11 Types of Taxes: Sales, Income, Capital Gains, and More

by Panzer
As we learned in the previous tutorial, ideally all government spending is funded by taxes,
or required payments to the government from every citizen in a society. Even if many of
us complain about paying them, most citizens accept that taxes are a necessary way to fund
the government. However, governments need to make the important decision of deciding what to tax.
Literally anything can be taxed, and some things can seem arbitrarily taxed. In his influential
book, The Wealth of Nations, Adam Smith argued that a tax should have four characteristics:
simplicity, certainty, fairness, and efficiency. In other words, it should be easy and convenient
for taxpayers to pay, it should be certain to taxpayers that they know how and why the taxes
are being collected, it should be compatible with taxpayers’ conditions, including their
ability to pay and still pay their own bills, and it should be efficient for governments to collect.
While Smith offers a welcome guide, governments around the world still tax in different ways.
So what should be taxed? In this tutorial we’re going to look at all the major types
of taxes that governments typically collect, starting with consumption taxes, or taxes on
the purchase of stuff. #1: Sales Taxes
A sales tax is a tax you pay when you buy something. Usually, whoever is selling you
something can collect those sales taxes the moment you make the purchase. This is
why when you buy a hat for $9.99, you actually end up paying around $10.79 when you check out.
That additional 80 cents is the sales tax. It’s important to note that this is on final goods,
or goods meant to be sold to your average consumer, as opposed to immediate goods,
or goods that are bought to produce other goods. Nearly every country in the world has some form of
a sales tax, but it’s important to recognize that there are different types of sales taxes. Some
examples of sales taxes include turnover taxes, which are taxes on the sale of the aforementioned
immediate goods, or vendor privilege taxes, which are taxes on retailers for the privilege of doing
business in a certain area. There are also taxes on the sale of specific types of items,
like the wholesale sales tax, which is a tax on the sales of wholesale goods before the goods
are sent to retailers, or luxury taxes, which are taxes on stuff that is not considered essential.
#2: Value-Added Taxes A value-added tax, or VAT, is a tax on the price
of a good or service at every stage of production or distribution. It’s similar to a sales tax,
but instead of just being applied to the stuff sold to the consumer, it is applied repeatedly for
every point of sale at which value has been added to the stuff. Let’s look at an example. Say a
farmer sells wheat to a baker. The value has been increased after the baker buys it, so a VAT is
collected by the farmer. Next, the baker sells his bread to a wholesale bakery supply distributor.
The value has once again been increased, so an additional VAT is collected by the baker. Finally,
the wholesale bakery supply distributor sells packaged bread to restaurants and supermarkets
across the country. The value has once again been increased so yet an additional VAT is collected
by the wholesale bakery supply distributor. The vast majority of countries in the world
have a value-added tax, but a glaring exception is the United States, which relies on sales
taxes instead. Governments often prefer the VAT over the sales tax, however, since it encourages
more specialization and discourages vertical integration, which is when one company completely