Tax liabilities are the amount owed to the tax authorities, such as the local, state, or federal governments. When you have a tax liability, it simply means you have a legally binding debt to your creditor.
Just like individuals, businesses can also incur tax liabilities from any taxable events that lead to tax liabilities, such as the making of sales, taxable income or profits, and issuing of payrolls. The governments mostly decide for them.
The governments use tax payments for different purposes, such as funding social programs and administrative roles(social security tax funds, retirements, and disability benefits). A taxpayer must know the tax base and its rate whenever a taxable event occurs.
Table of contents
Types Of Tax Liabilities
Different types of tax liabilities can be incurred from taxable events, which are evaluated based on a marginal or average impact and thus categorized into three main types,
- Regressive Tax
- Proportional Tax, and
- Progressive Tax
Regressive Taxes
A regressive tax system levies an equal percentage on products or goods that are being purchased regardless of the income of the buyer which has a higher impact on low-income earners as they pay an exorbitant amount of taxes than the high-income earners.
This is because the government assesses tax as a percentage of the total value of the assets that a taxpayer buys or owns, which has no connection with the amount an individual (taxpayer) earns or their income level. There are different regressive taxes, which include:
Property Tax Liability: They usually impose this type of tax on physical properties such as land or buildings. They are the major source of revenue for local or state governments as they generate over 70% of their revenues from property levies. It finances key public services such as fire departments, roads, schools, security, and emergency medical services.
Most people are only aware of the tax levied on residential properties such as lands and structures, which we refer to as “Real Property Taxes” many states also tax tangible personal properties(TPP), such as vehicles and equipment owned by an individual and business which are mostly movable properties like your business equipment, machinery, inventories, automobiles, and furniture. TPP taxes make up for a small share of the total state and local state revenue.
Sales Tax Liabilities: They are consumption tax levied on retail sales of goods and services.
Excise Taxes: They are taxes levied on consumables such as gasoline. They are fixed and are included in the product’s price or services.
Proportional Taxes
Proportional taxes, also referred to as the “Flat Tax” system, impose the same tax rate on everyone irrespective of their income or wealth. This system is meant to create equality between the marginal tax and the average tax rates paid. The aim of these taxes is to encourage individuals to work more and they also believe businesses will invest and spend more which in turn will pump more dollars into the economy. Examples of proportional tax include:
Occupational Taxes: they are tax levied on a person, corporations or other entities that are involved in an occupation or trade for profits.
Per capita Taxes: It is a flat rate of local tax that is payable by all adult residents living within a taxable jurisdiction.
Gross Receipts Taxes: It is a tax levy applied to a company’s or firm’s gross sales, without deduction for enterprise expenses which might be the cost of goods sold and unlike sales tax, gross tax is assessed only on businesses and are applied to business to business transactions with addition to the final consumer’s purchases.
Progressive Taxes
Taxes levied under a progressive system are based on the taxable amount of an individual’s income. It follows a speeding up program in order for top income earners to pay more than a low income earner.
The tax rate increases as an individual’s wealth or income increases. This type of system affects the top income earners because they can afford to pay more than the low-income earners. Progressive taxes include:
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Earned Income Tax Liability:
In this type of tax liability, working individuals are expected to pay federal income tax and, if possible state income tax as well as local income tax on their earnings(income). A high percentage of tax revenues is usually collected from high income earners than from low income earners. These taxes are applied through marginal tax rates and it can make a reasonable difference in the amount that an individual is to pay based on their filing status (married filing jointly or separately, single, or as the head of their household).
Other types of tax liabilities include:
Capital Gain Tax Liabilities
These are taxes levied on the gain or profits generated when an individual sells an asset with an increment in value. The rate of taxation depends on how long the assets have been held for.
So we have the short-term capital gain which is for assets that were sold after being held for a year or less after they were acquired and are taxed at the owner’s ordinary income. Long-term gains are assets held for more than a year before being sold and are usually taxed lower to encourage high levels of capital investment.
Payroll Tax Liabilities
Payroll taxes are mostly withheld from the employee’s paycheck or salary by their employer who remits the total amounts to the federal governments. Payroll taxes have both an employer and employee portion respectively which are used by the government to fund medicare programs and so on.
Corporate Tax Liabilities
Corporate income taxes are levied on a company’s or business income. The burden of corporate tax is shared between the business, its employees and the consumers by setting a high price and low wage. To encourage the growth of the business, most governments levy a corporate tax rate of 21%.
Classes of Taxes
Taxes can be classified into different categories, ranging from the method of payments, the subject bearing the tax burden and the extent of shifting the burden and so many other criteria but they are mostly classified as either “direct or indirect taxes”.
Direct Taxes
Direct taxes are basically taxes on individuals and they are often based on the taxpayer’s abilities which are measured by their income, consumption, or their net worth. The taxpayer can be an individual, couple, or family. In this type of tax the status of the taxpayer is also put into consideration (i.e. family status, number of children they have, financial burdens, and so on). Direct taxes rise as income rises and can be adjusted to an individual’s ability to pay by allowing for marital status and considering the number of dependents, etc.
Indirect Taxes
In contrast to the direct tax, in direct taxes levies or fees are applied to several essential consumer’s expenditures and the same rates can be applied to all taxed entities or distinct entities such as items of clothing or food which can be subjected to different rates.
At the retail level, single staged taxes are collected or at the manufacturing or wholesale levels just like in some developing countries. While multi-staged taxes are applied in the entire process of production to distribution.
Computing Taxes
Average tax rate
An average tax rate is the ratio of the total amount of taxes paid(denoted by T) to the total tax base which is the taxable income(denoted by P) expressed in percentage. To calculate the average tax rate:
Average tax rate=T/P
Marginal tax rate
Marginal tax rate is defined as the rate applying to the previous or next unit of tax base(the taxable income). Therefore it is the tax percentage of the highest earned dollar, which is equal to the change in taxes divided by the change in the tax base, expressed in percentage. To calculate the marginal tax rate:
change in T/ change in P = marginal tax rate
Conclusion
Payments of taxes are unavoidable, and how much of tax paid depends primarily on the tax system imposed and how much you own or make. To know how much tax you are subjected to, visiting a tax assessor or the tax office is the best option in order to get first-hand information and get answers to questions or doubts you have.
FAQs
In the United States, the federal income tax is a progressive tax.
They seem fair because the same amount of tax rates are levied on everyone irrespective of their earnings. But they hurt low-income earners when compared to others which are because it takes most of their income.
Real property is used to refer to properties like real estate or anything you own that is immovable or part of the land. In contrast, personal property is anything that you own that is movable and you can move or carry.
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