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Glossary of Tax Terms

Income Taxes:
These are taxes on income, both earned income (salaries, wages, tips, dividends if you hold stock). Individuals and businesses are subject to income taxes.

Business Taxes:
Businesses pay taxes to federal, state, and local governments. Businesses pay taxes on their profits. Businesses also pay unemployment insurance, workers compensation, Social Security and Medicare insurance.

Consumption Tax:
A consumption tax is a tax on the purchase of goods and services. The tax base for a consumption tax will consist of the daily purchases of goods and services, purchases made by millions of Americans. A consumption tax does away with complicated tax laws and tax loopholes for special interest groups, and it makes American products more competitive overseas, thereby boosting the American economy.

Direct Tax:
A direct tax cannot be shifted to others (unlike an indirect tax). A good example of a direct tax is the federal income tax. You have to pay it.

Effective tax rate:
The effective tax rate is the amount of taxes paid divided by either the tax base or some expanded, comprehensive, "loophole-free" measure of what an "ideal" tax base might be. In current policy analyses, the effective tax rate is usually income taxes paid divided by some measure of income. The measure of income can vary quite considerably. Sales tax paid divided by taxable sales would be the effective tax rate under the FairTax.

Excise Tax:
An excise tax is a tax on the sale or use of certain products or transactions. So every time you make a telephone call, buy a plane ticket, or ride in a car (to name but a few), you are paying an excise tax.

FICA (Federal Insurance Contribution Act):
The Federal Insurance Contributions Act (FICA) consists of both a Social Security (retirement) payroll tax and a Medicare (hospital insurance) tax. The tax is levied on employers, employees, and certain self-employed individuals.

Flat Tax:
A flat income tax is a tax on income. The tax base for a flat tax is the income of millions of Americans as well as American companies. But a flat tax allows Congress once again to make the tax laws complex. The flat tax also retains the corporate income tax, which makes American products more expensive overseas.

Income Taxes:
These are taxes on income, both earned income (salaries, wages, tips, dividends if you hold stock) and unearned income. Individuals and businesses are subject to income taxes.

Indirect Tax:
This is the type of tax that can be shifted to others — hence the name. For example: A company might have to pay a specific tax to the government, let's say a fuel tax. The company pays the tax, but can then increases the cost of its products so consumers are actually paying the tax indirectly by paying more for the company's products.

Local Taxes:
In addition to federal and state taxes, your local town or city may also need tax money to operate services such as garbage pick-up, water treatment, and street-cleaning.

Marginal tax rate:
The marginal tax rate is the amount of taxes paid on the next dollar of the tax base. In current policy analyses, the marginal tax rate is usually the income taxes that will be paid on the next dollar earned. Sometimes, Payroll taxes are considered as well (as they should be). The marginal tax rate is the most relevant tax rate when making economic analysis about the impact of a tax system on decisions about working, saving and investing because the marginal tax rate is what the tax will be on the activity the taxpayer is thinking about undertaking. For example, a worker considering whether to work overtime or to take a second job will be most concerned about what percentage of the extra money he will earn will be taken in taxes.

Payroll Taxes:
Your employer deducts a certain amount from your paycheck to pay for taxes.

Progressive Tax:
This type of tax takes a larger percentage from high-income groups than from low-income groups.

Property Tax:
It's likely you've landed on "property tax" when playing Monopoly. In real life, people pay taxes on property, including real estate, boat, cars, recreational vehicles, and business inventories.

Regressive Tax:
This type of tax takes a smaller percentage from high-income groups than from low-income groups.

Revenue Neutral:
Revenue neutral tax legislation is legislation that will not change the overall revenues collected by the government.

Sales Taxes:
Depending on the state you live in, you pay an extra percentage of sales tax for items purchased. A sales tax is like a consumption tax.

State Taxes:
There are all kinds of taxes that are used to finance all sorts of state programs. [Some of our money goes to the federal government, which pays for services like interstate highways, the armed forces, the F.B.I., and a lot more. Your state [also] needs money for schools, roads, and law enforcement.

Tariff Duty (Customs Duty or Import Duty):
Ever travel abroad and do a little duty-free shopping at the airport? You're buying tax-free products. When you buy that same product at your corner store (assuming it's not a duty-free shop), you're paying a tariff duty or tax on the product.

Tax Base:
The tax base is what is taxed. The tax base times the tax rate equals the tax owed. In an income tax, the tax base is taxable income. In a sales tax, the tax base is taxable sales.

Tax inclusive:
The income tax and payroll tax are tax-inclusive taxes because they are imposed not only on the money you actually receive, but also on the taxes that are withheld from your paycheck. Take a person that earns $100, pays $20 in tax and spends $80 in the store. In a tax-inclusive system like the income tax, we would say that the tax rate was 20 percent because $20 divided by $100 is 20 percent. In a tax-exclusive system like many state sales taxes, we would say that the tax rate was 25 percent because $20 divided by $80 is 25 percent.

Tax exclusive:
Most state sales taxes are tax exclusive because they are imposed only on the amount that you pay to the store before taxes (i.e., exclusive of taxes). Take a person that earns $100, pays $20 in tax and spends $80 in the store. In a tax exclusive system like many state sales taxes, we would say that the tax rate was 25 percent because $20 divided by $80 is 25 percent. In a tax inclusive system like the income tax, we would say that the tax rate was 20 percent because $20 divided by $100 is 20 percent.

Tax Liability (or total tax bill):
Tax liability is the total amount of tax that a person must pay. Taxpayers pay this through withholdings, estimated tax payments, and payments attached to their yearly tax forms.

Tax Shift:
When a person or group is able to shift a tax that they're supposed to pay to someone else.

Transaction Taxes:
The sale of all goods and services have transaction taxes (yet in Texas the sale of food and Bibles is not taxed). These taxes can be a set percentage of a sale value, or a set amount of a physical quantity.

Withholding ("Pay-as-you-earn" taxation): Your employer takes out a certain amount from your check to pay the government taxes.