An Income Tax is the financial charge imposed on the income of an individual, business firms, corporations or other legal entities. Income Tax system varies according to distribution of economic welfare. Income Tax on the individual is often levied on the total income of the individual, while the corporate tax is levied on the income of some legal entities.
Smart Finance
Three systems of income Tax are :-
1) Progressive Income Tax
In progressive Income Tax the tax rate increases with the taxable base amount. For example the first $ 10,000 earned may be taxed 5%, the next $10,000 at 10% and above this at 20%. Thus people with higher income pay a higher amount of tax, while those with lower income pay lower amount. Progressive Income Tax tends to reduce the tax incidence of individual with lower income and vice versa.
2) Regressive Income Tax:-
A Regressive Income Tax is imposed in such a way that the tax rate decreases as the taxable amount increases. For example tax is applied only to the first 50,000 earned. Regressive Income Tax tends to reduce the tax incidence of people with higher income, whereas it increases the tax incidence of people with lower income. Hence it is a greater burden on the poor than on the rich.
3) Proportional or Flat Income Tax:-
According to the system of Proportional Income Tax the tax rate is fixed as the taxable amount increases. In this system one rate is applied to all irrespective of income. Proportional Income tax is taxed at one marginal rate.
The tax systems use different types of taxation
I. Personal Income tax:-
It is imposed on the total income of the individual and is often collected on the PAYE mode where the tax is deducted from the salary and is immediately paid to the government.
II. Corporate Tax:-
Corporate tax is levied on the net profit of a company including capital gains.
III. Pay Roll Tax:-
IV. Pay roll taxes are of two kinds: In the first kind the employer withholds the tax from the employee’s salary whereas in the second kind the employer pays the tax for the employee from his own funds.
V. Inheritance tax:-
Inheritance tax is imposed on a person who inherits wealth or property of a dead person
VI. Capital gain tax:-
This tax is imposed on profits from a capital asset such as stock, share, real estate etc.
Money Sense
Income Tax is levied in almost all the countries around the world but not without criticism. In most countries taxation is a complex system. Tax systems may vary as per the type of tax .that is Progressive. Regressive or Proportional. Services provided by the government depend on the taxation.
