Types of Income Tax

Posted on December 31, 2020 by Guy Atkinson

A tax is any mandatory financial burden or any sort of tax levied on a person by a government agency in order to finance various public functions and government spending. Evasion of or disobedience to tax, and punishment for failure to pay is usually punishable by severe law. The amount of tax depends largely on the form of income, and its tax liability is usually determined by calculating the total income, after all allowances are taken. The rate of tax normally increases with the increase in taxable income. This rate may also be determined by certain facts such as residence, age and marital status of the taxpayer, among others.

One of the two forms of income tax that we have in Canada is the progressive tax system, which is regressive in nature. In this system, income gains are tax-free immediately, and capital gains are tax-deductible gradually, until they reach a certain level, which is called the threshold. When an individual reaches the threshold, his income is subjected to a regressive tax system, in which he would pay income taxes every two weeks based on the prior year’s income. As in the case of the progressive tax system, exemptions are available to people with disabilities, but the rates of taxation are higher.

A high-income earners’ tax credit allows them to keep more of their income for consumption, rather than contributing it to the state. With this feature, the high-income earners’ tax credit encourages saving, which in turn, creates more jobs for the needy. Also, since the credits are refundable, there is a minimal loss of revenue for the government. Despite the availability of the credits for high-income earners, the flat tax system still applies, with proportional taxes being applied to all incomes.

There are three different types of regressive taxes: regressive income taxes, capital gains taxes, and personal income taxes. The regressive tax system favors high-income earners by taxing the amount of money they earn as opposed to the value of their assets. These taxes are collected from the salaries and wages of these individuals. Capital gains tax and personal income tax are regressive in nature because they both depend on the amount of capital gained or lost. The third type, personal property taxes, are not regressive and have been in existence for ages, although with today’s volatile tax markets, property taxes may become regressive over time.

Progressive taxation is based on how much income or wealth a person has and is calculated according to its distribution. Individual income taxes, corporate income taxes, and estate taxes are examples of progressive taxes. Because progressive taxation requires equal payments each month, it is called “progressive” because after the person’s taxes have been taken, there is no left over for the government. In contrast, regressive taxes require the payment of a higher percentage of a person’s income or wealth before deductions are made for their taxes.

High-income earners may choose to pay a high-income tax rate or a proportional tax. A high-income tax rate usually starts at a high rate and gradually decreases. If a person keeps all his money in a savings account and doesn’t spend it, he won’t owe any tax to the government. A proportional tax takes away a portion of the amount a high-income-earning person earns before giving it to the government.

Some high-income earners to opt for both high-rate and progressive taxation. Some countries have hybrid systems of both progressive and regressive sales tax. In Canada for example, the personal income tax rate is proportional to the annual income of the individual, while sales tax is fixed and has no upper limit. There are also hybrid systems with mixed regressive/progressive tax rates.

Estate taxes are imposed by states and municipalities. The federal income tax system is basically a combination of state and municipal sales taxes. The corporate tax structure depends on the classification of income of the company’s owners and if the business is a sole proprietorship, partnership, limited liability or C corporation.

Tip of the Day

Time management for Finance Professionals

time management


I’ve just re-read Richard Denny’s fantastic book ‘Selling to Win’, in which he mentions a time management technique that I learnt many, many years ago from an old boss of mine.


  • Stay-ad

    Support This Site