What is tax? A tax is a compulsory contribution to a government. We all pay tax on pretty much
everything: the stuff we earn, the stuff we buy and the stuff we own. Like it or not, taxes are
how governments raise revenue. They spend the money on services that benefit the community. Things like
welfare, health, defence, education, infrastructure Etc. The burden of different taxes can fall on
different groups of people. We tend to think of taxes as proportional, regressive or progressive.
A proportional tax charges everyone the same average tax rate regardless of their income. It's
also called a flat tax because the line is flat. A regressive tax hits people with lower incomes
harder. As your income increases your average tax rate goes down and the burden of a progressive
tax lands on people with higher incomes. So as your income increases your average tax rate goes up. It
might seem obvious but most people want to keep their tax bills to a minimum. There are a couple of
ways to do that: the nice way and the naughty way. The nice way is to avoid tax. Tax avoidance means
you fully report your income and structure your finances in a way that minimizes your tax bill. It's
completely legal and even encouraged. Nobody should pay more tax than they have to. The naughty way is to evade
tax. Tax evasion can be as simple as not paying your taxes or perhaps you don't report all of your
income. It's illegal so don't do it. Taxes can also be direct or indirect. A direct tax is one that
a taxpayer pays straight to the government and an indirect tax is one that a taxpayer can pass
on to someone else. We'll see examples of both of these in a second. Hello and welcome back to
Accounting Stuff. I'm James and today I'll take you through 10 of the most common types of tax.
This is an intro to tax for beginners, I won't be giving any tax advice in this video. the rules
are different in different places and they're constantly changing so for any real life scenarios
please check with your local tax authority or seek help from a qualified tax accountant. Let's do this!
We pay tax on the stuff we earn, the stuff we buy and the stuff we own. Let's start with tax
on the stuff we earn. The first tax that jumps to mind is personal income tax. Personal income
tax or individual income tax is a direct tax on most forms of income earned by individuals. It's
charged on your salary or wages, the profit earned by your business if you're self-employed, and your
investment income from interest and dividends. Most countries have some form of personal income tax
and it's usually a large source of revenue. The tax collected often goes into a general fund to be
spent as the government sees fit. We can calculate personal income tax by multiplying your taxable
income by your personal income tax rate. It seems simple but usually your personal income tax rate
increases as you earn more. Let me show you how. In a galaxy far far away there's a small planet
called Naboo. Naboo has a graduated tax system with personal income tax bans. On the first 15,000
galactic credits you earn you pay nothing and on your next 35,000 you pay 20% tax. On any personal
income above 50,000 you pay 35%. Jar Jar is a cook for a wealthy nobleman he lives on Naboo and earns
80,000 credits during a tax year. Let's work out his personal income tax bill. On Jar Jar's first
fifteen thousand credits his tax rate is zero, so he pays nothing. On his next 35,000 his tax rate
is 20% so he pays 7,000 credits and on his income above fifty thousand his tax rate is 35 percent
eighty thousand minus fifty thousand is thirty thousand and thirty five percent
of that is ten thousand five hundred credits. So Jar Jar's total personal income tax bill is seven
thousand plus ten thousand five hundred which is seventeen thousand five hundred galactic credits.
If we visualize this on a graph we can see that personal income tax on Naboo is progressive. As
Jar Jar earns more his tax rate steps up. Jar Jar's marginal tax rate is 35%. This is the highest rate
of tax he pays. The effective tax rate that he pays on all of his income is an average tax rate.
We can work out Jar Jar's average tax rate by taking his total income tax payable and dividing
it by his total taxable income 17,500 divided by eighty thousand which comes out at around
22 percent. This is much lower than his marginal tax rate of 35 percent. But what other taxes do we
pay on the stuff we earn? We also pay payroll tax. Payroll tax is a direct tax on wages and
salaries earned by individuals. It can be paid by you, your employer or both. Payroll tax is normally
deducted from your pay slip like personal income tax. But it ignores profits, interest and dividends.
The tax money raised from payroll tax is often used to fund Social Security Programs.
These provide a safety net for those unable to work: people who are sick, retired or unemployed.
Payroll tax is equal to gross wages or salary multiplied by the payroll tax rate.
Naboo has a flat five percent payroll tax rate. Jar Jar earned 80,000 credits during the tax
year, but his gross wages were 60,000 credits. So his payroll tax payable is 60,000 multiplied by
5% which is three thousand credits. If we look at our graph you might think that payroll tax is a
flat tax. As Jar Jar's wages go up his effective payroll tax rate stays the same. But this one's
up for debate. You could argue that payroll tax is actually regressive since wealthy people tend
to earn more income from other sources like investments which are exempt from payroll tax.
But individuals aren't the only ones who pay tax. Companies are separate legal entities so they have
to pay tax too. Company tax or corporation tax is a direct tax on business profits. Profit is equal to
revenue less expenses and company tax payable is equal to taxable profit multiplied by the company
tax rate. The company tax rate on Naboo is 15%. The government set it a little bit lower than
the personal income tax rate to encourage economic growth. Naboo Technologies is a company that makes
communication devices. It's registered on Naboo and generated a taxable profit of 1 million credits
during the tax year. So their company tax payable is 1 million multiplied by 15% which is 150,000
credits. But wait there's more! We also have capital gains tax. Capital gains tax is a direct tax on
the profit realized when an investment is sold. Individuals and companies both pay capital gains
tax when they sell a long-term asset for a higher price than they bought it for. The asset might be
shares, bonds or real estate. But it normally excludes primary residences for individuals.
We can work out capital gains tax by multiplying the capital gain by the capital gains tax rate.
Jar Jar bought 100 shares in Naboo Technologies a few years back at 60 credits per share. The share
price has since risen to 100 credits so he decides to sell up and realize the capital gain. His
capital gain is 10,000 minus 6,000. So that's 4,000 credits. Naboo has a capital gains tax rate of
35% so Jar Jar's capital gains tax payable is 4,000 multiplied by 35 percent which is 1,400 credits.
I know we're covering a fair amount here so I've summarized all of the key points from this video
on my tax basics cheat sheet. It's available buy on my website. The link is down in the description
and the proceeds help keep these videos free from sponsors. So you pay tax on the stuff you earn but
what about the stuff you buy? Depending where you live, you might familiar with sales tax or value-added tax.
Sales tax is an indirect tax on the sale of products and services to the final customer.
It's a consumption tax, triggered by the customer when they buy something. You can find it on bills
and invoices in the US where it's a large source of revenue for many states. Sales tax is equal
to the list price of an item multiplied by the sales tax rate. A scavenger on Tatooine sells some
raw materials to a droid manufacturer for 2,000 credits. The Droid manufacturer uses these
to build a house droid which it then sells onto a moisture farmer for a list price of 10,000
credits. If the sales tax rate on Tatooine is 10% who pays what? Since the first transaction is
business-to-business the scavenger doesn't charge sales tax. The Droid manufacturer only pays them
the list price of 2,000 credits. But the second transaction is business-to-consumer. So this time
the droid manufacturer needs to charge sales tax. We can find out how much by taking the list price
of 10,000 credits and multiplying it by the sales tax rate of 10% which is one thousand. The droid
manufacturer collects 11,000 credits and pays the sales tax of 1,000 to the local government. As you
can see, sales tax is an indirect tax because it's collected by the seller but the cost is
born by the end consumer. The sales tax rate on Tatooine is flat but it's still considered to be
a regressive tax. The theory goes something like this... High income earners are able to save more
of their income which means they spend a lower proportion of it on taxable goods and services.
On the other hand, people with lower incomes spend a higher portion of it on consumption. You'll find
that a lot of places exempt necessities from sales tax in order to make it less regressive.
Things like food, water, rent and medication. Sales tax tends to be an American thing but value-added
tax is popular outside of the US. Value-added tax or VAT is an indirect tax on the sale of products
and services at each stage of the production chain. It's also called goods and services tax or GST. We
can calculate VAT by taking the list price of an item and multiplying it by the value-added
tax rate. This can get a little confusing because it sounds similar to sales tax. But allow me to
break it down for you. Let's pretend that Tatooine actually has a value-added tax system. The rate is
still 10 percent. The scavenger sells raw materials to the droid manufacturer and in return they pay
them the list price plus VAT since value-added tax is added at every step of the production chain. The
droid manufacturer turns the raw materials into a house droid which it sells onto the moisture
farmer. They pay the list price plus VAT as well. From the droid manufacturer's point of view, there
are two kinds of value-added tax: input VAT and output VAT. They collect output VAT on sales. This
is payable to the government. And they pay input VAT on purchases which they can claim back. The net
VAT payable to the government is equal to Output VAT minus input VAT. Let's throw some numbers in.
The Droid manufacturer pays the scavenger the list price of 2,000 plus 10% VAT which is 200 credits.
From the scavenger's point of view, this is output VAT. They owe this money to the government.
But from the droid manufacturer's point of view, this is input vat that they can claim back. Now
stay with me... When the droid manufacturer builds the house droid they add value in the production
chain which allows them to charge more money. The moisture farmer pays them the list price of 10,000
credits plus 10% VAT of 1,000 credits. The moisture farmer can't reclaim this as input VAT because
they're the final consumer in the production chain. But from the droid manufacturer's point
of view this is output VAT and they owe it to the government. Their net VAT payable is 1,000 of
output VAT minus 200 of input VAT so 800 credits. In total the government collects 1,000 credits.
200 from the scavenger and 800 from the droid manufacturer. VAT is a regressive indirect tax in the
same way that sales tax is. But the difference is in who pays the government. Sales tax was only
paid once by the droid manufacturer on the final sale, but the value-added tax payments are shared
amongst businesses in the production chain. Sales tax and value-added tax aren't the only taxes we
pay on the stuff we buy. Excise tax is an indirect tax on the sale of specific products and services.
Usually these are bad things that the government wants to discourage. Stuff like fuel, alcohol
cigarettes and CO2. For this reason it's sometimes called a Sin Tax. It's usually charged at the point
of production and becomes baked into the sales price of the final product. Often sales tax or
value-added tax is applied on top. Excise tax is equals total units of a product multiplied
by the excise tax rate per unit. The units can be based on weight, volume or any other unit of
measurement. Another tax on specific things is a tariff. A tariff is a tax imposed by one country
on specific products and services imported from another country. It's also called a customs duty.
Tariffs are trade barriers charged at the moment the product crosses the border. They're meant to
help domestic manufacturers by raising the prices of imports and reducing competition. The cost of a
tariff is equal to total units of a product multiplied by the tariff tax rate per unit.
Governments tax the stuff you earn and the stuff you buy but they also tax the stuff you own. Take
your house for example. Property tax is a direct tax on the ownership of land and buildings. It
tends to be charged by local governments to fund public services in the area. Things like
schools and libraries. Property tax is equal to the assessed value of a property multiplied by
the property tax rate. We can assess the value of a property by comparing it against the sale of
similar properties or calculating its replacement cost or taking its rental value. Jabba's Palace
sits on the Northern Dunes of Tatooine. If it has an assessed property value of 10 million credits
and the annual property tax rate on Tatooine is one percent then Jabba owes 100,000 credits in
property tax. Is property tax progressive? Sort of. On the one hand, people with lower incomes are less
likely to own property so they either don't pay property tax or they live in cheaper properties.
But on the other hand, the wealth of low-to-middle income homeowners can become heavily concentrated
in property and landlords can pass on their property taxes to tenants by raising the rent.
So perhaps property taxes are regressive... what do you think? Property tax is a type of wealth tax.
A wealth tax is a direct tax on the assets of individuals. We take net assets above a certain
threshold and multiply it by the wealth tax rate. An individual's net assets are their total assets
minus their total liabilities. The stuff they own minus the stuff they owe. If the wealth tax rate on
Tatooine is 0.5 percent how much wealth tax does Jabba owe? What are his net assets? This is where
things get tricky. Jabba has an enormous amount of wealth but is difficult and expensive to measure.
He doesn't just own property. He owns private companies and trusts all across the star system.
He also hires the very best tax experts to help him avoid paying it. In practice it can be difficult to implement a wealth tax.
Since you made it this far, I have one quick bonus tax for you: Inheritance tax. Inheritance tax is
a direct tax on inheritance received. It's one of the oldest taxes in the world, dating all the way
back to Roman times. When a person dies they pass on their assets and the recipient pays inheritance
tax when they receive them. We take inheritance received above a threshold and multiply it by
the inheritance tax rate. Inheritance tax is progressive since it targets people with a
high net worth, but there are often loopholes to avoid paying it. You might set up a family trust
or pass on gifts while you're still alive. You pay tax on everything! On the stuff you earn, the stuff
you buy and the stuff you own. Like I mentioned I've summarized all of the key points in my tax
basics cheat sheet. The link's in the description. I want to say a big thanks to all my channel
members you guys are the best and I appreciate your support. I'll see you in the next one!