What is tax? Learn about key tax definitions

June 15, 2021 : Allie Freeland

Taxes are prevalent around the world, but each country has various methods, rates, and tax laws. State to state, county and even local taxes differ within the United States.

This post will cover the answer to the question, “What is tax?” as well as the different types of tax that exist: including income, property, and sales tax definitions.

What does tax mean?

First, let’s explore the answer to “What is taxation?” Generally speaking, taxes are how we all chip in to finance our local, state or federal government. Taxes are used for the betterment of society.

Individuals, estates, trusts, and businesses pay tax to operate functions like defense programs, transportation, infrastructure, social services, income assistance, interest on debt, first responders, public schools and colleges, public libraries, science research, and healthcare programs.

Generally, taxes are divided into two categories:

• Direct tax, which is paid directly by the public to a government entity. (This includes income, estate, and property tax)

• Indirect tax, which is inadvertently paid by the public to a government entity. (This includes central excise duty, customs duties, service tax, and value-added tax.)

• * Sales tax can be direct or indirect.

Types of taxes

We brushed upon this previously, but there are multiple types of taxes individual taxpayers or entities pay. Some of the most common ones are property, sales, and income tax. Let’s explore each in greater detail:

Property tax definition

Property tax is tax paid by the owner of real estate or personal property. It’s determined by the value of the property. The piece of property is generally assessed by a local government entity to determine how much it’s worth and how it should be taxed.

Property taxes are a primary source of income for city, county, and state governments. While property owners see property tax as a financial burden, it’s lessened by the fact that you can deduct them from your income taxes. Learn more about deducting property taxes from your income taxes.

Sales tax definition

Sales tax is a tax imposed by the government on goods or services. Generally, the consumer is responsible for paying sales tax at the point of sale – and the business is responsible for reporting sales tax. Sales tax is imposed in most states — but not all. States within the U.S. establish what types of goods and services are taxed — and how much. Sales tax is not set at a graduated rate — it’s usually a flat rate.

Learn more about how you can deduct state sales tax from your income taxes.

Income tax definition

Income tax is a tax levied on income you receive in a tax year. Federal income tax in the U.S. is a “progressive” tax paid at a marginal tax rate. So, the income you receive in a tax year is taxed at different bracketed rates. Learn more about filing a federal tax return and common tax deadlines.