What Are the 7 Main Types of Taxes People Pay?

Governments rely on taxation to provide public services and maintain infrastructure. Taxes are mandatory financial contributions levied by governmental authorities on individuals or entities to generate revenue. This revenue funds a wide array of public initiatives, including the construction and maintenance of roads, support for educational institutions, and national defense. Understanding the different categories of taxes is an important aspect of personal financial literacy, helping individuals understand their financial obligations and how their contributions support society.

Taxes on Earnings

Taxes on earnings encompass levies applied to income derived from various sources, such as wages, investments, and business profits. These taxes form a significant portion of government revenue and are typically structured to reflect an individual’s or company’s financial capacity.

Personal Income Tax

Personal income tax is a primary tax on an individual’s wages, salaries, investment returns, and other income. This tax is levied at the federal level, by most state governments, and some local jurisdictions. The federal income tax system in the United States is progressive, meaning that higher earners pay a larger percentage of their income in taxes through a system of tax brackets and marginal rates. Taxable income is generally calculated by subtracting allowable deductions from gross income.

Corporate Income Tax

Corporate income tax is a tax imposed on the profits of businesses. This tax applies to corporations and is levied by both federal and state governments. The federal corporate tax rate is a flat 21% as of January 2025. While businesses pay this tax, some economists suggest that the burden can also be borne by consumers through higher prices or by employees through lower wages.

Payroll Taxes

Payroll taxes are amounts withheld from an employee’s wages and paid by employers. These taxes primarily fund federal programs like Social Security and Medicare, providing benefits for retirement, disability, and healthcare. Both employees and employers contribute to these taxes. For Social Security, employees and employers each pay 6.2% on income up to an annual cap ($176,100 in 2025). For Medicare, each pays 1.45% on all earnings with no income limit, and an additional 0.9% applies to individual earnings exceeding $200,000, paid only by the employee.

Taxes on Spending

Taxes on spending are applied to the purchase of goods and services, affecting consumers directly at the point of sale or indirectly through embedded costs. These taxes contribute to state and local government revenues, supporting various public services.

Sales Tax

Sales tax is a tax added to the price of most goods and services purchased by consumers. This tax is typically imposed at the state and local levels, with rates varying significantly by jurisdiction. The seller collects the sales tax and then remits it to the taxing authority. Most states and the District of Columbia levy general sales taxes, though some states do not.

Excise Tax

Excise taxes are specialized taxes levied on specific goods or services, often included in the price of the item. Common examples include taxes on gasoline, tobacco products, and alcoholic beverages. These taxes can serve various purposes, such as discouraging certain behaviors or funding specific projects, such as highway improvements from fuel taxes. Excise taxes can be a fixed amount per unit or a percentage of the item’s value.

Taxes on Assets

Taxes on assets are levied on wealth or property, affecting both real estate and the transfer of significant wealth. These taxes often serve as a substantial revenue source for local governments.

Property Tax

Property tax is a tax imposed on real estate. This tax is typically levied by local governments, such as counties, cities, and school districts, and is a primary funding source for local services like public schools. The amount of property tax owed is generally based on the assessed value of the property, determined by a local assessor. The assessed value is multiplied by the local tax rate to calculate the tax bill.

Estate and Gift Taxes

Estate and gift taxes are taxes on the transfer of wealth, either upon a person’s death (estate tax) or during their lifetime (gift tax). These federal taxes generally apply only to large transfers of wealth due to high exemption thresholds. For 2025, the federal estate tax exemption is $13.99 million per individual, and the annual gift tax exclusion is $19,000 per recipient. If a gift exceeds the annual exclusion, the excess reduces the lifetime exemption amount, and gift tax is typically paid only if the total lifetime and estate transfers surpass the cumulative exemption.