The New Tax Slab – 2021
Taxation is the allocation of funds from the tax revenues to the different public sector bodies or the individual taxpayers. The taxation system includes income, property, value-added taxes (VATs), indirect taxes (such as customs, Excise duties, and Value-added Tax) and direct taxes (such as income tax, corporate tax and personal income tax). A tax is an ordered financial burden or any kind of levy charged on a citizen by a governmental agency in order to finance government expenditure and various public welfare programs. There are various kinds of taxes: progressive, proportional, regressive, absolute and local. A person paying tax has to pay not only for the actual amount of tax but also for the form of tax he or she paid.
Progressive Tax Systems The basic principle of progressive taxation is that a person pays depending upon his income level. A graduated system thus allows people of all income levels to contribute equally to the tax revenues. There are various types of progressive tax systems in modern countries. Some examples include the Federal Income Tax System, the National Minimum Wage System, the Estate Tax System and the Social Security System. A flat tax system allows tax credits to be claimed by individuals at source and the benefits to be enjoyed are equal to the incomes before tax.
Regressive Tax Systems The principle behind the regressive tax system is that taxes are levied on earnings or salary and not on property or wealth. In broad terms, it implies that the more you earn the lower your tax liability will be. The basic definition of a regressive tax is the one that levies a tax when earnings or salary are earned and the same is not levied when the same is not earned again. Examples of regressive taxes are Sales Tax, Estate Tax and Property Tax.
Absolute Tax Systems If you think that paying taxes has become too much hassle then you should pay income tax according to absolute means. This system of taxation was introduced in the year 1932 and it applies to all incomes above minimum wage earner. It does not allow tax deductions or any other opportunities for individuals to reduce their tax burden. It basically means that you have no room to dodge taxes because the rate will shoot up every year according to your earnings. Some of the states in the US follow absolute tax system while some others do not.
Hybrid Systems There are hybrid systems of income tax where a portion of the total income is deducted from the salary prior to deduction of other income taxes. This means that the individual pays for income tax even while working. Some hybrid systems of income tax slabs have been adopted in the states of Tennessee and Oklahoma though the federal government does not allow such a system. California is another state that has not adopted a hybrid system of tax slabs but pays the full amount to the liable individual irrespective of his income. The full payment of income tax however does not go into the hand of the liable individual.
If you are a retired person or have a small business and are afraid that the old tax regime might affect you then you can choose to pay the full amount as you would have earned over the last 40 years. There are many persons who avoid paying income tax because they think that they would be taxed heavily after retirement or at a younger age if they decide to save. The best way to retain the benefits of the pension plan and retain the tax free allowance is to save the amount that would be required in future years.