What Are Taxes? Explained.

This article is a refresh of our old article here.

When it comes to money, there’s one thing no one can escape: taxes. It plays a major role in how governments fund essential services like healthcare, schools, and infrastructure. But what exactly are they, how do they work, and why do we pay them?

What Are Taxes?

Taxes are mandatory payments you make to your government so that you can enjoy the public service benefits such as roads, hospitals, police, education, and social programs.

If you live and work in a country, you are usually considered a tax resident, which means you are required to contribute to the tax system, yes that includes non-permanent resident or citizens. Each country has its own rules for determining tax residency, so it’s always best to check with your local tax authority like the IRD.

How Are Taxes Calculated?

Your taxes are generally based on your income. The more you earn, the higher your tax bill. That said, a big tax bill isn’t always bad per-se, it usually means you’re doing well financially!

Some key factors that determine how much tax you pay are:

• Income Level
  Salaries, business profits, and investment income are all taxable.
  
• Tax Deductions & Allowances
  These reduce your taxable income. For example, in Malaysia, individuals can claim deductions for medical expenses, education, or even supporting their parents. In New Zealand, deductions are more limited but include things like income protection insurance.

How Do You Pay Taxes?

Generally, in most countries if you earn a salary, your employer usually deducts taxes directly from your pay check before you even receive it. While self-employed folks will need to do some manual work by calculating your profits, declare your income, and file a tax return. Which one is preferred? That’s a question we have answered here.

This process varies depending on your country, but it typically involves submitting annual or quarterly tax forms to your local tax authority.

Why Are Taxes Important?

Taxes are not just a burden they’re what keep society running. Without taxes, there would be no public schools, no hospitals, no infrastructure, and no safety nets for those in need. Paying taxes ensures that everyone contributes to the community they live in.

They’re based on your income, can be reduced with deductions, and are either automatically withheld or filed manually depending on how you earn money.

Understanding taxes might not make it fun, but it makes them a lot less confusing and ensures you’re not leaving money (deductions) on the table.