A tax is an obligatory annual financial burden or any other kind of legal levy charged on a taxpayer by the government to fund public expenditure and government spending. Evasion of or refusal to payment, and/or support to or aid in evasion of tax, is punishable by fine or even imprisonment. In most developed countries, the obligation of paying taxes is enforced by the government through taxation. This system has developed over centuries mainly to create economic stability and support social welfare programs. This system of taxation has evolved to a level where tax payments act as a major source of income for most governments.
Taxation is considered as a broad term that encompasses many related concepts such as income tax, sales tax, property tax, personal income tax, value-added tax (VAT), indirect tax, import duty, property rent, and other indirect taxes. A modern progressive tax system is applied to ensure a fairly level playing field for all taxpayers by allowing both income and wealth holders to access a portion of the tax burden. This is done by taxation authorities levying various types of taxes depending upon ability to pay or merit. The principle reason why taxes are levied is to generate sufficient revenue to fund various public services, welfare programs, and other goals of government.
All types of taxes fall under direct tax which refers to taxes which are charged directly to the consumer. These taxes include income tax, corporate tax, property tax, vehicle registration tax, stamp duty, lottery tax, and inheritance tax. Indirect taxes refer to taxes which are indirectly charged or passed on to the consumer, such as sales tax, property tax, and vehicle registration tax. Many countries also have combined direct and indirect tax systems.
The major purpose for either direct or indirect taxes is to provide revenue for the government. The two different systems have different objectives. Direct taxes are typically used to raise money for the state such as in public utilities or capital expenditures. Indirect taxes are used to affect an economic activity such as interest, prices, production, and saving.
Generally speaking, goods and services are classified into two different categories based on their taxation level: consumption goods and income-based goods. Consumption goods are goods that people physically consume such as food, clothes, and fuel. Income-based goods are those that people earn through salaries, wages, and profits. Examples of income-based products are salaries, wages, and profits from the sale of certain types of productive assets such as labor and property.
Governments typically levy direct taxes on wealth. These include income, estate, and capital gains tax. Capital gains tax is a special type of tax on the transfer of capital from one person to another. While direct taxes represent a major component of overall taxation, they are normally only one-third of overall revenue.