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Types of Taxes

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US tax forms
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Taxes are obviously necessary in order for a society to provide public goods and services to its citizens. Unfortunately, taxes also impose costs on citizens both directly (because if an individual gives money to the government, she doesn't have the money any more) and indirectly (because taxes introduce inefficiency, or deadweight loss) into markets. Because the inefficiency that taxes introduce grows more than proportional to the amount of a tax, it makes sense for the government to structure taxes so that a lot of markets get taxed a little bit rather than so that a few markets get taxed a lot. Therefore, a number of different taxes exist, and they can be categorized in a number of ways. Let's take a look at some of the common tax breakdowns.

Business Taxes versus Personal Taxes

Because businesses and households are the main players in the circular flow of the economy, it makes sense that some taxes are levied on businesses and some on households. Taxes on businesses are usually calculated as a percentage of the profits of the businesses, or what's left after the company pays its suppliers, workers, etc. and also after it takes accounting deductions for things like depreciation of its assets. (In other words, the tax is a percentage of what's left over, not a percentage of what the company brings in in revenue.) This means that suppliers and workers are effectively paid with pre-tax dollars, but that the profits are taxed before they are distributed to shareholders or other owners. That said, corporations may end up indirectly paying other types of taxes during the course of their business activities. These taxes could include property taxes on land or buildings that a company owns, customs duties and tariffs that are charged on production inputs that come from foreign countries, payroll taxes on a company's employees, and so on.

Personal taxes, on the other hand, are levied on individuals or households. Unlike business taxes, personal taxes are generally not levied on the "profits" of a household (how much a household has left over after paying for what it buys) but rather on the revenue of a household, or what the household brings in in income. It's not surprising, then, the the most prevalent personal tax is an income tax. That said, personal taxes can also be levied on consumption, so let's take a look at income taxes versus consumption taxes.

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