1.2 Types of Taxes

Income Tax

Federal tax, state tax, local tax

1. Used extensively by the federal government, imposed by some states and local jurisdictions

2. Prime example of an ACTIVITY-BASED tax (earn the income over time, look at that activity over time, measure it, base of tax found)

   • Imposed on the cumulative result of an ongoing activity

Property Tax

Real property tax, personal property tax (ad valorem taxes)

1. Used exclusively by the states and local government

2. Also called AD VALOREM taxes because they are based on value

   • These are taxes on wealth and capital

3. Generally assessed on real property (realty)

4. Can also be assessed on personal property (peronalty)

• Cars, boats, intangibles like stcoks and bonds

Transfer Taxes

1. Imposed on the TRANSFER of property, rather than annually or FMV of property

• Gift tax - imposed on lifetime transfers (donor pays tax)

• Estate tax - imposed on transfers at death (estate pays tax)

2. Relatively minor in terms of revenue collected but can be substantial for certain individuals

Consumption Tax

1. Used primarily by state and local governments in the U.S.

2. Examples include sales taxes, use taxes, excise taxes, hotel taxes, & value-added taxes (VAT)

• These are TRANSACTION-BASED taxes

3. Tangible personal property (clothing, autos, restaurant food)

4. Services and recreation (haircuts, tire repair, minigolf)

Employment Tax

Payroll taxes (social security and Medicare), unemployment taxes

1. Assessed on earned income (wages and salary)

   • These are social insurance taxes. They fund pension, medical, and unemployment benefits, AKA payroll taxes

2. Employers and employees pay matching portions of FICA tax which has two parts— Medicare (1.45%) and Social Security (6.2%)

   • Self-employed individuals pay BOTH employer and employee portions

3. Employers pay federal and state unemployment taxes (FUTA and SUTA)

How do governments fund themselves

Over 40% is funded off personal income taxes