Income Tax vs. Sales Tax: What’s the Difference?
The difference between income tax and U.S. sales tax lies in what is being taxed and how it is collected. Here’s a simple breakdown:
1. What is Being Taxed
- Income Tax:
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- A tax on the money you earn from jobs, businesses, investments, or other sources.
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- It’s based on your income level and is usually progressive, meaning higher earners pay a larger percentage.
- Sales Tax:
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- A tax on the goods and services you buy.
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- It’s based on the purchase price and is the same percentage for everyone (flat rate).
2. Who Pays the Tax
- Income Tax: Paid by individuals or businesses based on their earnings.
- Sales Tax: Paid by consumers when they make purchases.
3. Who Collects the Tax
- Income Tax:
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- Collected by the federal government and, in many states, by state governments.
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- Employers often withhold income tax from paychecks and send it to the government.
- Sales Tax:
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- Collected by businesses at the time of sale and sent to state or local governments.
4. How the Rate Works
- Income Tax:
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- Rates vary based on income level, filing status, and location. Federal rates range widely, and many states have their own rates.
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- Deductions and credits can reduce the amount owed.
- Sales Tax:
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- A flat percentage applied to the selling price of goods and services.
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- Rates vary by state, and local taxes may be added (e.g., 4% to over 10% in some areas).
5. What It Funds
- Income Tax: Funds federal and state programs like defense, education, healthcare, and infrastructure.
- Sales Tax: Primarily funds state and local services like schools, roads, and public safety.
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