Tax: essence,base,and the types of tax rate

A tax is a compulsory payment levied on the persons or companies to meet the expenditure incurred on conferring common benefits upon the people of a country.

The tax structure of an economy depends on its tax base, tax rate, and how the tax rate varies. The tax base is the amount to which a tax rate is applied. The tax rate is the percentage of the tax base that must be paid in taxes. To calculate most taxes, it is necessary to know the tax base and the tax rate.

A regressive tax is one that is inversely proportional to income — the lower the income, the higher the tax in relation to income. Most regressive taxes are assessed on products and services in which the tax is a percentage of the cost of the product or service.

A progressive tax applies a higher tax rate to higher incomes. So if the tax rate on $50,000 is 10% and 20% for $100,000, then, continuing the above example, Bill still owes $5,000 in taxes while Jane will have to pay $20,000 in taxes. However, almost all progressive taxes are structured as a marginal tax, which means that the progressive tax rate is only applied to that part of the income which is greater than a certain amount. The portion of the tax base that is subject to a particular tax rate, known as a tax bracket, always has lower and upper limits, except for the top tax bracket, which has no upper limit.

Direct and portfolio investment

Foreign investors can have myriad motivations for seeking to earn profits in another country. But they have fundamentally two core choices when deciding how to deploy their capital.

They can make a portfolio investment, buying stocks or bonds, say, often with the idea of making a short-term speculative financial gain without becoming actively engaged in the day-to-day running of the enterprise in which they invest.

Or they can choose the long-haul, hands-on approach—investing in an enterprise in another economy with the objective of gaining control or exerting significant influence over management of the firm (which usually involves a stake of at least 10 percent of a company’s stock). In the most extreme case, investors may build new facilities from scratch, maintaining full control over operations.

It is the intent of lasting interest that is the crucial component of direct investment. A portfolio investor can sell a stock or bond quickly—whether to cement a gain or avoid a loss. Most corporations entering a foreign market through direct investment expect to substantially influence or control the management of the enterprise over the long haul.