The levying of resources from the private sector by a government, to pay for public goods and services. It is a form of revenue mobilization and an important part of macroeconomic management. Economists analyze tax policy, looking at trade-offs between how much revenue the taxes bring in and how they affect economic growth and distribution. They also consider the need to ensure that taxation is transparent and efficient, and does not give preferential treatment to specific groups of citizens or businesses.
Taxes can be direct, such as the income or sales taxes paid by an individual when they buy a good, or indirect, such as excise taxes on alcohol, tobacco, and pornography (collectively referred to as sin taxes). Indirect taxes are levied on economic transactions, such as a percentage of the sale price of a product (“ad valorem”-sales taxes), a flat amount on physical quantities (“per unit”-gasoline taxes), or a tariff (added to imported products to compensate for domestic production subsidies).
A person’s tax liability is the sum of all federal, state, local, and other taxes that the taxpayer must pay. This calculation can be complicated and requires careful attention to detail. Keeping records of spending and income is vital to accurately calculating one’s tax liability. Deductions, exemptions, and credits must be taken into consideration as well. Understanding the components of one’s tax liability allows a taxpayer to plan and budget efficiently. It is also critical to know how to file taxes, which can be done on paper or electronically (e-file). Regardless of the method chosen, filing a tax return can require several months to prepare and submit to the Internal Revenue Service.
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