Every April we have to go through filing federal income taxes, on our own or with the help Read this article of a tax accountant. Unless you happen to be a tax policy wonk, you probably don’t dwell too much on the theory and practice of taxation. While America’s tax code is notoriously complex, taxes break down into discrete categories that are easy to understand. However, to minimize how much taxes affect your finances, you may want to work with a financial advisor with tax planning expertise.
Income taxes do what the name implies. They tax the income you earn. Federal income taxes are both progressive and marginal. Marginal means that there are different tax rates for different income brackets. The top earners pay a high tax rate, but only on the amount of money they have in that top bracket.
So if you’re paying taxes for 2025 (filed in April 2026) and you have $50,000 in taxable income, you will pay 10% on the first $11,925; 12% on your income between $11,925 and $48,475; and 22% on income between $48,475 and $50,000. Since the highest income bracket for you has a rate of 22%, you would say that you’re in the 22% bracket. However, that doesn’t mean the government taxes all your income at 22%, as tax rates in the U.S. are marginal.
Consumption Tax
A consumption tax is a tax on the money people spend, not the money people earn. Sales taxes, which state and local governments use to raise revenue, are a type of consumption tax. An excise tax on a specific good, such as alcohol or gasoline, is another example of a consumption tax. Some economists and presidential candidates have proposed a federal consumption tax for the U.S. that could offset or replace taxes on capital gains and dividends.
Progressive Tax
This is a tax that is higher for taxpayers with more money. In a progressive tax system like the U.S. federal income tax, wealthy individuals pay tax at a higher rate than less wealthy individuals. This is why wealthy Americans are taxed more than middle-class Americans and middle-class Americans are taxed at a higher rate than working-class Americans.
Regressive Tax
A regressive tax is one that is not progressive. This could either mean that the tax is lower for wealthy individuals or that the tax is flat (everyone pays the same rate). Why is a flat tax regressive? People with lower incomes would feel the effect of a flat tax more strongly than people with higher incomes. To a multi-millionaire, a 15% tax wouldn’t translate to a substantial decrease in quality of life. To someone making $30,000 a year, a 15% tax would mean a serious dent in spending power.
Proportional Tax
A proportional tax is the same as a flat tax. Taxpayers at all income levels would pay the same “proportion” in taxes. As explained above, proportional taxes are regressive taxes. These types of taxes are common in state-level sales taxes but not common at the federal level. Anyone who remembers the 2012 presidential campaign will remember a famous proportional tax proposal, the 9-9-9 Plan. That plan was for a 9% business transaction tax, a 9% personal income tax and a 9% federal sales tax.
VAT or Ad Valorem Tax
Types of Taxes
The VAT tax is big in Europe but the U.S. has yet to adopt it. It’s a tax on the “added value” of a product, the difference between the sales price and the cost of producing a good or service. It’s a form of consumption tax that buyers pay when they make a purchase, similar to a sales tax.
So what’s the difference between sales tax and VAT? Sales tax is paid by the purchaser of a product. Only that final stage in the product’s life is subject to taxation. VAT, in contrast, is applied at each stage of the supply chain and then snowballed into the final purchase price. If you travel to a country with VAT you probably won’t notice you’re paying it because it is included in the prices you pay. Sales tax, on the other hand, is listed separately on receipts.
Property Tax
Property taxes are taxes you pay on homes, land or commercial real estate. If you’re deciding whether you can afford to buy a home, you should take property taxes into account. Unlike a mortgage, property tax payments don’t amortize. You have to keep paying them for as long as you live in a home – unless you qualify for property tax exemptions for seniors, veterans or disabled residents.
Capital Gains Taxes
Capital gains taxes apply to investment income after an investment is sold and a capital gain is realized. Because so many Americans don’t invest at all, they don’t pay capital gains taxes. There are also taxes on dividends and interests stemming from simple interest from a bank account or dividends and earnings from investments.
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