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Information sources: Wikipedia: «Taxation in the United States»; «Professional English in Use, Finance», Ian Mackenzie.

Q. - What is the purpose of taxation? Where do the taxes we pay go?

A. - Most of the governmental expenditure is financed by taxes. If governments overspend or spend more than they levy or charge in taxes, they need to borrow money to cover budget deficit.

Q. - What is meant by the term direct taxes and what types of direct taxes are there?

A. - The government collects direct taxes from the income of individuals and businesses. Direct taxes include: income tax, capital gains tax (CGT), capital transfer tax, corporation tax, national insurance (UK) or social tax (US).

· Individuals pay income tax on their wages or salaries (also called payroll tax), and most other money they receive.

· Most countries have a capital gains tax on profits made from the sale of assets such as stocks or shares. This is usually imposed or levied at a much lower rate than income tax.

· A capital transfer tax (colloquially called death duty in the UK, although no longer correct legally) is usually imposed on inheritance: property or money. It is also known as inheritance tax or estate tax. In fact, inheritance tax was introduced in the UK in 1986. It replaced capital transfer tax which had been in force since 1975 as a successor to estate duty. Capital transfer tax was re-branded inheritance tax (IHT).

· Companies pay corporation tax (BrE) or income tax (AmE) on their profits. Business profits are commonly taxed twice, because after the company pays tax on its profits, the shareholders pay income tax on any dividends received from these profits.

· Companies and their employees also pay taxes called national insurance (UK), or social tax (AmE), which the governments use to finance social security spending, such as unemployment benefits or sick pay.

Q. - What do indirect taxes embrace? What types of taxes do indirect taxes include and what are their specific features?

A. - Indirect taxes are levied on the production or sale of goods and services. Indirect taxes are included in the price for goods and services paid by the final purchaser.

· In most European countries companies pay VAT (value – added tax). VAT is levied at each stage of production and based on the value added to that product at that particular stage. The whole amount is then computed and added to the final price paid by the buyer.

· Sales taxes collected by retailers in the US are levied on the retail price of goods.

· Governments levy excise taxes or excise duties – additional sales taxes on commodities like tobacco products, alcoholic drinks and petrol to control trading in potentially harmful substances or cover expenses incurred by the use or abuse of such commodities (for instance payment for treatment of alcoholism).

· Special taxes, called tariffs, are often charged on goods imported from abroad.

Q. - What is the difference between progressive and proportional tax?

A. - Income tax for individuals is usually progressive, which means that people with higher incomes (higher tax bracket individuals) pay a higher rate of tax (a higher percentage of their income) than people with lower incomes. Indirect taxes such as sales tax and VAT are called proportional taxes, imposed at a fixed rate. Indirect taxes are actually regressive: people with a low income pay a proportionally greater part of their income than people with a high income.

Q. - What is meant by tax relief or tax benefits, and what is the difference between tax evasion and tax avoidance?

A. - To reduce the amount of income tax that employees are obliged to pay, some employers offer certain advantages to their staff instead of taxable money. These advantages are called benefits (or perks), such as company cars and free health insurance.

Multinational companies often register their head offices in the so-called tax havens (usually small countries where income taxes for foreign companies are low).

As to tax avoidance and tax evasion, one needs to register the important difference between the two. Using legal methods to minimize your tax burden (encumbrance) – the amount of tax you need to pay – is called tax avoidance. Tax avoidance often involves using loopholes – ways of getting around the law, because of an error or a technicality in the law itself. Using illegal methods – such as not declaring your income, or reporting it inaccurately – is called tax evasion and can lead to fines or penalties.

Q. - What are the main specific features of taxation in the United States?

A. - Taxation in the United States is a complex system which may involve payment to many different levels of government and many methods of taxation. United States taxation includes local government, possibly including one or more of municipal, township, district and county governments. It also includes regional entities such as school and utility as well as including state and federal government.

Tariffs were the largest source of federal revenue from the 1790s to the eve of World War I, until they were surpassed by income taxes.

The first federal statutes imposing the legal obligation to pay a federal income tax were adopted by Congress in 1861 and 1862 to pay for the Civil War.

At first the income tax was incrementally expanded by the Congress of the United States, and then inflation automatically raised most persons into tax brackets formerly reserved for the wealthy until income tax brackets were adjusted for inflation. Income tax now applies to almost two-thirds of the population. The lowest earning workers, especially those with dependents, pay no income taxes as a group and actually get a small subsidy from the federal government because of child credits and the Earned Income Tax Credit.

Some lower income individuals pay a proportionately higher share of payroll taxes for Social Security and Medicare than do some higher income individuals in terms of the effective tax rate.

The federal government collects several specific taxes in addition to the general income tax. Social Security and Medicare are large social support programs which are funded by taxes on personal earned income. Estate taxes are levied on inheritance. Net long-term capital gains as well as certain types of qualified dividend income are taxed preferentially.