In fiscal governance and public finance, the terminologies used to describe various forms of financial charges imposed by governments can be confusing or are easy to misunderstand. In this article let us talk about the difference between a tax and levy, their roles, applications and implication.
Before we begin, it is also important to understand that, the terminology and usage of taxes and levies can be different from one jurisdiction to another, and the distinctions listed below may not apply universally in all cases. Always refer to specific legal and regulatory contexts when discussing taxes and levies in a particular region.
What is a levy?
A levy is a government-authorized collection of funds or assets from individuals, businesses or entities to fulfill financial obligations or support public initiatives. It is essentially a form of taxation, but it can also refer to the act of enforcing the collection of these funds or assets. Levies are established and regulated by laws, regulations or statutes at various levels of government.
Levies are important in funding essential services, infrastructure projects, social programs and addressing specific economic, environmental or societal needs. The process involves establishing the levy’s purpose, determining the liable parties, assessing the amount owed, notifying taxpayers, collecting payments and implementing enforcement measures when necessary.
Types of Levies
Levies can take many forms depending on the purpose and scope of the collection.
- Tax Levies: Taxes imposed on income, property, sales or other economic activities.
- Property Levies: These levies specifically target real estate or property.
- Asset Levies: Usually imposed on specific assets such as financial assets like stocks, bonds, and bank accounts.
- Import and Export Levies: They are imposed on imports (import duties) and exports (export duties) so as to protect domestic industries or influence trade relations.
- Environmental Levies: These levies are designed to address environmental concerns, such as pollution or carbon emissions.
- Emergency Levies: In times of natural disasters or emergencies, governments may impose temporary levies to raise funds for disaster relief and recovery efforts.
What is a Tax?
A tax is a compulsory financial charge imposed by a government on individuals, businesses or other entities in order to fund public expenditures and government activities. Taxes are a primary source of revenue for governments at various levels (local, regional, national). Taxes are used to fund public services and programs such as infrastructure development, education, healthcare, defense, social welfare and more.
Taxes are collected based on certain criteria such as income, wealth, consumption, property ownership, or specific transactions. The specific rules and rates of taxation are different depending on the jurisdiction and the type of tax being levied.
Types of Taxes
Other than funding government activities and public services, taxes can also be imposed with the aim of redistributing wealth and achieving economic and social objectives. Some common types of taxes include:
- Income Tax: A tax levied on an individual’s or business’s earnings. It is usually based on a percentage of their total income.
- Sales Tax: A tax imposed on the purchase of goods and services, calculated as a percentage of the purchase price.
- Property Tax: A tax on the value of real estate or other property owned by individuals or businesses.
- Corporate Tax: A tax on the profits of corporations or businesses.
- Value Added Tax (VAT): A consumption tax levied on the value added to a product at each stage of production or distribution.
- Excise Tax: A tax on specific goods, such as alcohol, tobacco, fuel, and luxury items.
- Capital Gains Tax: A tax on the profits earned from the sale of certain assets, such as stocks, bonds, real estate, and other investments.
- Estate Tax and Inheritance Tax: Taxes levied on the transfer of wealth from one generation to another, either through inheritance or gifts.
Difference Between a tax and a levy
Purpose and Usage
- Taxes are primarily revenue-raising measures imposed by governments to fund public expenditures, such as infrastructure, public services, and social programs.
- A levy is a specific type of tax that is imposed for a particular purpose, often earmarked for a specific project or service. It is used to fund a specific government initiative, such as a new road or a public facility.
General vs. Specific
- Taxes are generally broader in scope and apply to a wide range of activities, transactions, or income sources within the jurisdiction.
- Levies are narrower in scope and are usually imposed on specific activities, assets, or transactions. They are often more targeted and limited in their application.
Rate and Calculation
- Taxes can have different rates and may be calculated based on factors such as income, property value, or consumption.
- Levies often have a fixed rate or a specific calculation method directly tied to the purpose for which they are imposed. For example, a levy on gasoline may be a fixed amount per gallon.
Duration
- Taxes are ongoing and can be collected over an indefinite period to sustain government operations.
- Levies are often temporary and are collected for a predetermined period or until a specific funding goal is achieved. Once the goal is met, the levy may expire.
Public Approval
- Taxes are usually established through legislative processes, and while public input may be considered, they are generally not subject to direct public approval.
- Some levies, especially those that require an increase in taxes or the introduction of new charges, may require voter approval through referendums or other forms of public consent.
Flexibility
- Taxes provide governments with greater flexibility in allocating funds across various programs and services according to changing priorities.
- Levies often come with stricter restrictions on how funds can be used, as they are earmarked for specific purposes. This reduces the government’s ability to reallocate funds as needed.