Tax system in United States of America

In world 2 types of taxes are levied on citizens, Direct Taxes and Indirect Taxes. Impact of direct tax is born by tax payer and indirect taxes are though paid by someone else but ultimate impact is on consumer.

United States of America (USA) have both direct and indirect tax system. Mainly federal government levies most of direct taxes and indirect taxes are collected by states and local authorities.

Direct Tax in USA

Direct tax system is one where impact and liability is born by taxpayer. For example Tax on Income is a direct tax. Individual or corporations pay Income tax on income earned.

In USA following major direct taxes are levied:

  • Income Tax
  • Wealth Tax
  • Estate and Gift Tax
  • Capital Gain Tax
  • Payroll Tax
  • Property Tax

Income Tax is collected on income of individuals, corporation, trusts and legal persons. Wealth Tax is collected on wealth. Gift tax is levied on gift incomes. Capital gain tax is collected on capital gains.

Payroll Tax is paid by employers on wages. Property tax is mostly at local city level and collected on property.

Indirect Tax in USA

Indirect Tax system is one in which impact of tax and liability of tax is born by different persons. For example, sales tax is collected by seller from customer and paid to government. In this case though tax is paid to government by seller but final impact is on consumer.

In USA 2 major indirect taxes levied are:

  • Sales Tax
  • Excise Tax

Sales tax is imposed on sales of goods and services. Sales Tax world wide is also called Goods and Services Tax (GST). In most of the cases Sales Tax is levied and governed at state level.

Excise Tax is collected on manufacturing of goods. Excise tax is governed and levied both at state level and federal level.

Updated: March 31, 2020

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