Most taxes fall into three categories: taxes on what you earn, taxes on what you buy, and taxes on what you own.
It’s critical to remember that every dollar you pay in taxes was earned as income. One of the primary distinctions between the tax kinds described below is the point of collection—that is, when you pay the tax.
For example, if you earn $1,000 in a state with a 10% flat income tax, $100 should be withheld from your paycheck when you earn that much.
If you take $100 from your leftover earnings a week later to buy a new smartwatch in a state with a 5% sales tax, you’ll spend an extra $5.
Taxes on What You Earn
Individual Income Taxes
An individual income tax (or personal income tax) is levied on an individual’s or household’s wages, salaries, investments, or other kinds of income.
Many individual income taxes are “progressive,” which means that tax rates rise as a taxpayer’s income rises, with higher-earners paying a bigger percentage of income taxes than lower-earners.
Corporate Income Taxes
The federal and state governments levy a corporate income tax (CIT) on business earnings, which are defined as revenues (what a company generates in sales) minus costs (the cost of doing business).
Businesses in the United States are broadly divided into two types: C corporations, which pay the corporate income tax, and passthroughs, which include partnerships, S corporations, LLCs, and sole proprietorships and “pass” their income to their owners’ income tax returns and pay the individual income tax.
While C firms must pay corporate income tax, the cost of the tax falls not just on the business but also on its consumers and employees through increased prices and lower earnings.
Because of the negative economic repercussions, several nations have changed to taxing firms at rates lower than 30%, notably the United States, which reduced its federal corporate income tax rate to 21% as part of the Tax Cuts and Jobs Act of 2017.