Understanding Taxes: Types and Economic Functions Explained

[00:00:00]Hey I’m the Mr. Beat dude Taxes.   Everyone just loves taxes. Oh they’re just  great. You work 60 hour weeks busting your   butt to pay the bills and feed the kids and then  the government just comes along and takes it.   Takes what you earned. Takes what you deserve. You know what?!? And taxation is theft!!!

[00:00:44]Ok, during that clip. I calmed  down a bit. I’m a changed man.   (sighs) Let’s just break down what taxes  are and why we have them first, ok?

[00:00:57]A tax is a required payment to the government.  You have to pay it. If you don’t, there will be   bad consequences and stuff. Now, why on earth  do we have to pay taxes? So the government   can pay for stuff. Now, remember, as I said in a  previous video, the purpose of the government is   to protect society. More specifically, to resolve  conflicts, defend a society from other societies,   or provide public services. That costs money,  and they need to get that money from somewhere.

[00:01:28]What are they going to do,   borrow tens of trillions of dollars  to pay for everything? Hahahahahahahha   but yeah seriously, they do that, too.

[00:01:40]Now remember, in a democratic society,  our tax dollars should ideally go where   we want them to go. Understandably, many  get upset when this does not happen.  https://www.youtube.com/watch?v=2t1zK24_8MU Regardless, let’s go through all the major types  of taxes that governments usually collect. And   Ok, first, let’s look at consumption  taxes, or taxes on the purchase of stuff.  Sales Taxes A sales tax is a tax on sales.   Yeah, since that definition didn’t help  you whatsoever, it’s a tax you pay when you   buy something. Usually, whoever is selling you  stuff can collect those sales taxes the moment you   purchase the stuff. That’s why when you buy  that hat for $9.99, you actually end up paying   $10.79 at the cash register. That additional  80 cents is the sales tax. It’s important to   note that this is on final goods, or goods  meant to be sold to your average consumer,   as opposed to intermediate goods, which  are goods bought to produce other goods.

[00:03:18]Nearly every country in the world  has some form of a sales tax. Now,   there are different types of sales taxes, like  turnover taxes, where there are taxes on the   sale of the aforementioned intermediate goods.  Or taxes on the sale of specific types of items,   like the wholesale sales tax, a tax on the  sales of wholesale goods before the goods   are sent to retailers. Or luxury taxes, taxes  on stuff not considered essential. But...that’s   enough about sales taxes. Let’s not  get into the weeds too much here.

[00:03:51]Value-added taxes A value-added tax, or VAT, is a tax on the price   of a good or service at every stage of production  or distribution. It’s similar to a sales tax,   but instead of just being applied to the stuff  sold to the consumer, it is applied repeatedly   at every point of sale at which value has been  added to the stuff. Let’s look at an example.   Say a farmer sells cotton to a textile producer.  The value has been increased after the textile   producer buys it, so a VAT is collected by the  farmer. Next, the textile producer sells fabric   to a hat maker. The value has once again been  increased after the hat maker buys the fabric,   so an additional VAT is collected by the textile  producer. And finally, the hat maker sells hats to   the hat store. The value has once again been  increased after the hat store buys the hats,   so yet an additional VAT is collected by the  hat maker. There is the total VAT collected.

[00:04:52]The vast majority of countries in the world  have a value-added tax, but a glaring exception   is the United States, which relies on sales taxes  instead. Governments often prefer the VAT over the   sales tax since it encourages more specialization  and discourages vertical integration,   which is when one company completely owns and  controls the supply chain. :coughs: Amazon Here’s two quick graphs to show you the basic  difference between a sales tax and a VAT.   Feel free to pause here and  stare at it for 48 seconds.

[00:05:27]Excise taxes An excise tax is any   tax on stuff made when it’s produced, as opposed  to when it’s sold. Now, up until recently when I   taught Economics to my high schoolers,  I gave them the wrong definition, and   I apologize for that. Please don’t be mad at me  bros. In my defense, most places online define   an excise tax the way I used to. Basically, a  tax on the sale of specific goods or services,   or on certain activities. I think the confusion  arises because excise taxes are often sin taxes,   or excise taxes placed on stuff that most  people view as harmful to society. Ya know,   stuff like cigarettes, alcohol, marijuana,  gambling, prostitution or even sugary beverages.

[00:06:21]But the main thing that makes an  excise tax, an excise tax, is that   businesses pay them, not consumers. Both excise  taxes and value-added taxes are often called   “indirect taxes” since consumers end up indirectly  paying them anyway because producers and retailers   will end up just raising their prices when  they have to pay excise and value-added taxes.

[00:06:46]Regardless, many folks are cool with excise taxes,  as long as they are sin taxes, because they think   if something is bad for you or society, then  it should be more expensive to discourage folks   from buying it. Take gas taxes. I’m currently  in Missouri, and I’m getting gas here because   it’s much cheaper than in Kansas. Why? Missouri  has lower per-gallon excise taxes on gasoline.

[00:07:16]So yeah, excise taxes are usually a fixed  amount for each unit of a good or service sold,   and governments also apply them  to a narrow range of goods.   Other common targets of excise taxes include  salt, paper, advertising, and coffee?

[00:07:36]Oh you BETTER not be taxing my coffee! So those are the three main consumption   taxes. Critics often say consumption taxes  are the most regressive form of taxation,   since folks who have the least amount of wealth  end up paying a larger portion of their wealth   in taxes than wealthier individuals do. One way  governments have attempted to solve the problem   of sales taxes being regressive is allowing sales  tax exemptions, meaning certain organizations   like schools or nonprofit hospitals don’t have to  pay sales taxes. Or, governments may make certain   goods sales tax exempt, like clothing, groceries,  and other stuff that’s important for survival.

[00:08:23]Next up are taxes on property!   Woohoo!

[00:08:31]Property taxes A property tax is a recurring tax   paid based on the value of the property  we own. Typically, it’s on real estate,   like land and buildings, but also personal  property like vehicles and equipment. At minimum,   we usually pay property taxes once a year, and  if the value goes up on our property...yay!...we   get to pay more property taxes. But  if the value goes down...yay!...we   get to pay LESS property taxes but...boo!...our  stuff is worth less so that sucks and stuff.   Governments may also collect property  taxes when the property changes owners.

[00:09:09]Oh, and by the way, property taxes are the single  biggest source of state and local revenue in   the United States, funding things like schools,  roads, the police, and other important services.

[00:09:21]Next up are taxes on assets. And in case you  forgot what assets are, they are anything of   value that can be converted into money. Estate taxes  An estate tax is a tax on your right to transfer  wealth at your death. It’s automatically taken   out of someone’s estate- eh, get it?- upon their  death. Typically, governments collect estate taxes   on estates with assets worth at least tens  of millions of dollars, so uh, most of you   watching this video right now won’t have to worry  about this one. Oh, and critics of estate taxes   often nickname them “death taxes,” which I think  is pretty effective use of language there buddy.

[00:10:04]Related to estate taxes are inheritance  taxes, which also revolve around the idea   that many have that if you’re getting  free money from a dead relative,   it’s ok for the government to take some of  it since you didn’t earn that inheritance,   amirite? Anyway, an inheritance tax is what the  beneficiary, or the person inheriting the wealth,   has to pay when they receive the inheritance. Wealth taxes  A wealth tax is a tax on a person’s total net  worth. To figure out a person’s net worth,   we look at the value of their  assets minus their debt. So like,   if they had $10 million in assets and $1 million  in debt, their net worth would be $9 million.

[00:10:49]I think my net worth is negative, by the way.

[00:10:52]Anyway, similar to property taxes, a wealth  tax is recurring, Wealth taxes are not that   common around the world. Some European  governments collect them once a year,   and Colombia and Argentina both have a wealth  tax. Apparently it has already raised billions   in Argentina, but European countries have  had less success raising money this way   since people have hid their assets or  taken their assets to other countries.

[00:11:18]And so, others favor taxes on earned wealth  in a given year, not accumulated wealth.  Income taxes This is probably   the tax that most of you complain about the most.  An income tax is a recurring tax on your income,   or the money you make. It’s the main reason  why your paycheck isn’t as high as it should   be. But it’s not just on wages or salaries.  It’s also on other forms of investments an   individual or household earns. Now, there  can be expenses and deductions that lower   the amount of income that is taxed, and  that’s why filing your income taxes can   get quite tricky to a point where many hire  someone to file their income taxes for them.

[00:12:03]The vast majority of income  taxes are “progressive,”   meaning tax rates increase as a person’s income  increases, meaning they end up paying a larger   percentage of income taxes than those who earn  less. Typically a progressive tax system has   tax brackets, so different portions of  your income are taxed at different rates.   The rate you pay on the last dollar you earn  is often higher than what you pay on the first   dollar you earn. Governments always start at  zero when calculating. In the United States,   there are currently seven different tax brackets  at rates of 10, 12, 22, 24, 32, 35, and 37. Most   Americans don’t ever have to worry about paying  more than 22% of the last dollar they earn.   Ok, enough of that. Some places  have a proportional income tax,   in which the tax rate is fixed, so you pay the  same percentage no matter what your income is.

[00:12:59]Now, if you are self-employed, you  often have to calculate your own   income and pay the government directly.  Employers often collect payroll taxes.

[00:13:09]So how do the richest citizens get  out of paying so much in income taxes?   By reporting a lower income of course! But  there’s another way to get their income.  Capital gains taxes A capital gains tax is a tax on the profit   on the sale of an asset. Often this is through  the sale of stocks, bonds, precious metals,   or cryptocurrency. Even antiques can be subject  to a capital gains tax if you make enough money   from them. The capital gains tax rate depends  on how much profit you gained in a given year.

[00:13:44]It is FAR more common than a wealth tax,  mostly since it’s easier to keep track of.   However, often wealthy folks just hold  on to assets...they don’t sell them,   so that’s why some argue a wealth tax  might be better to generate more money.

[00:14:00]A lot of folks ask me for money, probably since  they think I’m actually Mr. Beast, But what if I   were to give you $15,000? Now, I’d have to check  with Mrs. Beat to make sure it was ok first.  Gift taxes A gift tax is a tax   on money or property simply given to another  person. So it’s similar to an estate tax or   inheritance tax. Related to the gift tax is the  generation-skipping transfer tax, when someone   wants to give money or assets to a grandchild  or an unrelated person much younger than them.

[00:14:41]Wait a second, don’t corporations  earn income, too? Why yes they do.  Corporate Income Taxes A corporate income tax,   or simply corporate tax, is a tax on business  profits, which are revenues minus expenses.   Typically corporate tax rates are flat. The thing  about corporate taxes is that they indisputably   create tax havens. See all these countries? They  all have an effective 0% corporate tax rate,   which is why so many companies incorporate  headquarters in them to avoid paying taxes   on their annual profits. Here’s one example.  Back in 2017, Google shifted $23 billion to   tax haven Bermuda. So yeah, this is one big  reason why corporate taxes remain controversial.

[00:15:32]Oh, and how could I forget… Tariffs  Tariffs are taxes on stuff crossing an  international border. Ya know, imports   and exports. But mostly imports. Tariffs can be a  fixed percentage of the price or change according   to the price. Historically, tariffs have been  an important source of revenue for governments.

[00:16:02]The idea is that governments can both make money  and encourage production to stay domestic. A   win-win, right? Eh, not quite. Nearly every  economist out there argues tariffs have a negative   effect on economic growth and economic welfare,  and that free trade and the reduction of trade   barriers is the best way to grow an economy. That  said, free trade can lead to income inequality,   like we see around the world currently, so that’s  why many politicians have called for tariffs.

[00:16:35]In conclusion, there are MANY types of taxes  I haven’t even mentioned, but those are   the main types. But yeah, in general, there’s  three types of taxes. Taxes on what you buy,   taxes on what you own, and taxes  on what you earn. Now excuse me,   I got a letter from the IRS. Apparently I  owe them...seriously. I gotta go pay this.

[00:18:07]So, what’s YOUR favorite type  of tax? Or should I say, what’s   the type of tax you hate the least  amount? Let me know in the comments below.   Next week, the wildly successful YouTube series  Supreme Court Briefs makes its dramatic return.   Let’s see, what else. Oh, don’t forget to  follow me on TikTok and stuff. I’ve been   posting more on there lately. Ok, I think  that’s it for now. Thanks for watching!