Tax Definition

Taxes are compulsory fees which are levelled on companies and individuals by the government as a source of public revenue. Taxes are often taken in two forms: either as deductions from the income a person or business receives, or as additional costs on products, services, and materials bought and sold. They are one of the accounting entry expenses which must be factored into a business balance sheet, along with amortization, interest on liabilities, and depreciation, in order to work out which of a company’s assets actually belong to the shareholders, the people who actually own the business! Taxes are a universal aspect of living in a nation state, and so it is likely that wherever you go in the world, you will find yourself being taxed for one thing or another. It is often joked that the only two certainties in life are death and taxes!

What Do Taxes Pay For?

Taxes are the primary funding for state spending. Governments justify their taking taxes by arguing that it improves things like public services and infrastructure – transport, streetlamps, policing and other similar things. Taxes may also help protect a person’s health and liberty – for example, in the UK, taxes pay for both the public healthcare system, the National Health Service, and the state pension.

Most people would agree taxes are necessary expenses for the good of society, but the issue of how much governments should permitted to take is often highly politically charged. Libertarians and right-wing thinkers often argue that the state, and the taxations it levies, should be small. By contrast, those on the left often argue for higher taxes on the rich, to redistribute wealth in the interests of equality.

Examples Of Taxes

The most common type of tax is income tax, which often appears in two forms: corporate and personal. The amount of income tax which must be paid depends on the taxable income of the individual or business.

Another common form of taxation is VAT – value added tax. This is a tax on both the buyer and seller of a product, material, or service. For the buyer, it is an additional layered expense on the purchase price. For the seller, it is a tax on the value of their asset at the stage of its manufacture or delivery at which it is sold.

Whatever your feelings on taxation, it is advisable to get used to paying them. As an investor, you should be aware that businesses have their taxes to pay too. Make sure businesses don’t pull the wool over your eyes by presenting figures which don’t include accounting entries which reflect the real claims to a company’s assets, such as its EBITDA figure, which doesn’t include taxation and other non-cash expenses.

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