What is tax and how is it calculated? A simplified guide to understanding tax systems in different countries
Taxes are one of the most important financial tools that governments rely on to fund public services such as education, health, infrastructure, and defense. Although they are imposed mandatorily on individuals and companies, tax systems and methods of calculation vary from one country to another.
In this article, we will answer the question: What is tax and how is it calculated? and review the main types and differences between tax systems around the world.
What is tax?
Definition: Tax is a mandatory financial amount collected by the government from individuals and companies in exchange for public services and economic development.
Objective: To fund the state budget, reduce social disparities, and encourage or restrict certain economic activities.
Main types of taxes
1. Direct taxes
Imposed directly on individuals or companies.
Examples: Income tax, corporate tax, property tax.
2. Indirect taxes
Imposed on goods and services when purchased.
Examples: Value-added tax (VAT), customs duties, sales tax.
How is tax calculated?
1. Income Tax
Calculation: A percentage of the individual's annual income.
Example: In the United States, taxes are progressive starting from 10% and reaching over 35% depending on the income level.
2. Corporate Tax
Calculation: A percentage of the company's profits after deducting expenses.
Example: In the UAE, a new corporate tax of 9% was implemented starting in 2023.
3. Value-Added Tax (VAT)
Calculation: A specific percentage on goods and services.
Example:
European Union: Between 17% and 25%.
Saudi Arabia and UAE: 15%.
4. Property Tax
Calculation: A percentage of the annual value of the property.
Example: In Canada and the USA, the percentage varies by state or province (approximately 1% of the home's value annually).
Tax systems in different countries
1. United States
Progressive system on individuals.
Income, sales, property taxes, and local fees.
2. Gulf countries (UAE, Saudi Arabia, Qatar)
No individual income tax.
Greater reliance on Value-Added Tax and customs duties.
Introduction of corporate taxes recently.
3. European Union
Relatively high taxes to fund a strong social welfare system.
Income tax reaching 40–50% in some countries.
Value-added tax between 17–25%.
4. Asia (Singapore, Hong Kong)
Low taxes to attract investment.
Singapore: Income tax ranges from 0–22%.
Hong Kong: Simplified tax system with a maximum individual income tax of 15%.
Why do taxes differ between countries?
Economic system: Capitalist vs. socialist.
Fiscal policy: Countries tend to reduce taxes to attract investment, while others increase them to fund social services.
Standard of living: High-income countries often impose higher taxes to cover services.
Conclusion
Tax is the backbone of government funding around the world. However, how tax is calculated clearly varies from country to country based on economic systems and fiscal policies. Understanding taxes helps individuals and companies plan their finances properly, whether they live in high-tax countries like Europe or low-tax ones like the Gulf and Asia.
