Jose:'So the government takes tax from people's salary or wage, which is called income tax.'
Peter:'But it's not just your salary/wage that the government takes income tax from, it's from all of your income or earnings. So if you make money from stock/share dividends or renting a house or from the interest you receive from your savings in the bank, the government takes income tax from those as well.'
Jose:'Ok. I didn't know that. Are there any other taxes I have to pay from my salary?'
Peter:'Unfortunately, yes. Here in the US, the government also taxes your salary to pay for your pension with another tax called social security tax. Also, there is another tax which is used to pay for the free medical treatment which people get when they are 65 or over called Medicare tax or just Medicare. But unlike the social security tax, Medicare tax is taken from both a person's salary/wage and from the income they make from investments and savings (e.g. stock/share dividends, interest from savings etc...).'
Jose:'Like income tax?'
Jose:'So, apart from my salary and income being taxed, what other taxes do I have to pay?'
Peter:'You are also taxed when you buy things (like a computer, cookies, DVDs etc...) or use some types of services (like using a taxi or eating in a restaurant etc...). This tax is called sales tax. The percentage you pay in sales tax depends on both the state (or even the city/county) you are buying it in and the type of product or service it is (some products/service have different sales tax rates and in some states there is no sales tax on certain products).'
Jose:'So many taxes. I have also heard about direct taxes. What are those?'
Peter:'Direct tax is not actually the name of a tax, but a type of tax. Direct taxes are all taxes which comes directly from your income, earnings or you have to pay for owning assets (like owning a house). So, income tax is a type of direct tax, because the government takes money directly from your salary and income.
Taxes which are added to the price of products or services are called indirect taxes because the tax isn't taken directly from you. With this type of tax, you only pay it when you buy or sell things. An example of an indirect tax is the sales tax.'
Jose:'So for a company, the tax it pays on its profit. Is that a direct or indirect tax?'
Peter:'The tax on a company's profits is called corporate tax. And because the government takes the tax directly from the company, it's a direct tax.'
Jose:'Are there any other taxes which companies have to pay?'
Peter:'Yes, there are. Some companies have to pay a tax for each product or quantity of products they produce to be sold or sell. This tax is called excise tax.'
Jose:'Why only some companies?'
Peter:'Because the government only places an excise tax on some types of products. Here in America, there is an excise tax on the sale of tobacco, alcohol and gasoline, but not on food, books or clothes.'
Jose:'But isn't that the same as sales tax?'
Peter:'It's in addition to sales tax, it's like an extra sales tax on certain products.'
Jose:'What other types of taxes are there?'
Peter:'There are lots, but one of the most important is capital gains tax. This is a tax on any profit a person or a company makes from actually selling something they own. For example, if you sell your business or stocks and shares, the tax on the profit you make is called capital gains tax.'
Jose:'I heard that if somebody gives you money or property after they die, the government even taxes that!'
Peter:'Yes, they do. It's called estate tax. So it's better to give your children money or property before you die.'
Jose:'Don't you also have to pay tax if you import something (like a car or furniture) from another country?'
Peter:'From some countries you do. Governments tax products that are imported from another country or sometimes even exported to another country. These taxes are called customs duties or tariffs.'
Jose:'Are there any more taxes?'
Peter:'Lots more. There is also in tax you pay to the council of the city or county for owning a property (e.g. a house, office, shop, factory, land etc...). It's called property tax and you have to pay it every year. The higher the value of the property, the higher the amount of property tax you will have to pay.'
Jose:'And if you rent the property, do you have to pay property tax?'
Peter:'No, you don't here in America.'