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A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example, tribes, secessionist movements or revolutionary movements). Taxes could also be imposed by a subnational entity. Taxes consist of direct tax or indirect tax, and may be paid in money or as corvée labor. A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government a payment exacted by legislative authority." A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name."

In modern capitalist taxation systems, taxes are levied in money, but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated in politics and economics. Tax collection is performed by a government agency such as Revenue Canada, the Internal Revenue Service (IRS) in the United States, or Her Majesty's Revenue and Customs (HMRC) in the UK. When taxes are not fully paid, civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration) may be imposed on the non-paying entity or individual.

Purposes and effects

Funds provided by taxation have been used by states and their functional equivalents throughout history to carry out many functions. Some of these include expenditures on war, the enforcement of law and public order, protection of property, economic infrastructure (roads, legal tender, enforcement of contracts, etc.), public works, social engineering, and the operation of government itself. Most modern governments also use taxes to fund welfare and public services. These services can include education systems, health care systems, pensions for the elderly, unemployment benefits, and public transportation. Energy, water and waste management systems are also common public utilities. Colonial and moderning states have also used cash taxes to draw or force reluctant subsistence producers into cash economies.

Governments use different kinds of taxes and vary the tax rates. This is done to distribute the tax burden among individuals or classes of the population involved in taxable activities, such as business, or to redistribute resources between individuals or classes in the population. Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor, the disabled, or the retired by taxes on those who are still working. In addition, taxes are applied to fund foreign and military aid, to influence the macroeconomic performance of the economy (the government's strategy for doing this is called its fiscal policy - see also tax exemption), or to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less attractive.

The resource collected from the public through taxation is always greater than the amount which can be used by the government. The difference is called compliance cost, and includes for example the labour cost and other expenses incurred in complying with tax laws and rules. The collection of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism rehabilitation centres, is called hypothecation. This practice is often disliked by finance ministers, since it reduces their freedom of action. Some economic theorists consider the concept to be intellectually dishonest since (in reality) money is fungible. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general fund. In some cases, such taxes are collected in fundamentally inefficient ways, for example highway tolls.

Some economists, especially neo-classical economists, argue that all taxation creates market distortion and results in economic inefficiency. They have therefore sought to identify the kind of tax system that would minimize this distortion. Also, one of every government's most fundamental duties is to administer possession and use of land in the geographic area over which it is sovereign, and it is considered economically efficient for government to recover for public purposes the additional value it creates by providing this unique service.

Since governments also resolve commercial disputes, especially in countries with common law, similar arguments are sometimes used to justify a sales tax or value added tax. Others (e.g. libertarians) argue that most or all forms of taxes are immoral due to their involuntary (and therefore eventually coercive/violent) nature. The most extreme anti-tax view is anarcho-capitalism, in which the provision of all social services should be a matter of voluntary private contracts.

Proportional, progressive, and regressive

An important feature of tax systems is the percentage of the tax burden as it relates to income or consumption. The terms progressive, regressive, and proportional are used to describe the way the rate progresses from low to high, from high to low, or proportionally. The terms can be applied to any type of tax. A progressive tax is a tax imposed so that the tax rate increases as the amount to which the rate is applied increases. The opposite of a progressive tax is a regressive tax, where the tax rate decreases as the amount to which the rate is applied increases. In between is a proportional tax, where the tax rate is fixed as the amount to which the rate is applied increases. Progressive taxes reduce the tax incidence of people with smaller incomes, as they shift the incidence disproportionately to those with higher incomes. Regressive taxes reduce the tax incidence of people with higher incomes, as they shift the incidence disproportionately to those with smaller incomes.

Direct and indirect

Taxes are sometimes referred to as direct tax or indirect tax. The meaning of these terms can vary in different contexts, which can sometimes lead to confusion. In economics, direct taxes refer to those taxes that are collected from the people or organizations on whom they are ostensibly imposed. For example, income taxes are collected from the person who earns the income. By contrast, indirect taxes are collected from someone other than the person ostensibly responsible for paying the taxes. In law, the terms may have different meanings. In U.S. constitutional law, for instance, direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership. Indirect taxes are imposed on rights, privileges, and activities. Thus, a tax on the sale of property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax. The distinction can be subtle between direct and indirect taxation, but can be important under the law.

Until 1913, the United States Constitution required that all direct taxes be apportioned according to population; that is, if one state had twice the population of another state, then the direct tax revenue from that state had to be exactly twice that from the other state. In 1895, the US Supreme Court interpreted the income tax as a direct tax when applied to income from property, and struck down the tax as a result. The ruling did not affect the status of income taxes on income from personal services, which continued to be classified as an excise, or indirect tax, not required to be apportioned. However, the Court ruled the entire income tax law invalid, including the tax on income from personal services, reasoning that Congress had not anticipated that only part of that particular law would be deemed enforceable. The U.S. federal government then had no income tax until the Sixteenth Amendment, which removed the apportionment requirement for income taxes (whether considered direct or indirect). The apportionment requirement under the U.S. Constitution remains for other direct taxes, such as taxes on property by reason of ownership.

Tax burden

Law establishes from whom a tax is collected. In many countries, taxes are imposed on business (such as corporate taxes or portions of payroll taxes). However, who ultimately pays the tax (the tax "burden") is determined by the marketplace as taxes become embedded into production costs. Depending on how quantities supplied and demanded vary with price (the "elasticities" of supply and demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the buyer (in the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will be paid by the supplier. If the elasticity of demand is low, more will be paid by the customer. And contrariwise for the cases where those elasticities are high. If the seller is a competitive firm, the tax burden flows back to the factors of production depending on the elasticities thereof; this includes workers (in the form of lower wages), capital investors (in the form of loss to shareholders), landowners (in the form of lower rents) and entrepreneurs (in the form of lower wages of superintendence).

To illustrate this relationship, suppose the market price of a product is US$1.00, and that a $0.50 tax is imposed on the product that, by law, is to be collected from the seller. If the product is a luxury (in the economic sense of the term), a greater portion of the tax will be absorbed by the seller. For example, the seller might drop the price of the product to $0.70 so that, after adding in the tax, the buyer pays a total of $1.20, or $0.20 more than he did before the $0.50 tax was imposed. In this example, the buyer has paid $0.20 of the $0.50 tax (in the form of a post-tax price) and the seller has paid the remaining $0.30 (in the form of a lower pre-tax price).

Morality

Under some political views, activities funded by taxes can be beneficial to society and progressive taxation can be used in modern countries to provide an overall benefit to the majority of the population and social justice. Because payment of tax is compulsory and enforced by the police and justice system through what some libertarians view as institutionalized violence, libertarians consider taxation to be equivalent to theft, accusing the government of levying taxes via coercive means. Libertarians, individual anarchists, and anarcho-capitalists, see taxation as government aggression (see Zero Aggression Principle). The libertarian writer Jason C. Reeher echoed the sentiments of Murray Rothbard on these grounds; in criticizing his local school district's relatively small property tax increase, Reeher said that "(t)he thief who steals the least is still a thief." Some libertarians recommend a minimal level of taxation in order to maximize the protection of liberty, while others prefer market alternatives such as private defense agencies and arbitration agencies or voluntary contributions.

One counter-argument is that because the government is the party performing the act of imposing taxes, and assuming the existence of a democracy, society as a whole decides how the tax system should be organised. The American Revolution's "No taxation without representation" slogan implied this view. The same argument could be made in a monarchy: "since the King embodies the nation, the nation as a whole decides how the tax system should be organised." Substituting the terms "Politburo," "Führer," or "Leader," etc., for the word "King," one can describe the politics of most of the 20th century. Under this view, taxes are paid individually and therefore, to be considered voluntary, in any meaningful way, should be levied only with the consent of the individual.

According to methodological individualism, "society as a whole" should not make such decisions. Under this view, the moral stature of an act, such as slavery or theft is not contingent upon its legality or popularity. Thomas Jefferson argued that, "A direct democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine." Several justifications are offered for taxation. Taxation of business is justified on the grounds that business necessarily involves use of publicly established and maintained economic infrastructure, and that businesses are in effect charged for this use. Compulsory taxation of individuals, such as income tax, is justified on similar grounds, including territorial sovereignty, and the social contract. Libertarians argue that government services used by people are either already paid for directly or are services that ought to be provided by a free market. Such taxes, they argue, are a way for the rulers to exploit the people.

History

Taxation levels

The first known system of taxation was in Ancient Egypt around 3000 BC - 2800 BC in the first dynasty of the Old Kingdom. Records from the time document that the pharaoh would conduct a biennial tour of the kingdom, collecting tax revenues from the people. Early taxation is also described in the Bible. In Genesis (chapter 47, verse 24 - the New International Version), it states "But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children." Joseph was telling the people of Egypt how to divide their crop, providing a portion to the Pharaoh. A share (20%) of the crop was the tax. While not money, the idea is the same.

Quite a few records of the government tax collection in Europe since at least the 17th century are still available today. But the taxation levels are hard to compare to the size and flow of the economy since production numbers are not as readily available. The government expenditures and revenue in France during the 17th century went from about 24.30 million livres in 1600-10 to about 126.86 million livres in 1650-59 to about 117.99 million livres in 1700-10 when the government debt had reached 1.6 billion livres. In 1780-89 it reached 421.50 million livres. The taxation as a percentage of production of final goods may have reached 15% - 20% during the 17th century in places like France, the Netherlands, and Scandinavia. During the war-filled years of the eighteenth and early nineteenth century, tax rates in Europe increased dramatically as war became more expensive and governments became more centralized and adept at gathering taxes. This increase was greatest in England, Peter Mathias and Patrick O'Brien found that the tax burden increased by 85% over this period. Another study confirmed this number, finding that per capita tax revenues had grown almost six-fold over the eighteenth century, but that steady economic growth had made the real burden on each individual only double over this period before the industrial revolution. Average tax rates were higher in Britain than France the years before the French Revolution, twice in per capita income comparison, but they were mostly placed on international trade. In France, the taxes were lower but the burden was mainly on landowners, individuals, and internal trade and thus created far more resentment.

Taxation as a percentage of GDP in 2003 was 56.1% in Denmark, 54.5% in France, 49.0% in the Euro area, 42.6% in the United Kingdom, 35.7% in the United States, 35.2% in The Republic of Ireland, and among all OECD members an average of 40.7%.

Forms of taxation

In monetary economies prior to fiat banking, a critical form of taxation was seigniorage, the tax on the creation of money.

Other obsolete forms of taxation include:

• Scutage - paid in lieu of military service; strictly speaking a commutation of a non-tax obligation rather than a tax as such, but functioning as a tax in practice
• Tallage - a tax on feudal dependents
• Tithe - a tax, or more precisely a tax-like payment (one tenth of one's earnings or agricultural produce), paid to the Church (and thus too specific to be a tax in strict technical terms even though appearing as one to the payer)
• Aids - During feudal times Aids was a type of tax or due paid by a vassal to his lord.
• Danegeld - medieval land tax originally raised to pay off raiding Danes and later used to fund military expenditures.
• Carucate - tax which replaced the danegeld in England.
• Tax Farming - the principle of assigning the responsibility for tax revenue collection to private citizens or groups.

Some principalities taxed windows, doors, or cabinets to reduce consumption of imported glass and hardware. Armoires, hutches, and wardrobes were employed to evade taxes on doors and cabinets. In extraordinary circumstances, taxes are also used to enforce public policy like congestion charge (to cut road traffic and encourage public transport) in London. In Tsarist Russia, taxes were clamped on beards. Today, one of the most complicated taxation-systems worldwide is in Germany. Three quarters of the world's taxation-literature refers to the German system. There are 118 laws, 185 forms, and 96,000 regulations, spending €3.7 billion to collect the income tax. Today, governments of advanced economies of EU, North America, and others rely more on direct taxes, while those of developing economies of India, Africa, and others rely more on indirect taxes.

Tax rates

Taxes are most often levied as a percentage, called the tax rate. An important distinction when talking about tax rates is to distinguish between the marginal rate and the effective (average) rate. The effective rate is the total tax paid divided by the total amount the tax is paid on, while the marginal rate is the rate paid on the next dollar of income earned. For example, if income is taxed on a formula of 5% from US$0 up to $50,000, 10% from $50,000 to $100,000, and 15% over $100,000, a taxpayer with income of $175,000 would pay a total of $18,750 in taxes.

Tax calculation

((0.05*50,000) + (0.10*50,000) + (0.15*75,000)) = 18,750

The "effective rate" would be 10.7%:

(18,750/175,000) = 0.107

The "marginal rate" would be 15%.

An ad valorem tax is one where the tax base is the value of a good, service, or property. Sales taxes, tariffs, property taxes, inheritance taxes, and value added taxes are different types of ad valorem tax. An ad valorem tax is typically imposed at the time of a transaction (sales tax or value added tax (VAT)) but it may be imposed on an annual basis (property tax) or in connection with another significant event (inheritance tax or tariffs). An alternative to ad valorem taxation is an excise tax, where the tax base is the quantity of something, regardless of its price. For example, in the United Kingdom, a tax is collected on the sale of alcoholic drinks that is calculated by volume and beverage type, rather than the price of the drink.

Economics of taxing a good

Figure 1 indicates a good in a free market. This good could represent anything from apples to zippers. At this equilibrium quantity, Q1 units of the good are sold at price P1. Social surplus, here equal to the consumer surplus plus the producer surplus, is maximized (assuming that there are no externalities).

Figure 2 shows a marginal tax on production of a good. The tax charges a fee whenever a producer wishes to produce an extra unit of the good or, in the case of transaction taxes, when a consumer receives a good. When a marginal tax is placed on production, the market price will rise to P2, and since fewer consumers wish to purchase the good at the higher price, the quantity produced falls to Q2. The government receives the amount of the tax for each unit sold, amounting to the region shown in grey. This is the revenue the government receives for this tax. The social surplus is now the consumer surplus plus the producer surplus plus the government revenue.

Note that in this situation, where price elasticities of demand and supply are equal, the price of the good that consumers face (the market price) only increases by half the amount of the tax, the other half of the tax is borne by the producer. Thus both consumer and producer surpluses shrink by equal amounts. This property occurs infrequently. Who bears the cost of the tax is determined by the price elasticities of the demand and supply of the good. For goods with inelastic demands (at least in the short-run) like cigarettes, and gasoline almost all of the tax is paid by the consumer. Alternatively, for goods with inelastic supply curves, like event tickets where seats remain fixed, the producer bears almost all, if not all, of the tax. For a more indepth discussion on who bears the burden of taxation, see tax incidence.

In addition to administrative costs, there are effects on economic efficiency that can result due to marginal taxes, in the form of a loss in social surplus (shown in orange). This loss is often called deadweight loss which is a loss created because potential trades (in the amount of Q1-Q2) are not executed. The deadweight loss is proportional to the square of the tax rate. Thus if the tax rate is doubled, the deadweight loss will quadruple. This means a small tax on a broad tax base (sales tax) would normally be more efficient, or result in less deadweight loss, than a large tax rate on a narrow tax base (taxing a particular good heavily).

For the purposes of calculating the magnitude of deadweight loss, it is important to realize that taxes are cumulative. For example, if an individual faced a 10% state income tax and a 30% federal income tax, this should be analyzed as one 40% tax, not two separate taxes. The deadweight loss is proportional to the square of 40 (1600) , not the square of 10 plus the square of 30 (1000). The practical effect is that small tax increases can lead to large increases in deadweight loss if the cumulative tax rates are already high.

Types of taxes

The Organisation for Economic Co-operation and Development (OECD) publishes perhaps the most comprehensive analysis of worldwide tax systems. In order to do this it has created a comprehensive categorisation of all taxes in all regimes which it covers:

Capital gains tax

A capital gains tax is the tax levied on the profit released upon the sale of a capital asset. In many cases, the amount of a capital gain is treated as income and subject to the marginal rate of income tax. However, in an inflationary environment, capital gains may be to some extent illusory: if prices in general have doubled in five years, then selling an asset for twice the price it was purchased for five years earlier represents no gain at all. Partly to compensate for such changes in the value of money over time, some jurisdictions, such as the United States, give a favorable capital gains tax rate based on the length of holding. European jurisdictions have a similar rate reduction to nil on certain property transactions that qualify for the participation exemption. In Canada, 50% of the gain is taxable income. In India, Short Term Capital Gains Tax (arising before 1 year) is 10% flat rate of the gains and Long Term Capital Gains Tax is nil for stocks & mutual fund units held 1 year or more and 20% for any other assests held 3 years or more. If such a tax is levied on inherited property, it can act as a de facto probate or inheritance tax.

Corporation tax

Corporate tax refers to a direct tax levied by various jurisdictions on the profits made by companies or associations and often includes capital gains of a company. Earnings are generally considered gross revenue less expenses. Corporate expenses that relate to capital expenditures are usually deducted in full (for example, trucks are fully deductable in the Canadian tax system, while a corporate sports car is only partly deductable). They are often deducted over the useful life of the asset purchase. Generally, industrialized countries also use a regressive rate of tax upon corporate income.

See also: Excess profits tax, Windfall profits tax

Excises

Unlike an ad valorem, an excise is not a function of the value of the product being taxed. Excise taxes are based on the quantity, not the value, of product purchased. For example, in the United States, the Federal government imposes an excise tax of 18.4 cents per US gallon (4.86¢/L) of gasoline, while state governments levy an additional 8 to 28 cents per US gallon. Excises on particular commodities are frequently hypothecated. For example, a fuel excise (use tax) is often used to pay for public transportation, especially roads and bridges and for the protection of the environment. A special form of hypothecation arises where an excise is used to compensate a party to a transaction for alleged uncontrollable abuse; for example, a blank media tax is a tax on recordable media such as CD-Rs, whose proceeds are typically allocated to copyright holders. Critics charge that such taxes blindly tax those who make legitimate and illegitimate usages of the products; for instance, a person or corporation using CD-R's for data archival should not have to subsidize the producers of popular music.

Excises (or exemptions from them) are also used to modify consumption patterns (social engineering). For example, a high excise is used to discourage alcohol consumption, relative to other goods. This may be combined with hypothecation if the proceeds are then used to pay for the costs of treating illness caused by alcohol abuse. Similar taxes may exist on tobacco, pornography, etc., and they may be collectively referred to as "sin taxes". A carbon tax is a tax on the consumption of carbon-based non-renewable fuels, such as petrol, diesel-fuel, jet fuels, and natural gas. The object is to reduce the release of carbon into the atmosphere. In the United Kingdom, vehicle excise duty is an annual tax on vehicle ownership.

Income tax

An income tax is a tax levied on the financial income of persons, corporations, or other legal entities. Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate tax, corporate income tax, or corporation tax. Individual income taxes often tax the total income of the individual (with some deductions permitted), while corporate income taxes often tax net income (the difference between gross receipts, expenses, and additional write-offs).

The "tax net" refers to the types of payment that are taxed, which included personal earnings (wages), capital gains, and business income. The rates for different types of income may vary and some may not be taxed at all. Capital gains may be taxed when realized (e.g. when shares are sold) or when incurred (e.g. when shares appreciate in value). Business income may only be taxed if it is significant or based on the manner in which it is paid. Some types of income, such as interest on bank savings, may be considered as personal earnings (similar to wages) or as a realized property gain (similar to selling shares). In some tax systems, personal earnings may be strictly defined where labor, skill, or investment is required (e.g. wages); in others, they may be defined broadly to include windfalls (e.g. gambling wins).

Personal income tax is often collected on a pay-as-you-earn basis, with small corrections made soon after the end of the tax year. These corrections take one of two forms: payments to the government, for taxpayers who have not paid enough during the tax year; and tax refunds from the government for those who have overpaid. Income tax systems will often have deductions available that lessen the total tax liability by reducing total taxable income. They may allow losses from one type of income to be counted against another. For example, a loss on the stock market may be deducted against taxes paid on wages. Other tax systems may isolate the loss, such that business losses can only be deducted against business tax by carrying forward the loss to later tax years.

Inheritance tax

Inheritance tax, estate tax, and death tax or duty are the names given to various taxes which arise on the death of an individual. In United States tax law, there is a distinction between an estate tax and an inheritance tax: the former taxes the personal representatives of the deceased, while the latter taxes the beneficiaries of the estate. However, this distinction does not apply in other jurisdictions; for example, if using this terminology UK inheritance tax would be an estate tax.

See also: Allodial, Pigovian tax, Estate tax (United States), Inheritance Tax (United Kingdom).

Poll tax

A poll tax, also called a per capita tax, or capitation tax, is a tax that levies a set amount per individual. One of the earliest taxes mentioned in the Bible of a half-shekel per annum from each adult Jew (Ex. 30:11-16) was a form of poll tax. Poll taxes are administratively cheap because they are easy to compute and collect and difficult to cheat. Economists have considered poll taxes economically efficient because people are presumed to be in fixed supply. However, poll taxes are very unpopular because they are strongly regressive (poorer people pay a higher proportion of their income than richer people). In addition, the supply of people is in fact not fixed over time: on average, couples will choose to have fewer children if a poll tax is imposed. The introduction of a poll tax in medieval England was the primary cause of the 1381 Peasants' Revolt, and in England and Wales in 1990 the change from a progressive local taxation based on property values to a single-rate form of taxation regardless of ability to pay (the Community Charge, but more popularly referred to as the Poll Tax) was instrumental in the demise of the then Prime Minister Margaret Thatcher.

Property tax

A property tax is a tax imposed on property by reason of its ownership. A property tax is usually levied on the value of property owned, usually real estate. Property taxes may be charged on a recurrent basis (e.g., yearly). A common type of property tax is an annual charge on the ownership of real estate, where the tax base is the supposed value of the property. For a period of over 150 years from 1695 a window tax was levied in England, with the result that you can still see listed buildings with windows bricked up in order to save their owner's money. A similar tax on hearths existed in France and elsewhere, with similar results. The two most common type of event driven property taxes are stamp duty, charged upon change of ownership, and inheritance tax, which is imposed in many countries on the estates of the deceased.

In contrast with a tax on buildings, a land value tax is levied only on the unimproved value of the land ("land" in this instance may mean either the economic term, i.e., all natural resources, or the natural resources associated with specific areas of the earth's surface: "lots" or "land parcels"). Land tax has long been recognised as the only tax which does not distort market relations or carry an excess burden. This holds true only as long as the tax does not exceed the land's economic rent. Some political economists claim that because land is not the product of labour, is in fixed supply, and because its value is publicly created and not the result of any activity of the owner, it should be the only tax base. See Georgism. When real estate is held by a higher government unit or some other entity not subject to taxation by the local government, the taxing authority may receive a payment in lieu of taxes to compensate it for some or all of the foregone tax revenue.

In many jurisdictions (including many American states), there is a general tax levied periodically on residents who own personal property within the jurisdiction. Vehicle and boat registration fees are subsets of this kind of tax. Usually, the tax is designed with blanket coverage but with large exceptions for obvious things like food and clothing. Household goods are exempt as long as they are kept or used within the household. However, any otherwise non-exempt object can lose its exemption if regularly kept outside the household. Thus, tax collectors often monitor newspaper articles for stories about wealthy people who have lent art to museums for public display, because the artworks have then become subject to personal property tax. And if an artwork had to be sent to another state for some touch-ups, it may have become subject to personal property tax in that state as well.

Retirement tax

Some countries with social security systems, which provide income to retired workers, fund those systems with specific dedicated taxes. These often differ from comprehensive income taxes in that they are levied only on specific sources of income, generally wages and salary (in which case they are called payroll taxes). A further difference is that the total amount of the taxes paid by or on behalf of a worker is typically considered in the calculation of the retirement benefits to which that worker is entitled. Examples of retirement taxes include the FICA tax, a payroll tax that is collected from employers and employees in the United States to fund the country's Social Security system; and the National Insurance Contributions (NICs) collected from employers and employees in the United Kingdom to fund the country's national insurance system.

These taxes are sometimes regressive in their immediate effect. For example, in the United States, each worker, whatever his or her income, pays at the same rate up to a specified cap, but income over the cap is not taxed. A further regressive feature is that such taxes often exclude investment earnings and other forms of income that are more likely to be received by the wealthy. The regressive effect is somewhat offset, however, by the eventual benefit payments, which typically replace a higher percentage of a lower-paid worker's pre-retirement income.

Sales tax

Sales taxes are a form of excise levied when a commodity is sold to its final consumer. Retail organizations contend that such taxes discourage retail sales. The question of whether they are generally progressive or regressive is a subject of much current debate. People with higher incomes spend a lower proportion of them, so a flat-rate sales tax will tend to be regressive. It is therefore common to exempt food, utilities and other necessities from sales taxes, since poor people spend a higher proportion of their incomes on these commodities, so such exemptions would make the tax more progressive. This is the classic "You pay for what you spend" tax, as only those who spend money on non-exempt (i.e. luxury) items pay the tax.

A small number of US states rely entirely on sales taxes for state revenue, as those states do not levy a state income tax. Such states tend to have a moderate to large amount of tourism or inter-state travel that occurs within their borders, allowing the state to benefit from taxes from people the state would otherwise not tax. In this way, the state is able to reduce the tax burden on its citizens. The US states that do not levy a state income tax are Alaska, Tennessee, Florida, Nevada, South Dakota, Texas, Washington state, and Wyoming. Additionally, New Hampshire and Tennessee levy state income taxes only on dividends and interest income. Of the above states, only Alaska and New Hampshire do not levy a state sales tax. Additional information can be obtained at the Federation of Tax Administrators website.

In the United States, there is a growing movement for the replacement of all federal payroll and income taxes (both corporate and personal) with a national retail sales tax and monthly tax rebate to households of citizens and legal resident aliens. The tax proposal is named FairTax. In Canada, the federal sales tax is called the Goods and Services tax (GST) and now stands at 6%. All provinces except Alberta also have a provincial sales tax. Most businesses can claim back the taxes they pay and so effectively it is the final consumer who pays the tax.

Tariffs

An import or export tariff (also called customs duty or impost) is a charge for the movement of goods through a political border. Tariffs discourage trade, and they may be used by governments to protect domestic industries. A proportion of tariff revenues is often hypothecated to pay government to maintain a navy or border police. The classic ways of cheating a tariff are smuggling or declaring a false value of goods. Tax, tariff and trade rules in modern times are usually set together because of their common impact on industrial policy, investment policy, and agricultural policy. A trade bloc is a group of allied countries agreeing to minimize or eliminate tariffs against trade with each other, and possibly to impose protective tariffs on imports from outside the bloc. A customs union has a common external tariff, and, according to an agreed formula, the participating countries share the revenues from tariffs on goods entering the customs union.

Toll

A toll is a tax or fee charged to travel via a road, bridge, tunnel or other route. Historically tolls have been used to pay for state bridge, road and tunnel projects. They have also been used in privately constructed transport links. The toll is likely to be a fixed charge, possibly graduated for vehicle type, or for distance on long routes.

Shunpiking is the practice of finding another route to avoid payment of tolls. In some situations where tolls were increased or felt to be unreasonably high, informal shunpiking by individuals escalated into a form of boycott by regular users, with the goal of applying the financial stress of lost toll revenue to the authority determining the levy.

Transfer tax

Historically, in many countries, a contract needed to have a stamp affixed to make it valid. The charge for the stamp was either a fixed amount or a percentage of the value of the transaction. In most countries the stamp has been abolished but stamp duty remains. Stamp duty is levied in the UK on the purchase of shares and securities, the issue of bearer instruments, and certain partnership transactions. Its modern derivatives, stamp duty reserve tax and stamp duty land tax, are respectively charged on transactions involving securities and land. Stamp duty has the effect of discouraging speculative purchases of assets by decreasing liquidity. In the US transfer tax is often charged by the state or local government and (in the case of real property transfers) can be tied to the recording of the deed or other transfer documents. Taxes on currency transactions are known as Tobin taxes.

See also: Stamp duty

Value added tax

A value added tax (VAT), also known as 'Goods and Services Tax' (G.S.T), or 'Impuesto Indirecto sobre la Prestacion de Servicios' (I.S.I.), Single Business Tax, or Turnover Tax in some countries, applies the equivalent of a sales tax to every operation that creates value. To give an example, sheet steel is imported by a machine manufacturer. That manufacturer will pay the VAT on the purchase price, remitting that amount to the government. The manufacturer will then transform the steel into a machine, selling the machine for a higher price to a wholesale distributor. The manufacturer will collect the VAT on the higher price, but will remit to the government only the excess related to the "value added" (the price over the cost of the sheet steel). The wholesale distributor will then continue the process, charging the retail distributor the VAT on the entire price to the retailer, but remitting only the amount related to the distribution mark-up to the government. The last VAT amount is paid by the eventual retail customer who cannot recover any of the previously paid VAT. For a VAT and sales tax of identical rates, the total tax paid is the same, but it is paid at differing points in the process.

VAT is usually administrated by requiring the company to complete a VAT return, giving details of VAT it has been charged (referred to as input tax) and VAT it has charged to others (referred to as output tax). The difference between output tax and input tax is payable to the Local Tax Authority. If input tax is greater than output tax the company can claim back money from the Local Tax Authority. VAT was historically used to counter evasion in a sales tax or excise. By collecting the tax at each production level, the theory is that the entire economy helps in the enforcement. However, forged invoices and similar evasion methods have demonstrated that there are always those who will attempt to evade taxation.

Economic theorists have argued that the collection process of VAT minimises the market distortion resulting from the tax, compared to a sales tax. However, VAT is held by some to discourage production.

Wealth (net worth) tax

Some countries' governments will require declaration of the tax payers' balance sheet (assets and liabilities), and from that exact a tax on net worth (assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax is in place for both "natural" and in some cases legal "persons".

See also

• Tax rates around the world
• List of countries by tax revenue as percentage of GDP
• Deposit Interest Retention Tax
• Dividend tax
• Fiscal neutrality
• International taxation
• Optimal tax
• Tax incidence
• Revenue On-Line Service
• Solidarity tax on wealth in France
• Non-profit organization
• Tax avoidance and tax evasion
• Tax fraud
• Tax policy
• Tax resistance
• Tax shelter
• Wealth tax
• Tax exemption
• Tax Freedom Day
• Tax slavery
• Tax haven
• Tax incidence
• Tax law
• Taxation in the United Kingdom
• Zero Aggression Principle

By country or region

• Taxation in Australia
• Taxation in Canada
• Taxation in France
• Taxation in Germany
• Taxation in Hong Kong
• Taxation in India
• Taxation in Indonesia
• Taxation in New Zealand
• Taxation in the Republic of Ireland
• Taxation in Russia
• Taxation in Singapore
• Taxation in the United Kingdom
• Taxation in the United States
• Taxation in the European Union

Notes

1. Black's Law Dictionary, p. 1307 (5th ed. 1979).
2. Id.
3. See, e.g., 26 U.S.C. § 7203 in the case of U.S. Federal taxes.
4. Parkin, Michael (2006), Principles of Microeconomics, p. 134.
5. Human Action Chapter II. Sec. 4. The Principle of Methodological Individualism by Ludwig von Mises
6. Thomas Jefferson quotes, ThinkExist
7. Taxes in the Ancient World, University of Pennsylvania Almanac, Vol. 48, No. 28, April 2, 2002
8. Hoffman, Phillipe and Kathryn Norberg (1994), Fiscal Crises, Liberty, and Representative Government, 1450-1789, p. 238.
9. Hoffman, Phillipe and Kathryn Norberg (1994), Fiscal Crises, Liberty, and Representative Government, 1450-1789, p. 300 .
10. "OECD national accounts". Retrieved 2007-03-01.
11. Tax/Spending Burden, Forbes magazine, 05-24-04
12. 2005 Country tax data, Organisation for Economic Co-operation and Development, 2005
13. The OECD Classification of Taxes and Interpretative Guide, Organisation for Economic Co-operation and Development, 2004
14. "OECD Tax Database". Organisation for Economic Co-operation and Development. Retrieved 2007-01-30.
15. Although Texas has no individual income tax, the state does impose a franchise tax -- soon to be replaced by a margin tax -- on business activity that, while not denominated as an income tax, is in substance a kind of income tax.

References

• A Tax Policy for Growth and Jobs - An Essay on the Effects of the Tax Burden and Tax Structure on Growth.

External links

• WikiCPA.com tax articles
• The Tax History Museum provides a synthetic overview of the history of American taxation.
• TaxWorld Tax history, the language of tax, tax stats, etc.
• TaxAlmanac
• Tax Foundation
• Encyclopedia for investors
• Tax Justice Network

• Tax reform
• Taxation
• Basic financial concepts