The Three Basic Tax Types

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Most taxes can be divided into three buckets: taxes on what you earn, taxes on what you buy, and taxes on what you own.

It’s important to remember that every dollar you pay in taxes starts as a dollar earned as income. One of the main differences among the tax types outlined below is the point of collection—in other words, when you pay the tax.

Taxes on What You Earn

Individual Income Taxes

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns.

Corporate Income Taxes

A corporate income tax (CIT) is levied by federal and state governments on business profits, which are revenues (what a business makes in sales) minus costs (the cost of doing business).

Payroll Taxes

Payroll taxes are taxes paid on the wages and salaries of employees to finance social insurance programs. Most taxpayers will be familiar with payroll taxes from looking at their paystub at the end of each pay period, where the amount of payroll tax withheld by their employer from their income is clearly listed.

Capital Gains Taxes

Capital assets generally include everything owned and used for personal purposes, pleasure, or investment, including stocks, bonds, homes, cars, jewelry, and art. Whenever one of those assets increases in value—e.g., when the price of a stock you own goes up—the result is what’s called a “capital gain.”

Taxes on What You Buy

Sales Taxes

Sales taxes are a form of consumption tax levied on retail sales of goods and services. If you live in the U.S., you are likely familiar with the sales tax from having seen it printed at the bottom of store receipts.

Gross Receipts Taxes

Gross receipts taxes (GRTs) are applied to a company’s gross sales, regardless of profitability and without deductions for business expenses. This is a key difference from other taxes businesses pay, such as those based on profits or net income, like a corporate income tax, or final consumption, like a well-constructed sales tax.

Value-Added Taxes

A Value-Added Tax (VAT) is a consumption tax assessed on the value added in each production stage of a good or service. Each business along the production chain is required to pay a VAT on the value of the produced good/service at that stage, with the VAT previously paid for that good/service being deductible at each step. The final consumer, however, pays the VAT without being able to deduct the previously paid VAT, making it a tax on final consumption. This system ensures that only final consumption can be taxed under a VAT, avoiding tax pyramiding.

Excise Taxes

Excise taxes are taxes imposed on a specific good or activity, usually in addition to a broad consumption tax, and comprise a relatively small and volatile share of total tax collections. Common examples of excise taxes include those on cigarettes, alcohol, soda, gasoline, and betting.

Taxes on Things You Own

Property Taxes

Property taxes are primarily levied on immovable property like land and buildings and are an essential source of revenue for state and local governments in the U.S. Property taxes in the U.S. account for over 30 percent of total state and local tax collections and over 70 percent of total local tax collections. Local governments rely on property tax revenue to fund public services like schools, roads, police and fire departments, and emergency medical services.

Tangible Personal Property (TPP) Taxes

Tangible personal property (TPP) is property that can be moved or touched, such as business equipment, machinery, inventory, furniture, and automobiles. Taxes on TPP make up a small share of total state and local tax collections, but are complex, creating high compliance costs; are nonneutral, favoring some industries over others; and distort investment decisions.

Estate and Inheritance Taxes

Both estate and inheritance taxes are imposed on the value of an individual’s property at the time of their death. While estate taxes are paid by the estate itself, before assets are distributed to heirs, inheritance taxes are paid by those who inherit property. Both taxes are usually paired with a “gift tax” so that they cannot be avoided by transferring the property prior to death.

Wealth Taxes

Wealth taxes are typically imposed annually on an individual’s net wealth (total assets, minus any debts owed) above a certain threshold.

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Alfredo Gaxiola has worked on numerous IRS problem cases and has successfully settled with the IRS to release liens on houses, bank accounts and wages and, if needed, setting a payment installment plan that is not burdensome for the client. He has conducted appeals before the U.S. Tax Court and obtained favorable resolutions in reducing the tax debt of his clients. Mr. Gaxiola served as Treasurer of Camara de Empresarios Latinos, one of the largest and strongest Hispanic organizations in the city of Houston. He has conducted financial and accounting seminars for the Houston Small Business Development Corporation, as well.

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