sales tax (in some areas), and special sales taxes on specific items like tobacco or alcohol.

In the USA the valuation of a property for its taxes purposes is made by the local government and the owners are required to pay them the property tax. First and foremost, they act as a financial resource that district in services and school systems. Inversely, though these are still taxes, they may be hardship for areas where the house prices continue going up, and thereby, the affordability also keeps on degrading.

Features:

• Assessed Property Value: The property taxes are levied on the assessment of the real estate property value.
• Levied by Local Governments: They are levied by local governments to finance infrastructure and to provide quality education.
• Stable Revenue Source: The mechanism of property taxes brings in additional revenue for the local government.

Advantages:

• Stable Funding: Local services are hence to some extent ensured by property taxes as they tend to be stable and reliable.
• Revenue for Public Services: They are vital sources of securing revenues for public funding of things such education, infrastructure, and fire and police services.
• Local Control: Local authorities hold the power for fixing property tax rates the bills of which in turn are directed at meeting the requirements of the community.

Disadvantages:

• Burden on Property Owners: Reality is that property taxes can be a high taxation for property owners, particularly those for whom the property values is rapidly rising.
• Impact on Affordability: Extensive property taxes could bring low-income home owners in housing dilemmas.
• Disparity in Rates: Different tax methods in different settlements may cause different tax burden’s ratio.

Examples: Real estate property tax, personal property tax (on vehicles, boats, etc.).

Payroll taxes are payments made by workers and their employers as their contribution towards Social security fund, Medicare and other related social insurance plans. Therefore, they are the souces of social welfare benefits. Accordingly, they can pull a string a little bit, so that they make take home pay of employees less than their earnings and labor cost of enterprises higher than the latter, which make the sustaining of long-term tax funding a tough job.

Features:

• Contributions by Employees and Employers: Payroll taxes, workers as well as employers, bear contributions
• Funding Social Security and Medicare: The tax revenues keep the systems of Social Security, Medicare and unemployment insurance running.
• Mandatory Deductions: Along with the employer, payroll taxes are constantly taken from the employees’ salary.

Advantages:

• Direct Funding for Social Programs: The payroll taxes itself is the main source of funding for social welfare programs such as old age retirement, social, and other programs for the welfare of the citizens.
• Stable Revenue for Programs: This kind of income facilitates social security and Medicare funding which ensures a solid base for these programs.
• Employee Benefits: This employee tax specifically serves to finance programs that give workers a safety net and covers any financial support.

Disadvantages:

• Reduction in Take-Home Pay: Withholding a substantial amount of money from workers paychecks could be of no interest to the employees as they aimed at getting a larger disposable income.
• Increased Labor Costs: Businesses can expect to incur additional labor costs as a result of the FICA tax contributions they will be making.
• Sustainability Challenges: Finance of social programs is complicated by the population migration and changes in the cultural features along with the economy.

Examples: Social Security tax, Medicare tax, unemployment insurance tax.

In the USA excise taxes are imposed on particular products like the ones mentioned above, including fuel, alcohol, and tobacco, and luxury items as well. They fulfill two-fold functions i.e. both deterring overconsumption and boosting revenue. On the other hand, these measures may generate various black market clandestine actions related to heavily taxed products and can be viewed as an uneven implementation between consumption groups.

Features:

• Levied on Specific Goods: Special excise taxes are applied to the products like fuel, alcohol, cigarettes, and high-end goods.
• Purpose: They are thus created to curb spending or to finance related activities.
• Varied Rates: There is a wide range of taxation rates that is applied by a product type and jurisdiction.

Advantages:

• Promoting Public Health: VAT’s on items including cigarettes and sugary drinks are often enforced to limit their consumption.
• Revenue for Programs: They can generate revenue that can be channeled to social programs targeting the tax revenue goods e.g. healthcare or education.
• Discouraging Consumption: Taxes increase might nudge consumers from over-consuming of some items.

Disadvantages:

• Black Market Activities: Excise taxation which can result in smuggling or activities of black market for products with high rates.
• Consumer Impact: Discriminatory taxation represents a problem, specifically when it prefers consumers in lower income groups.
• Complexity in Administration: The issue on the management and enforcement of excise duties is however compounded by the fact that the rates and types of products they applied differ.

Examples: Fuel tax, alcohol tax, tobacco tax, luxury goods tax.

The wide spectrum of the taxes in the USA assumes a critical mission for the purpose of government operations’ budget, social program sources, and infrastructure projects’ funding. The three tax types differ in their features and benefits, as well as their downsides. Nevertheless, they generate tax revenue which is necessary for the smooth functioning of the nation. Awareness of the minute details on taxation provide the citizens and the business holders with a tool to take a bold step when making financial decisions which on the larger scale greatly enhance ongoing discussions on the field of taxation policy.