Ad valorem tax
An ad valorem tax is a tax whose amount is based on the value of a transaction or of a property. It is typically imposed at the time of a transaction, as in the case of a sales tax or value-added tax. An ad valorem tax may also be imposed annually, as in the case of a real or personal property tax, or in connection with another significant event. In some countries, a stamp duty is imposed as an ad valorem tax.
Operation
All ad valorem taxes are collected according to the determined value of the taxed item. In the most common application of ad valorem taxes, namely municipal property taxes, public tax assessors regularly assess the property owner's real estate in order to determine its current value.The determined value of the property is used to calculate the annual tax collected by the municipality or any other government entity upon the property owner. Ad valorem taxes are based on real property ownership and can therefore be compared with transaction taxes. Ad valorem tax is determined and collected every year, while a transaction tax is only levied at the time of the transaction.
Collection
Municipalities usually collect property ad valorem taxes, but they are levied also by government entities; examples are counties, school districts, or special taxation zones, also known as special purpose zones. Many entities can collect ad valorem taxes from the property owners; for example, a city and a county. Ad valorem property taxes are usually the main source of income for state and municipal governments. Municipal property ad valorem taxes are often referred to as "property taxes".Tax value
Generally, starting from January 1 of each year, the tax assessment used to determine ad valorem taxes is calculated. Ad valorem tax as a percentage of the value of the assessed property, usually the fair market value of the property. Fair market price refers to the estimated selling price of the property. It is assumed that both willing buyers and sellers have the willingness to trade, and both parties have a reasonable understanding of all relevant facts about the property, and both parties are not obliged to complete the transaction. Fair market value can be seen as just a reasonable price.Examples
There are different ad valorem taxes and they are based in some cases on the ownership of real assets, or alternatively they can be "transactional taxes", e.g. sales tax. Property taxes usually are determined and collected with annual incidence, while transactional taxes take place at the time when the transaction occurs.Land value tax
With land value taxes, which are a form of ad valorem tax, just the value of the land itself is taxed. Buildings, personal property and any kind of decoration are ignored by the following tax. LVT is different from other real estate taxes. Practically speaking, every jurisdiction collecting real estate property tax includes a land value tax, since land value has a meaningful impact on the overall property value. In 1879, Henry George published Progress and Poverty, by which he advocated a flat tax on lands based on the original unimproved value of the latters in their natural state, the "land value tax". George believed this tax was sufficient to support all government programs, being substantially a "single tax".The idea was, instead of taxing labor and capital, to tax the rent of land and natural opportunities, in order to regain the rent for public use. He pointed out that, in general, taxation will stifle production behavior: he thought that incomes taxation reduces people's motivation to earn an income, taxation of wheat reduces wheat production, and so on. However, taxing the value of unimproved land has different effects: it's possible to distinguish two different sources of value for a land, the natural value of the land and the value created by improving it. Since the value of unacquired land is not earned, neither land value nor land value tax will affect production behavior.
Sales tax
A sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax is usually set as a percentage by the government charging the tax. There is usually a list of exemptions. The tax can be included in the price or added at the point of sale.Ideally, a sales tax is fair, has a high compliance rate, is difficult to avoid, is charged every time an item is sold retail, and is simple to calculate and simple to collect. A conventional or retail sales tax attempts to achieve this by charging the tax only on the final end user, unlike a gross receipts tax levied on the intermediate business which purchases materials for production or ordinary operating expenses prior to delivering a service or product to the marketplace. This prevents so-called tax "cascading" or "pyramiding", in which an item is taxed more than once as it makes its way from production to final retail sale. There are several types of sales taxes: seller or vendor taxes, consumer excise taxes, retail transaction taxes, or value-added taxes.
Value-added tax
A value-added tax, or goods and services tax, is a tax on exchanges. It is levied on the added value that results from each exchange. It differs from a sales tax because a sales tax is levied on the total value of the exchange. For this reason, a VAT is neutral with respect to the number of passages that there are between the producer and the final consumer. A VAT is an indirect tax, in that the tax is collected from someone other than the person who actually bears the cost of the tax. To avoid double taxation on final consumption, exports are usually not subject to VAT, and the VAT charged under such circumstances is usually refundable.History
The origin of the value-added tax is a debatable topic. It is variously ascribed to either German businessman Wilhelm von Siemens in 1918, or American economist Thomas S. Adams in his works between the years 1910-1921. Adams intended the VAT as a substitute for the business income tax and meant it not as an appendix to the federal income tax system in existence at the time but as its major alternative. In contrast the innovators in Germany thought of the VAT as a substitution for an already existing sales tax and as an adjunct to the tax on income.Firstly VAT was introduced in France in 1954, but its usage was limited only to several cases. First full-scale VAT was put in place in Denmark in 1967. The spread of VAT was helped by the fact that European Union began to require members to adopt the VAT upon their entrance to the EU. Major influences in the spread of VAT outside of the EU are generally attributed to the IMF and the World Bank. Ironically the United States, who to this day do not have the VAT, promoted the tax largely in their post WWII occupation of Japan as well as in their advisory activities to developing economies.
Property tax
A property tax, millage tax is an ad valorem tax that an owner of real estate or other property pays on the value of the property being taxed. Ad valorem property taxes are collected by local government departments on real property or personal property. Ad valorem property taxes are usually a main, if not the main, source of income for state and municipal governments. Municipal ad valorem property tax is often referred to as "property tax" for short. The owner of the property should pay this tax based on the value of the property.Ad valorem taxes refer to goods or property taxes seen as a percentage of the sales price or estimated value. They belong to the assessed value range. There are three species or types of property: Land, Improvements to Land, and Personal.
Real estate, real property or realty are all terms for the combination of land and improvements. The taxing authority requires and/or performs an appraisal of the monetary value of the property, and tax is assessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions. Usually, ad valorem taxes are calculated as a percentage of the estimated value of the considered property.
The estimated value of a property usually refers to the annual determination of the fair market value. "Fair market value" is generally defined as the price that willing buyers are willing to pay and the price of property that willing sellers are willing to accept, and neither price is forced to buy or sell.
It is also considered as the price at which a property changes hands between a potential buyer and a potential seller when both parties have reliable knowledge of all necessary facts and do not require buying or selling. Most tax authorities require regular inspections of the subject matter during the evaluation process and decide evaluation measures to determine fair market value.
Though, there is no uniform tax base that applies to all places. In some countries, property taxes are based on the value of the property depending on market value, site value, rental value. In different countries, taxes are calculated on building area and property area – called unit value. These methods can also be used in combination.
History
Property taxes have existed since the first ancient civilizations such as Mesopotamia, Babylon, Persia and China. Ancient Greece and ancient Rome also had various property taxes. One of the earliest well documented ad valorem taxes known in Europe is the Danegeld – a land-tax first imposed in 1012 in Britain to pay off Viking raiders. The amount of tax collected was based on the value of the taxpayer's property – usually measured by a local unit to determine the size of the land. Since the Danegeld became in time too complicated to collect, it was later replaced by Carucage, also a tax based on the size of land owned by the taxpayer.Application of a sales or property tax
United States
Ad valorem duties are important to those importing goods into the United States because the amount of duty owed is often based on the value of the imported commodity. Ad valorem taxes are a major source of revenues for state and municipal governments, especially in jurisdictions that do not employ a personal income tax. Virtually all state and local sales taxes in the United States are ad valorem.Ad valorem is used most frequently to refer to the value placed on property by the county tax assessors. An assessment is made against this value by applying an assessment rate. The net assessment is determined after subtracting any exemptions to which the property owner is entitled, and a tax or millage rate is applied to this net assessment to determine the ad valorem tax due from the property owner.
The two main basis for determining the ad valorem value are fair market value and current use value. The fair market value is based on the typical selling price for property on which the buyer and seller can agree, with the assumption that the property is being used or will be used at its highest and best use after the sale. The current use value is the typical selling price for property with an assumption that it will continue after the sale to be used in its current use rather than being converted to its highest and best use. State legislatures have created many variations to these two main valuation approaches.
In some states, a central appraisal authority establishes values on all properties and distributes these to the local county or jurisdiction taxing authority, which then sets a tax rate and imposes the local ad valorem tax. In other states, a central appraisal authority values certain properties that are difficult to value at the local level and sends these values to the local county or jurisdiction taxing authority, while the local tax assessors determine the value on all other property in the county or jurisdiction.
"Ad valorem" tax, most frequently referred to as property tax, relates to the tax that results when the net assessed value of a property is multiplied times the millage rate applicable to that property. This millage rate is usually expressed as a multiple of 1/1000 of a dollar. Thus the fractional amount of 0.001 will be expressed as 1 mill when expressed as an ad valorem tax millage rate.
The tax determined from multiplying the ad valorem assessment times the ad valorem tax rate is typically collected by the tax collector or tax commissioner.