Tax is a compulsory payment or charge collected by local, state, and national governments to pay for the operation of government and to provide public goods or services. Most countries have a tax system that imposes income taxes, property taxes, sales taxes, value-added taxes (VAT), payroll taxes, duties, and tariffs. The taxes imposed vary by country and sub-unit, but most have a progressive structure that increases rates as income levels rise. Some countries also levy wealth taxes, inheritance taxes, gift taxes, capital gains taxes, business property taxes, consumption taxes, and environmental taxes.
In general, the objective of taxation is to maximize revenue for a nation while maintaining an optimal level of tax burden to prevent excessive economic distortions such as unemployment or inflation. Economists define a tax as “a transfer of wealth from private to the public sector, which affects economic decisions and incentives”.
Calculating Tax
The calculation of tax begins by determining taxable income, which is the amount of a person’s gross pay before any deductions or credits are applied. The taxpayer’s filing status (single, married filing jointly, or married filing separately) and standard deductions determine the tax bracket they fall into and how much they are taxable for that year.
The next step is to calculate the taxpayer’s tax liability by applying their applicable rate to taxable income, subtracting any deductions and credits, and adding any tax refunds received. Once the computed tax is determined, the taxpayer can send this data to the IRS.