Understanding Different Types of Taxation

Types of TaxationIndividuals and businesses around the world are subject to many different types of taxation systems. In some countries, including the United States, a significant portion of the total tax burden is levied by the federal government. However, provincial and other local authorities can also enforce additional taxes within their jurisdiction.

According to an article published by the International Monetary Fund, taxation is currently “the only practical means of raising the revenue to finance government spending on the goods and services that most of us demand.” The main principle of any tax policy is to generate sufficient funds to finance various government-sponsored programs and agencies. This includes military institutions, welfare funds and social security.

Taxation of Income

As of 2011, every member nation of the Organization for Economic Cooperation and Development (OECD), which includes all North American countries, most of Europe and parts of Asia, levies taxes on individuals and businesses based on their income. According to a 2006 OECD publication, there are three basic types of personal income tax systems: comprehensive, dual income and flat tax. These three structures serve as model archetypes rather than as functional tax systems. None of the OECD member countries have a taxation system that completely lines up with one of these three designs.

Comprehensive income tax systems enforce variable tax rates, which increase with the total income of the taxpayer. In contrast, a flat tax system levies a fixed tax rate on all individual income, regardless of how much money they made. A flat tax system increases the simplicity and transparency of taxation, according to the OECD publication, and reduces the government’s administrative and enforcement costs.

Dual income tax systems are hybrids of the comprehensive and flat rate types that are popular in some European countries, including Norway. According to the OECD, “The dual income tax system levies a proportional tax rate on all net income (capital, wage and pension income less deductions) combined with progressive rates on gross labor and pension income.” This taxation system combines a flat tax rate on personal income with an increasing tax rate on income generated directly from employment, like salary or wages.

Consumption Taxes

Consumption taxes are an increasingly appealing type of taxation for many governments, according to an OECD policy brief titled “Consumption Taxes: the Way of the Future?” Consumption taxes are levied on goods and services, common policies include value added tax (VAT), sales tax, excise tax and tariffs.

The majority of OECD member countries, including the United Kingdom, Germany and Australia, have instituted a VAT policy that is now an integral part of their taxation system. “The [VAT] is a major source of tax revenue for every industrialized country in the world except the United States,” according to a report published through The Heritage Foundation.

This type of taxation affects each stage of production and distribution, so the producers or providers must shoulder some of the tax burden.  Sales taxes are similar to VAT, but a sales tax is only levied once a consumer purchases the final good or service. Most state governments in the U.S. have a sales tax, but the federal government does not enforce a sales tax or VAT policy.

Excise duties and tariffs are other common types of consumption-based taxes, but they only apply to select products that meet certain criteria. According to the South African revenue service, “Excise duty is levied on certain locally manufactured goods as well as on their imported equivalents.” Products like tobacco, alcohol and vehicles are common subjects of excise taxes. Tariffs are specific taxes that apply to imported goods from foreign countries. They are often implemented to protect native businesses from international competition.

Other Taxes

Many types of taxation aren’t classified as either income-based or consumption taxes. These taxes may be specific to particularly industries or localities, and are not necessarily common throughout developed countries.

Property taxes provide a significant portion of provincial income in the United States. This tax is levied by state governments to finance local programs, including education and roadway maintenance. The amount of property tax varies significantly, even within the United States. This tax is often 1 to 2 percent of the property value, but some states have a much lower rate of a fraction of a percent.

Some city or regional jurisdictions may enforce unusual taxes that are not found elsewhere in a province or country. For example, the city of New York levies a commercial rent tax that only applies to commercial operations that rent space within a certain part of the city. According to the City of New York government website, this tax only affects tenants renting a location in Manhattan south of the center of 96th street.


  1. International Monetary Fund: “Tax Policy for Developing Countries.” Vito Tanzi et al. March 2001. http://www.imf.org/external/pubs/ft/issues/issues27/index.htm
  2. OECD: “Reforming Personal Income Tax.” March 2006. http://www.oecd.org/dataoecd/43/21/36346567.pdf
  3. OECD: “Consumption Taxes: the Way of the Future?” October 2007. http://www.oecd.org/dataoecd/45/6/39495382.pdf
  4. The Heritage Foundation: “The Value-Added Tax is Wrong for the United States.” Curtis Dubay. December 2010. http://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-states
  5. South African Revenue Service: “What Kinds of Taxes do We Pay.” http://www.sars.gov.za/home.asp?pid=289
  6. The City of New York: “Business and Excise Taxes: Commercial Rent Tax.” http://www.nyc.gov/html/dof/html/business/business_tax_rent.shtml
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Understanding Different Types of Taxation