A tax is a charge that is paid by a person, firm or other legal entity to a government in order to fund public services.[1] Taxes are usually collected based on economic factors such as income levels or consumption habits. Some taxes are levied based on behaviour such as taxes on alcohol, smoking or pollution.[2] These taxes are often used to encourage or discourage certain behaviour like employing air pollution control devices.

Taxes come in a variety of different ways and apply to different areas:[3]

  • Excise tax- A tax levied on specific goods or services.
  • Income tax- A tax levied on the amount of income a person generates per annum.
  • Pigovian tax- A tax levied on activities in the market that cause negative externalities such as a carbon tax.
  • Sales tax- A tax levied based on ones consumption. This tax is levied when a good or service is purchased.
  • Value added tax- A value added tax or VAT is a consumption tax similar to a sales tax. A VAT is dependent on the difference between the price that a seller paid for a good and the resale price that a consumer buys the good or service for.
  • Property tax- A tax levied on the value of ones property.
  • Tariff- A tax levied on imported goods.


  1. J.Black, N. Hashimzade, and G. Myles. (2009) "Tax." [Online], Available:, 2009 [Aug 8, 2016]
  2. Investopedia. "Taxes." [Online], Available:[Aug 13, 2016].
  3. A. Goolsbee, S. Levitt and C. Syverson. ‘’Microeconomics’’. New York: Worth Publishers, 2013, pp. 90.

Authors and Editors

Lyndon G., Celeste Pomerantz, Jason Donev
Last updated: September 17, 2016
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