How many times are we taxed

When applied to profits earned from stocks, capital gains taxes result in the same dollar being taxed twice, also known as double taxation.

Sales taxes are a form of consumption tax levied on retail sales of goods and services. If you live in the U. All U. Sales tax rates can have a significant impact on where consumers choose to shop, but the sales tax base —what is and is not subject to sales tax—also matters. Tax experts recommend that sales taxes apply to all goods and services that consumers purchase but not to those that businesses purchase when producing their own goods.

This is a key difference from other taxes businesses pay, such as those based on profits or net income, like a corporate income tax, or final consumption, like a well-constructed sales tax.

GRTs are particularly harmful for startups, which post losses in early years, and businesses with long production chains. Despite being dismissed for decades as inefficient and unsound tax policy, policymakers have recently begun considering GRTs again as they seek new revenue streams. The final consumer, however, pays the VAT without being able to deduct the previously paid VAT, making it a tax on final consumption. This system ensures that only final consumption can be taxed under a VAT, avoiding tax pyramiding.

More than countries worldwide and all OECD countries except the United States levy a VAT, making it a significant revenue source and the most common form of consumption taxation globally.

Excise taxes are taxes imposed on a specific good or activity, usually in addition to a broad consumption tax, and comprise a relatively small and volatile share of total tax collections. Common examples of excise taxes include those on cigarettes, alcohol, soda, gasoline, and betting.

An externality is a harmful side effect or consequence not reflected in the cost of something. For instance, governments may place a special tax on cigarettes in hopes of reducing consumption and associated health-care costs, or an additional tax on carbon to curb pollution. Excise taxes can also be employed as user fees.

A good example of this is the gas tax. The figures correspond to OECD averages and all values are expressed as percentage of total taxation. These figures give us an idea of the evolution of the importance of different forms of commodity taxation in OECD countries. As we can see, the composition of consumption taxes has fundamentally changed in the OECD over the last few decades: the weight of consumption taxes has been stable, because the substantially increased importance of VAT has been effectively balanced by a reduction in importance of other taxes on specific goods and services, the bulk of which are excise taxes.

The visualization shows how value added tax rates compare between world regions. These figures come from the World Development Report , and include corporate tax rates as a benchmark. This visualization shows that value added tax rates are similar in developed and developing countries, which suggests that the differences we observe in revenue between regions, are likely due to differences in compliance.

In fact, this is not only specific to commodity taxation — Besley and Persson 13 show that developed countries tend to raise much more income-tax revenue than developing countries with comparable statutory rates, which suggests that the tax base in low-income countries is more strongly affected by compliance difficulties. In summary, the evidence suggests that fiscal capacity i. Most VAT systems around the world adopt multi-rate systems with one or more reduced rates applying to particular goods.

As can be seen, in most countries that use VAT exceptions, reduced rates tend to apply to basic products in which low-income households spend a larger share of their income such as food ; as well as to products with perceived positive social spillovers such as newspapers, books and medicines.

Many countries also use reduced rates for other reasons. From this chart, it seems like providing support to specific industries, such as tourism, is another important factor considered by governments. Taxes affect economic interactions by changing the relative prices of goods and services in the economy. This implies that, to assess who bears the burden of a tax, it is not sufficient to look at statutory tax rates. A similar argument can be made if the tax is levied on consumers, since in a market economy the tax will lower demand, and this will have a consequence also for producers.

The key point is that, in order to analyze the economic incidence of taxation in a market economy, we need to look beyond statutory tax rates. Below we provide concrete examples of how economists try to estimate the economic incidence of taxation. To do this, they make the following assumptions: i Taxes on earnings are borne by workers; ii Taxes on individual income are borne by the households that pay them; iii Taxes on corporate income are borne by individuals in proportion to their capital income; iv Taxes on consumption are borne by individuals in proportion to their consumption.

Based on these assumptions, the CBO calculates total tax contributions as a share of pre-tax income for different segments of the pre-tax income distribution. The visualization, plotting CBO estimates of average tax rates, shows that the federal tax system in the US has been generally progressive: those located higher in the ranking of incomes, pay a higher share of their income in taxes. Across time, we can also see that progressivity has not been constant — the period saw important reductions in tax rates for the rich, without comparable reductions for the poor.

The hike in tax rates towards the end corresponds primarily to significant changes in tax rules in The visualization above shows that, according to the estimates from the Congressional Budget Office , richer individuals in the US generally tend to bear a larger burden of taxation than the poor.

The next visualisation, from Piketty and Saez 19 shows estimated average tax rates in France, the US and the UK, at two points in time: and Notice that these are average rates i.

Again, we can see in these estimates that the systems in question are progressive — increasingly higher percentiles in the income distribution pay increasingly higher effective rates of taxation. However, the lines are much flatter in , which shows that the systems have become less progressive at the top: the average share of income paid by those at the very top of the income distribution has dropped substantially since This is important because, as the authors of the figure point out, over the same period pre-tax income inequality grew significantly: a few very rich individuals at the very top are accumulating an increasingly large share of national incomes.

An important point that should be kept in mind is that these estimates are not directly comparable to those from the Congressional Budget Office discussed above, because they do not take into account government transfers, and rely on different methodological assumptions — for example, they do not consider excise taxes but they do consider estate taxes.

For more details see Piketty and Saez We have already pointed out that rich countries tend to collect much higher tax revenues than poor countries. The visualization provides further evidence of the extent of this correlation.

The vertical axis measures GDP per capita after accounting for differences in purchasing power across countries , while the horizontal axis measures tax revenues as share of GDP. We can see that there is a strong positive correlation: richer countries tend to have higher tax revenues as a share of their GDP. And this is also true within world regions represented here with different colors. We argued above that the efficiency of tax collection is a strong predictor of cross-country differences in tax revenues — rich countries have more capacity to extract revenues.

As historical data shows, this capacity was largely possible because, throughout the 19th century and up until the first half of the 20th century, these countries found increasingly cheaper ways to collect taxes.

The visualization, from Lindert 21 , shows that the US and the UK saw steep declines in the administrative cost shares of indirect tax collection across the 19th century and the early 20th. As we can see, the cost of collections dropped, from over 4. Cross-country differences in tax revenues are linked to the capacity of countries to implement efficient tax collection systems.

Here we provide evidence suggesting that political factors — such as the extent of institutionalized constraints on the decision-making powers of policy makers — help shape the level and evolution of fiscal capacity of countries. The chart, from Besley and Persson 23 , plots the cross-country relationship between political institutions and tax revenues. The authors approximate the strength of political institutions by calculating the proportion of years since independence or since if independence is earlier that a country had strong constraints on the executive.

In essence, this variable aims to capture the extent to which accountability groups impose institutionalized constraints on the decision-making powers of policy makers. The scatter plot controls for baseline differences in GDP — that is, what we observe is the correlation between tax revenues and political institutions conditional on GDP levels.

As we can see, countries with strong executive constraints collect higher tax revenues, when income per capita is held constant, than do countries with weak executive constraints.

This hypothesis seems to be supported by raw correlations. The plot, from Benedek et al. It shows a broad negative association: between and , when foreign aid as a share of GDP was increasing, average tax revenue in relation to GDP decreased slightly.

This relationship cannot be interpreted causally, as there are many factors that simultaneously drive ODA flows and tax revenues. More complex econometric studies that try to account for further sources of bias find that there is no consistently significant relationship between aid and tax collection see Prichard 26 and the references therein for more details. One way to gauge the extent to which taxation redistributes resources between individuals in a country, is by looking at how the distributions of incomes change before and after taxes.

The visualization does this, showing the reduction of inequality that different OECD countries achieve through taxes and transfers. The estimates correspond to the percentage point reduction in inequality, as measured by changes in the Gini coefficients of income, before and after taxes and transfers.

The IDD provides further details regarding how these estimates are constructed. The data shows that across the 35 countries covered, taxes and transfers lower income inequality by around one-third on average equivalent to around 0. Generally speaking, countries that achieve the largest redistribution through taxes and transfers tend to be those with the lowest after-tax inequality.

While informative for the purpose of cross-country comparisons, these results have to be interpreted carefully, since the before-tax distribution of incomes is already the result of choices made by individuals who take taxes and transfers into consideration. Put simply, the before-tax distributions of incomes are likely to be different to the actual distributions of incomes that would be in place if there were no taxes or transfers. This can be clearly explained in the context of pensions: individuals receiving state pensions appear in the data as poor before transfers; but many of them would of course have private pensions if they lived in a country without state transfers.

The extent to which taxes affect behavior is discussed in more detail below. In market economies, consumers and producers change their behavior in response to taxes. If the sum starts getting larger, however, the IRS gets interested. If the money is designed for a specific purpose, like college tuition, giving the money directly to the institution can help avoid this tax. Many students think scholarships are tax free—and they are, as long as the funds pay for tuition, fees, books and supplies.

But some scholarships cover room and board as well, or subsidize travel expenses to attend a conference or other similar activities. Scholarship money used for that purpose is taxable , since it's not directly tied to the classroom. If you hit it big, then next year the venue will mail you a form. Every kid dreams of finding buried treasure in the backyard.

Property that comes into your possession after being lost or abandoned is subject to tax at its fair market value the first year it comes into your undisputed possession. This is true whether the prize comes in the form of cash or something else. For example, if your employer awards you a two-year lease on a car for winning a sales promotion, you will have to declare the value of the lease as income.

One tax hit that catches some filers unaware is debt cancellation. The lender will send you a for the money, and you will have to include it in your taxable income. You accept this as fair but stop and think for a minute. How many times can the IRS tax money from money that was already taxed?

This double taxation is repeated in many areas. Your parents worked hard and made some money and paid tax on every penny, yet when they die and leave that money to you, the IRS wants to tax it again. If your parents earned any of that money from dividends, the company that paid your parents paid tax, then your parents paid tax then you did again.

It has now been triple taxed. If you then leave any of that money to your kids they will tax it yet again. If we do some simple math, pass the money around enough times and the IRS will get almost every cent of what was earned by everyone.

Quite a racket if I do say so myself.