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A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or
legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is described by ...
) by a
government A government is the system or group of people governing an organized community, generally a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Departmen ...

government
al organization in order to fund
government spending Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting A variety of measures of national income and output are used in economics to estimate total economic activit ...
and various
public expenditure Public expenditure is spending made by the government A government is the system or group of people governing an organized community, generally a State (polity), state. In the case of its broad associative definition, government norma ...
s (regional, local, or national). A failure to pay in a timely manner, along with evasion of or resistance to taxation, is punishable by
law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is described by its bounda ...
. Taxes consist of
direct Direct may refer to: Mathematics * Directed set In mathematics Mathematics (from Ancient Greek, Greek: ) includes the study of such topics as quantity (number theory), mathematical structure, structure (algebra), space (geometry), and calc ...
or
indirect tax An indirect tax (such as sales tax, per unit tax, value added tax (VAT), or value added tax, goods and services tax (GST), excise, consumption tax, tariff) is a tax that is levied upon goods and services before they reach the customer who ultimate ...
es and may be paid in money or as its labour equivalent. The first known taxation took place in Ancient Egypt around 3000–2800 BC. Most countries have a tax system in place, in order to pay for public, common, or agreed national needs and for the functions of government. Some levy a flat percentage rate of taxation on personal annual income, but most scale taxes are progressive based on brackets of annual income amounts. Most countries charge a tax on an individual's
income In microeconomics Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a bas ...
as well as on corporate income. Countries or subunits often also impose
wealth tax A wealth tax (also called a capital tax or equity tax) is a tax on an entity's holdings of asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, an ...
es,
inheritance tax An inheritance tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interre ...
es, estate taxes,
gift tax In economics, a gift tax is the tax on money or property that one living person gives to another. Items received upon the death of another are considered separately under the inheritance tax An inheritance tax is a tax paid by a person who inhe ...
es,
property tax A property tax or millage rate is an ad valorem tax An ''ad valorem'' tax (Latin language, Latin for "according to value") is a tax whose amount is based on the value of a transaction or of property. It is typically imposed at the time of a ...
es,
sales tax A sales tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelate ...
es,
use tax A use tax is a type of tax levied in the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located in North America. It consists ...
es,
payroll tax Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their employees. By law, some payroll taxes are the responsibility of the employee and others fall on the em ...
es,
duties A duty (from "due" meaning "that which is owing"; fro, deu, did, past participle of ''devoir''; la, debere, debitum, whence "debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to anot ...
and/or
tariff A tariff is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated el ...
s. In economic terms, taxation transfers wealth from households or businesses to the government. This has effects that can both increase and reduce
economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economics, economy over time. Statisticians conventionally measure such growth as the percent rate of i ...

economic growth
and economic welfare. Consequently, taxation is a highly debated topic.


Overview

The legal definition and the economic definition of taxes differ in some ways such that economists do not regard many transfers to governments as taxes. For example, some transfers to the public sector are comparable to prices. Examples include tuition at public universities and fees for utilities provided by local governments. Governments also obtain resources by "creating" money and coins (for example, by printing bills and by minting coins), through voluntary gifts (for example, contributions to public universities and museums), by imposing penalties (such as traffic fines), by borrowing and confiscating
criminal In ordinary language, a crime is an unlawful act punishable by a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper ...

criminal
proceeds. From the view of economists, a tax is a non-penal, yet compulsory transfer of resources from the private to the
public sector The public sector (also called the state sector) is the part of the economy composed of both public service A public service is a service Service may refer to: Activities :''(See the Religion section for religious activities)'' * Administ ...
, levied on a basis of predetermined criteria and without reference to specific benefits received. In modern taxation systems, governments levy taxes in money; but
in-kindThe term in kind (or in-kind) generally refers to goods, services, and transactions not involving money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with t ...
and ''
corvée Corvée () is a form of unpaid, forced labour Unfree labour, or forced labour, is any work relation, especially in modern or early modern history, in which people are employed against their will with the threat of destitution, detention, ...

corvée
'' taxation are characteristic of traditional or pre-
capitalist Capitalism is an economic system An economic system, or economic order, is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, ...

capitalist
states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated in
politics Politics (from , ) is the set of activities that are associated with Decision-making, making decisions in Social group, groups, or other forms of Power (social and political), power relations between individuals, such as the distribution of res ...

politics
and
economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interact ...

economics
. Tax collection is performed by a government agency such as the
Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service A revenue service, revenue agency or taxation authority is a government agency responsible for the intake of government revenue, including taxes and sometimes non-tax revenue. Depe ...
(IRS) in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
,
Her Majesty's Revenue and Customs , type = Non-ministerial government department Non-ministerial government departments (NMGDs) are a type of Departments of the Government of the United Kingdom, department of the Government of the United Kingdom that deal with matters for whic ...
(HMRC) in the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shorth ...

United Kingdom
, the
Canada Revenue Agency The Canada Revenue Agency (CRA; ) is the revenue service of the Government of Canada. The CRA collects Taxation in Canada, taxes, administers tax law and tax policy, policy, and delivers Welfare, benefit programs and tax credits for the federal gov ...
or the
Australian Taxation Office The Australian Taxation Office (ATO) is an Australian statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Taxation in Australia, Australian federal taxation sys ...
. When taxes are not fully paid, the state may impose civil penalties (such as fines or forfeiture) or criminal penalties (such as
incarceration Imprisonment (from , via French French (french: français(e), link=no) may refer to: * Something of, from, or related to France France (), officially the French Republic (french: link=no, République française), is a country primarily lo ...
) on the non-paying entity or individual.


Purposes and effects

The levying of taxes aims to raise revenue to fund
governing
governing
or to alter prices in order to affect
demand In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant ...

demand
. States and their functional equivalents throughout history have used the money provided by taxation to carry out many functions. Some of these include expenditures on economic
infrastructure Infrastructure is the set of fundamental facilities and systems that support the sustainable functionality of households and firms. Serving a country, city, or other area, including the services and facilities necessary for its economy An ec ...

infrastructure
(
road A road is a wide way leading from one place to another, typically one with a specially prepared surface which vehicles and bikes can use. Roads consist of one or two roadway A carriageway (British English British English (BrE) is the ...

road
s,
public transport Public transport (also known as public transportation, public transit, mass transit, or simply transit) is a system of transport Transport (in British English), or transportation (in American English), is the Motion, movement of humans ...

public transport
ation,
sanitation Sanitation refers to public health Public health has been defined as "the science and art of preventing disease", prolonging life and improving quality of life Quality of life (QOL) is defined by the World Health Organization The ...

sanitation
,
legal systems The contemporary national legal systems are generally based on one of four basic systems: civil law, common law, statutory law, religious law Religious law includes ethical and moral codes taught by religious traditions. Different religio ...
,
public security Public security is the function of governments which ensures the protection of citizens, persons in their territory, organizations, and institutions against threats to their well-being – and to the prosperity of their communities. To meet the i ...
, public
education Education is the process of facilitating learning, or the acquisition of knowledge, skills, value (ethics), values, morals, beliefs, habits, and personal development. Educational methods include teaching, training, storytelling, discussion ...

education
, public
health systems A health system, also known as health care system or healthcare system, is the organization An organization, or organisation (Commonwealth English The use of the English language English is a of the , originally spoken by t ...
),
military A military, also known collectively as armed forces, is a heavily armed, highly organized force primarily intended for warfare War is an intense armed conflict between State (polity), states, governments, Society, societies, or pa ...

military
,
scientific Science () is a systematic enterprise that Scientific method, builds and organizes knowledge in the form of Testability, testable explanations and predictions about the universe."... modern science is a discovery as well as an invention. ...

scientific
research & development Research is "creativity, creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization, and analysis of information to increase understanding of a topic or issue. A research project ma ...
,
culture Culture () is an umbrella term which encompasses the social behavior and Norm (social), norms found in human Society, societies, as well as the knowledge, beliefs, arts, laws, Social norm, customs, capabilities, and habits of the individuals i ...

culture
and
the arts The arts refers to the theory, human application and physical expression of creativity Creativity is a phenomenon whereby something somehow new and somehow valuable is formed. The created item may be intangible (such as an idea, a scienti ...
,
public works Public works are a broad category of infrastructure Infrastructure is the set of fundamental facilities and systems that support the sustainable functionality of households and firms. Serving a country, city, or other area, including the serv ...

public works
,
distributionDistribution may refer to: Mathematics *Distribution (mathematics) Distributions, also known as Schwartz distributions or generalized functions, are objects that generalize the classical notion of functions in mathematical analysis. Distr ...
,
data collection Data collection is the process of gathering and measuring Measurement is the quantification of attributes of an object or event, which can be used to compare with other objects or events. The scope and application of measurement are depend ...
and
dissemination To disseminate (from lat. ''disseminare'' "scattering seeds"), in the field of communication Communication (from Latin ''communicare'', meaning "to share") is the act of developing Semantics, meaning among Subject (philosophy), entities or Org ...
, public
insurance Insurance is a means of protection from financial loss. It is a form of risk management Risk management is the identification, evaluation, and prioritization of risk In simple terms, risk is the possibility of something bad happening. ...

insurance
, and the operation of government itself. A government's ability to raise taxes is called its
fiscal capacity Fiscal capacity is the ability of the state to extract revenues to provide public goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, ...
. When
expendituresExpenditure is an outflow of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner, 174 ...
exceed tax
revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to comp ...
, a government accumulates
government debt In public finance, government debt, also known as public interest, public debt, national debt and sovereign debt, is the total amount of debt owed at a point in time by a government or sovereign state to lenders. Government debt can be owed to ...
. A portion of taxes may be used to service past debts. Governments also use taxes to fund
welfare Welfare (or commonly, social welfare) is a type of government support intended to ensure that members of a society can meet basic human needs Maslow's hierarchy of needs is an idea in psychology Psychology is the science of mind and ...
and
public services A public service is a Service (economics), service intended to serve all members of a community. Public services include services provided by a government to people living within its jurisdiction, either directly through public sector agencies o ...

public services
. These services can include
education system Education is the process of facilitating learning Learning is the process of acquiring new , , s, s, , attitudes, and s. The ability to learn is possessed by s, s, and some ; there is also evidence for some kind of learning in certain ...
s,
pension A pension (, from Latin Latin (, or , ) is a classical language A classical language is a language A language is a structured system of communication Communication (from Latin ''communicare'', meaning "to share" or "to be ...

pension
s for the
elderly An elderly woman at a Ringing Cedars' settlement in Russia.">Russia.html" ;"title="Ringing Cedars' settlement in Russia">Ringing Cedars' settlement in Russia. Old age refers to ages nearing or surpassing the life expectancy of human beings, a ...
,
unemployment benefits Unemployment benefits, also called unemployment insurance, unemployment payment, unemployment compensation, or simply unemployment, are payments made by authorized bodies to unemployed Unemployment, according to the OECD The Organisatio ...
, transfer payments,
subsidies A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from the government, the ter ...

subsidies
and
public transportation Public transport (also known as public transportation, public transit, mass transit, or simply transit) is a system of transport Transport (commonly used in the U.K.), or transportation (used in the U.S.), is the Motion, movement of hum ...

public transportation
.
Energy In physics Physics is the that studies , its , its and behavior through , and the related entities of and . "Physical science is that department of knowledge which relates to the order of nature, or, in other words, to the regula ...
,
water Water (chemical formula H2O) is an Inorganic compound, inorganic, transparent, tasteless, odorless, and Color of water, nearly colorless chemical substance, which is the main constituent of Earth's hydrosphere and the fluids of all known li ...
and
waste management Waste management (or waste disposal) includes the processes and actions required to manage waste Waste (or wastes) are unwanted or unusable materials. Waste is any substance which is discarded after primary use, or is worthles ...

waste management
systems are also common
public utilities A public utility company (usually just utility) is an organization that maintains the infrastructure Infrastructure is the set of fundamental facilities and systems that support the sustainable functionality of households and firms. Serving a ...
. According to the proponents of the chartalist theory of
money creation Money creation, or money issuance, is the process by which the money supply In macroeconomics, the money supply (or money stock) refers to the total volume of money held by the public at a particular point in time in an economy. There are ...
, taxes are not needed for government revenue, as long as the government in question is able to issue
fiat money Fiat money (from la, fiat, ) is a type of money that is not backed by any commodity such as gold or silver, and typically declared by a decree from the government to be legal tender. Throughout history, fiat money was sometimes issued by local ...
. According to this view, the purpose of taxation is to maintain the stability of the currency, express public policy regarding the distribution of wealth, subsidizing certain industries or population groups or isolating the costs of certain benefits, such as highways or social security. Effects of taxes can be divided into two fundamental categories: * Taxes cause an
income effect The theory of consumer choice is the branch of microeconomics Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that ar ...

income effect
because they reduce
purchasing power Purchasing power is the amount of goods and services that can be purchased with a unit of currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Im ...
to taxpayers. * Taxes cause a
substitution effect In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...

substitution effect
when taxation causes a substitution between taxed goods and untaxed goods. If we consider, for instance, two
normal good In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant ...
s, ''x'' and ''y,'' whose prices are respectively ''px'' and ''py'' and an individual budget constraint given by the equation ''xpx'' + ''ypy'' = Y, where Y is the income, the slope of the budget constraint, in a graph where is represented good ''x'' on the vertical axis and good ''y'' on the horizontal axes, is equal to -''py''/''px'' . The initial equilibrium is in the point (C), in which
budget constraint In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...

budget constraint
and
indifference curve In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. ...

indifference curve
are
tangent In geometry Geometry (from the grc, γεωμετρία; ' "earth", ' "measurement") is, with , one of the oldest branches of . It is concerned with properties of space that are related with distance, shape, size, and relative position ...

tangent
, introducing an ''
ad valorem tax An ''ad valorem'' tax (Latin language, Latin for "according to value") is a tax whose amount is based on the value of a transaction or of property. It is typically imposed at the time of a transaction, as in the case of a sales tax or value-added ...
'' on the ''y'' good (budget constraint: ''pxx'' + ''py''(1 + ''τ'')''y ='' Y'')'', the budget constraint's slope becomes equal to -''py''(1 + τ)/''px''. The new equilibrium is now in the tangent point (A) with a lower indifferent curve. As can be noticed the tax's introduction causes two consequences: # It changes the consumers' real income (less purchasing power) # It raises the relative price of ''y'' good. The income effect shows the variation of ''y'' good quantity given by the change of real income. The substitution effect shows the variation of ''y'' good determined by relative prices' variation. This kind of taxation (that causes the substitution effect) can be considered distortionary. Another example can be the introduction of an income
lump-sum tax A lump-sum tax is a special way of taxation, based on a fixed amount, rather than on the real circumstance of the taxed entity.
(''xpx'' + ''ypy'' = Y - T), with a parallel shift downward of the budget constraint, can be produced a higher revenue with the same loss of consumers' utility compared with the property tax case, from another point of view, the same revenue can be produced with a lower utility sacrifice. The lower utility (with the same revenue) or the lower revenue (with the same utility) given by a distortionary tax are called excess pressure. The same result, reached with an income lump-sum tax, can be obtained with these following types of taxes (all of them cause only a budget constraint's shift without causing a substitution effect), the budget constraint's slope remains the same (-''px''/''py''): * A general tax on consumption: (Budget constraint: ''px''(1 + τ)''x'' + ''py''(1 + τ)''y ='' Y) * A proportional income tax: (Budget constraint: ''xpx'' + ''ypy'' = Y(1 - ''t'')) When the t and τ rates are chosen respecting this equation (where t is the rate of income tax and tau is the consumption tax's rate): \frac=1-t\Rightarrow t=\frac the effects of the two taxes are the same. A tax effectively changes the relative prices of products. Therefore, most
economists An economist is a professional and practitioner in the social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the s ...
, especially
neoclassical economists Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are driven by the supply and demand In microeconomics Microeconomics is a branch of that studies ...
, argue that taxation creates
market distortionIn neoclassical economics, a market distortion is any event in which a market reaches a market clearing price for an item that is substantially different from the price that a market would achieve while operating under conditions of perfect compe ...
and results in economic inefficiency unless there are (positive or negative) externalities associated with the activities that are taxed that need to be internalized to reach an efficient market outcome. They have therefore sought to identify the kind of tax system that would minimize this distortion. Recent scholarship suggests that in the
United States of America The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
, the federal government effectively taxes investments in higher education more heavily than it subsidizes higher education, thereby contributing to a shortage of skilled workers and unusually high differences in pre-tax earnings between highly educated and less-educated workers. Taxes can even have effects on labor supply: we can consider a model in which the consumer chooses the number of hours spent working and the amount spent on consumption. Let us suppose that only one good exists and no income is saved. Consumers have a given number of hours (H) that is divided between work (L) and free time (F = H - L). The hourly wage is called ''w'' and it tells us the free time's
opportunity cost In microeconomic theory Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Produ ...
, i.e. the income to which the individual renounces consuming an additional hour of free time. Consumption and hours of work have a positive relationship, more hours of work mean more earnings and, assuming that workers don't save money, more earnings imply an increase in consumption (Y = C = ''w''L). Free time and consumption can be considered as two normal goods (workers have to decide between working one hour more, that would mean consuming more or having one more hour of free time) and the budget constraint is negatively inclined (Y = ''w''(H - F)). The
indifference curve In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. ...

indifference curve
related to these two goods has a negative slope and free time becomes more and more important with high levels of consumption. This is because a high level of consumption means that people are already spending many hours working, so, in this situation, they need more free time than consume and it implies that they have to be paid with a higher salary to work an additional hour. A proportional income tax, changing budget constraint's slope (now Y = ''w''(1 - ''t'')(H - F)), implies both substitution and income effects. The problem now is that the two effects go in opposite ways: the income effect tells us that, with an income tax, the consumer feels poorer and for this reason he wants to work more, causing an increase in labor offer. On the other hand, the substitution effect tells us that free time, being a normal good, is now more convenient compared to consume and it implies a decrease in labor offer. Therefore, the total effect can be both an increase or a decrease of labor offer, depending on the indifference curve's shape. The
Laffer curve In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behavi ...

Laffer curve
depicts the amount of government revenue as a function of the rate of taxation. It shows that for a tax rate above a certain critical rate, government revenue starts decreasing as the tax rate rises, as a consequence of a decline in labor supply. This theory supports that, if the tax rate is above that critical point, a decrease in the tax rate should imply a rise in labor supply that in turn would lead to an increase in government revenue. Governments use different kinds of taxes and vary the tax rates. They do this in order to distribute the tax burden among individuals or classes of the population involved in taxable activities, such as the
business sector In business, the business sector or corporate sector - sometimes popularly called simply "business" - is "the part of the economy made up by company, companies". It is a subset of the Sovereign state, domestic economy, excluding the economic act ...
, or to redistribute resources between individuals or classes in the population. Historically, taxes on the poor supported the
nobility Nobility is a social class normally ranked immediately below Royal family, royalty and found in some societies that have a formal aristocracy (class), aristocracy. Nobility has often been an Estates of the realm, estate of the realm that p ...
; modern social-security systems aim 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 aid and military ventures, to influence the
macroeconomic Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), producti ...
performance of the economy (a government's strategy for doing this is called its
fiscal policy In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plan ...

fiscal policy
; see also
tax exemption Tax exemption is the reduction or removal of a liability to make a compulsory payment that would otherwise be imposed by a ruling power upon persons, property, income, or transactions. Tax-exempt status may provide complete relief from taxes, reduc ...
), or to modify patterns of consumption or employment within an economy, by making some classes of the transaction more or less attractive. A state's tax system often reflects its communal values and the values of those in current political power. To create a system of taxation, a state must make choices regarding the distribution of the tax burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent. In democratic nations where the public elects those in charge of establishing or administering the tax system, these choices reflect the type of community that the public wishes to create. In countries where the public does not have a significant amount of influence over the system of taxation, that system may reflect more closely the values of those in power. All large
business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trad ...

business
es incur administrative costs in the process of delivering revenue collected from customers to the suppliers of the goods or services being purchased. Taxation is no different, as governments are large organizations; 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 the
compliance costCompliance costs are all expenses that a company uses up to adhere to government regulations. Compliance costs incorporate salaries of employees in compliance, time and funds spend on announcing, new system necessitated to meet retention, and so on. ...
and includes (for example) the labor 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 centers, is called
hypothecation Hypothecation is the practice where a debtor pledges collateral to secure a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred paymen ...
.
Finance minister A finance minister is an executive or cabinet position in charge of one or more of government finances, economic policy and financial regulation. A finance minister's portfolio has a large variety of names across the world, such as "treasury", ...
s often dislike this practice, since it reduces their freedom of action. Some economic theorists regard hypothecation as intellectually dishonest since, in reality, money is
fungible In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of good ...
. 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, through highway tolls. Since governments also resolve commercial disputes, especially in countries with
common law In law, common law (also known as judicial precedent or judge-made law, or case law Case law is the collection of past legal decisions written by courts and similar tribunal A tribunal, generally, is any person or institution with authority ...
, similar arguments are sometimes used to justify a
sales tax A sales tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelate ...
or
value added tax A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law L ...
. Some (
libertarians Libertarianism (from french: libertaire, "libertarian"; from la, libertas, "freedom") is a political philosophy Political philosophy is the philosophical study of government, addressing questions about the nature, scope, and legitimacy of ...
, for example) portray most or all forms of taxes as
immoral Immorality is the violation of moral A moral (from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as L ...
due to their involuntary (and therefore eventually coercive or violent) nature. The most extreme anti-tax view,
anarcho-capitalism Anarcho-capitalism is a political philosophy Political philosophy or political theory is the philosophical Philosophy (from , ) is the study of general and fundamental questions, such as those about reason, existence, knowledge ...
, holds that all social services should be voluntarily bought by the people using them.


Types

The
Organisation for Economic Co-operation and Development The Organisation for Economic Co-operation and Development (OECD; french: Organisation de Coopération et de Développement Économiques, OCDE) is an intergovernmental economic organisation with 38 member countries, founded in 1961 to st ...

Organisation for Economic Co-operation and Development
(OECD) publishes an analysis of the tax systems of member countries. As part of such analysis, OECD has developed a definition and system of classification of internal taxes, generally followed below. In addition, many countries impose taxes (
tariff A tariff is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated el ...
s) on the import of goods.


Income


Income tax

Many jurisdictions tax the income of individuals and of
business entities In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is described by its b ...
, including
corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal ...

corporation
s. Generally, the authorities impose a tax on net profits from a
business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trad ...

business
, on net gains, and on other income. Computation of income subject to tax may be determined under accounting principles used in the jurisdiction, which tax-law principles in the jurisdiction may modify or replace. The incidence of taxation varies by system, and some systems may be viewed as
progressive Progressive may refer to: Politics * Progressivism is a political philosophy in support of social reform Political organizations * Congressional Progressive Caucus, members within the Democratic Party in the United States Congress dedicated to th ...
or regressive. Rates of tax may vary or be constant (flat) by income level. Many systems allow individuals certain personal allowances and other non-business reductions to taxable income, although business deductions tend to be favored over personal deductions. Tax-collection agencies often collect
personal income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable incomeTaxable income refers to the base upon which an income tax An income tax is a tax imposed on ...
on a pay-as-you-earn basis, with corrections made after the end of the
tax year A fiscal year (or financial year, or sometimes budget year) is used in government accounting, which varies between countries, and for budget purposes. It is also used for financial reporting by businesses and other organizations. Laws in many jur ...
. These corrections take one of two forms: * payments to the government, from taxpayers who have not paid enough during the tax year *
tax refund A tax refund or tax rebate is a payment to the taxpayer when the taxpayer pays more tax than they owe. By country United States According to the Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service for the ...
s from the government to those who have overpaid Income-tax systems often make deductions available that reduce the total tax liability by reducing total taxable income. They may allow losses from one type of income to count 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 income tax by carrying forward the loss to later tax years.


Negative income tax

In economics, a negative income tax (abbreviated NIT) is a
progressive income tax Progressive may refer to: Politics * Progressivism Progressivism is a political philosophy in support of social reform. Based on the idea of progress in which advancements in science, technology, economic development and social organization ...
system where people earning below a certain amount receive supplemental payment from the government instead of paying taxes to the government.


Capital gains

Most jurisdictions imposing an income tax treat
capital gain Capital gain is an economic concept defined as the profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial an ...
s as part of income subject to tax. Capital gain is generally a gain on sale of capital assets—that is, those assets not held for sale in the ordinary course of business. Capital assets include personal assets in many jurisdictions. Some jurisdictions provide preferential rates of tax or only partial taxation for capital gains. Some jurisdictions impose different rates or levels of capital-gains taxation based on the length of time the asset was held. Because tax rates are often much lower for capital gains than for ordinary income, there is widespread controversy and dispute about the proper definition of capital.


Corporate

Corporate tax refers to income tax, capital tax, net-worth tax, or other taxes imposed on corporations. Rates of tax and the taxable base for corporations may differ from those for individuals or for other taxable persons.


Social-security contributions

Many countries provide publicly funded retirement or healthcare systems. In connection with these systems, the country typically requires employers and/or employees to make compulsory payments. These payments are often computed by reference to wages or earnings from self-employment. Tax rates are generally fixed, but a different rate may be imposed on employers than on employees. Some systems provide an upper limit on earnings subject to the tax. A few systems provide that the tax is payable only on wages above a particular amount. Such upper or lower limits may apply for retirement but not for health-care components of the tax. Some have argued that such taxes on wages are a form of "forced savings" and not really a tax, while others point to redistribution through such systems between generations (from newer cohorts to older cohorts) and across income levels (from higher income levels to lower income-levels) which suggests that such programs are really taxed and spending programs.


Payroll or workforce

Unemployment and similar taxes are often imposed on employers based on the total payroll. These taxes may be imposed in both the country and sub-country levels.


Wealth

A wealth tax is levied on the total value of personal assets, including: bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated businesses, financial securities, and personal trusts.Edward N. Wolff, "Time for a Wealth Tax?"
''Boston Review'', Feb–Mar 1996 (recommending a net wealth tax for the US of 0.05% for the first $100,000 in assets to 0.3% for assets over $1,000,000
Typically liabilities (primarily mortgages and other loans) are deducted, hence it is sometimes called a net wealth tax.


Property

Recurrent property taxes may be imposed on immovable property (real property) and on some classes of movable property. In addition, recurrent taxes may be imposed on the net wealth of individuals or corporations. Many jurisdictions impose
estate tax An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the Estate (law), estate (money and property) of a person who has died. International tax law distinguishes b ...
,
gift tax In economics, a gift tax is the tax on money or property that one living person gives to another. Items received upon the death of another are considered separately under the inheritance tax An inheritance tax is a tax paid by a person who inhe ...
or other
inheritance tax An inheritance tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interre ...
es on property at death or at the time of gift transfer. Some jurisdictions impose taxes on financial or capital transactions.


Property taxes

A property tax (or millage tax) is an '' ad valorem'' tax levy on the value of a property that the owner of the property is required to pay to a government in which the property is situated. Multiple jurisdictions may tax the same property. There are three general varieties of property: land, improvements to land (immovable man-made things, e.g. buildings), and personal property (movable things).
Real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...
or realty is the combination of land and improvements to the land. Property taxes are usually charged on a recurrent basis (e.g., yearly). A common type of property tax is an annual charge on the ownership of
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...

real estate
, where the tax base is the estimated value of the property. For a period of over 150 years from 1695, the government of England levied a
window tax#REDIRECT Window tax Window tax was a property tax A property tax or millage rate is an ad valorem tax on the value of a property. In the OECD The Organisation for Economic Co-operation and Development (OECD; french: Organisation de Coo ...

window tax
, with the result that one can still see
listed buildings A listed building, or listed structure, is one that has been placed on one of the four statutory lists maintained by Historic England Historic England (officially the Historic Buildings and Monuments Commission for England) is an executive n ...
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 types of event-driven property taxes are
stamp duty Stamp duty is a tax that is levied on single property purchases or documents (including, historically, the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions). A physical revenu ...
, charged upon change of ownership, and
inheritance tax An inheritance tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interre ...
, which many countries impose on the estates of the deceased. In contrast with a tax on real estate (land and buildings), a land-value tax (or LVT) 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"). Proponents of the land-value tax argue that it is economically justified, as it will not deter production, distort market mechanisms or otherwise create
deadweight loss Image:Deadweight-loss-price-ceiling.svg, 250px, Deadweight loss created by a binding price ceiling. The producer surplus always decreases, but the consumer surplus may or may not increase; however, the decrease in producer surplus must be greater th ...
es the way other taxes do. 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 taxesA payment in lieu of taxes (usually abbreviated as PILOT, or sometimes as PILT) is a payment made to compensate a government for some or all of the property tax revenue lost due to tax exempt ownership or use of real property. Canada The federal go ...
to compensate it for some or all of the foregone tax revenues. In many jurisdictions (including many American states), there is a general tax levied periodically on residents who own
personal property Personal property is property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the ...
(personalty) within the jurisdiction. Vehicle and boat registration fees are subsets of this kind of tax. The tax is often designed with blanket coverage and large exceptions for things like food and clothing. Household goods are often exempt when kept or used within the household. 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. 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.


Inheritance

Inheritance tax, estate tax, and death tax or duty are the names given to various taxes that arise on the death of an individual. In United States
tax law Tax law or revenue law is an area of legal study in which public or sanctioned authorities, such as federal, state and municipal governments (as in the case of the US) use a body of rules and procedures (laws) to assess and collect tax A ...
, 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.


Expatriation

An expatriation tax is a tax on individuals who renounce their
citizenship Citizenship is a relationship between an individual and a state to which the individual owes allegiance and in turn is entitled to its protection. Each state determines the conditions under which it will recognize persons as its citizens, and t ...

citizenship
or residence. The tax is often imposed based on a deemed disposition of all the individual's property. One example is the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
under the '' American Jobs Creation Act'', where any individual who has a net worth of $2 million or an average income-tax liability of $127,000 who renounces his or her citizenship and leaves the country is automatically assumed to have done so for tax avoidance reasons and is subject to a higher tax rate.


Transfer

Historically, in many countries, a contract needs to have a stamp affixed to make it valid. The charge for the stamp is either a fixed amount or a percentage of the value of the transaction. In most countries, the stamp has been abolished but
stamp duty Stamp duty is a tax that is levied on single property purchases or documents (including, historically, the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions). A physical revenu ...
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 Stamp duty in the United Kingdom is a form of tax charged on legal instruments (written documents), and historically required a Impressed duty stamp, physical stamp to be attached to or impressed upon the document in question. The more modern vers ...
, 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
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
, 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.


Wealth (net worth)

Some countries' governments will require a declaration of the taxpayers'
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
(assets and liabilities), and from that exact a tax on
net worth Net worth is the value of all the non-financial and financial asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and no ...
(assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax may be levied on "
natural Nature, in the broadest sense, is the natural, physical, material world or universe The universe ( la, universus) is all of space and time and their contents, including planets, stars, galaxies, and all other forms of matter and ...
" or " legal persons."


Goods and services


Value added

A value-added tax (VAT), also known as Goods and Services Tax (G.S.T), 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. Many tax authorities have introduced automated VAT which has increased
accountability Accountability, in terms of ethics and governance, is equated with answerability, blameworthiness, legal liability, liability, and the expectation of account-giving. As in an aspect of governance, it has been central to discussions related to probl ...

accountability
and
auditability An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
, by utilizing computer systems, thereby also enabling anti-cybercrime offices as well.


Sales

Sales taxes are 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 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 U.S. 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 a 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 U.S. 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 A dividend is a distribution of profits by a corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law 'b ...
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 th
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 FairTax was a single rate tax proposal in 2005, 2008 and 2009 in the United States that includes complete dismantling of the Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service of the United States federa ...
. In Canada, the federal sales tax is called the Goods and Services Tax (GST) and now stands at 5%. The provinces of British Columbia, Saskatchewan, Manitoba, and Prince Edward Island also have a provincial sales tax The provinces of Nova Scotia, New Brunswick, Newfoundland & Labrador, and Ontario have harmonized their provincial sales taxes with the GST—Harmonized Sales Tax and thus is a full VAT. The province of Quebec collects the Quebec Sales Tax which is based on the GST with certain differences. Most businesses can claim back the GST, HST, and QST they pay, and so effectively it is the final consumer who pays the tax.


Excises

An excise duty is an
indirect tax An indirect tax (such as sales tax, per unit tax, value added tax (VAT), or value added tax, goods and services tax (GST), excise, consumption tax, tariff) is a tax that is levied upon goods and services before they reach the customer who ultimate ...
imposed upon goods during the process of their manufacture, production or distribution, and is usually proportionate to their quantity or value. Excise duties were first introduced into England in the year 1643, as part of a scheme of revenue and taxation devised by parliamentarian
John Pym John Pym (20 May 1584 – 8 December 1643) was an English English usually refers to: * English language English is a West Germanic languages, West Germanic language first spoken in History of Anglo-Saxon England, early medieval Engl ...

John Pym
and approved by the
Long Parliament The Long Parliament was an English Parliament The Parliament of England was the legislature of the Kingdom of England from the mid 13th to 17th century. The first English Parliament was convened in 1215, with the creation and signing of ...
. These duties consisted of charges on beer, ale, cider, cherry wine, and tobacco, to which list were afterward added paper, soap, candles, malt, hops, and sweets. The basic principle of excise duties was that they were taxes on the production, manufacture, or distribution of articles which could not be taxed through the
customs house A custom house or customs house was traditionally a building housing the offices for a jurisdictional government whose officials oversaw the functions associated with importing and exporting goods into and out of a country, such as collecting ...

customs house
, and revenue derived from that source is called excise revenue proper. The fundamental conception of the term is that of a tax on articles produced or manufactured in a country. In the taxation of such articles of luxury as spirits, beer, tobacco, and cigars, it has been the practice to place a certain duty on the importation of these articles (a
customs duty A tariff is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law, a legal person is any person A person (plural people or persons) is a being that has certai ...
). Excises (or exemptions from them) are also used to modify consumption patterns of a certain area ( social engineering). For example, a high excise is used to discourage
alcohol In chemistry, alcohol is an organic compound that carries at least one hydroxyl functional group (−OH) bound to a Saturated and unsaturated compounds, saturated carbon atom. The term alcohol originally referred to the primary alcohol ethan ...
consumption, relative to other goods. This may be combined with
hypothecation Hypothecation is the practice where a debtor pledges collateral to secure a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred paymen ...
if the proceeds are then used to pay for the costs of treating illness caused by
alcohol use disorder Alcoholism is, broadly, any drinking of alcohol (drug), alcohol that results in significant Mental health, mental or physical health problems. Alcoholism is not a recognized diagnostic entity. Predominant diagnostic classifications are alcoho ...
. Similar taxes may exist on
tobacco Tobacco is the common name of several plants in the genus Genus /ˈdʒiː.nəs/ (plural genera /ˈdʒen.ər.ə/) is a taxonomic rank In biological classification In biology, taxonomy () is the scientific study of naming, defini ...

tobacco
,
pornography Pornography (often shortened to porn) is the portrayal of Human sexual activity, sexual subject matter for the exclusive purpose of sexual arousal.
, etc., and they may be collectively referred to as "
sin tax A sin tax is an excise tax file:Lincoln Beer Stamp 1871.JPG, upright=1.2, 1871 U.S. Revenue stamp for 1/6 barrel of beer. Brewers would receive the stamp sheets, cut them into individual stamps, cancel them, and paste them over the bung of the ...
es". A
carbon tax A carbon tax is a tax levied on the carbon Carbon (from la, carbo "coal") is a with the C and 6. It is lic and —making four s available to form s. It belongs to group 14 of the periodic table. Carbon makes up only about 0.025 pe ...

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 dutyVehicle Excise Duty (VED) (also known as "vehicle tax", "car tax", or often erroneously as "road tax Road tax, known by various names around the world, is a tax which has to be paid on, or included with, a wheeled vehicle to use it on a public road. ...
is an annual tax on vehicle ownership.


Tariff

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 Trade involves the transfer of goods from one person or entity to another, often in exchange for money. Economists refer to a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of r ...

trade
, and they may be used by governments to protect domestic industries. A proportion of tariff revenues is often hypothecated to pay the government to maintain a navy or border police. The classic ways of cheating a tariff are
smuggling Smuggling is the illegal transportation of objects, substances, information or people, such as out of a house or buildings, into a prison A prison, also known as a jail or gaol (dated, English language in England, standard English, Austr ...
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 An industrial policy (IP) or industrial strategy of a country is its official strategic effort to encourage the development and growth of all or part of the economy, often focused on all or part of the manufacturing sector. The government takes me ...
,
investment policy An investment policy is any government regulation or law that encourages or discourages foreign investment in the local economy, e.g. currency exchange limits. Explanation As globalization Globalization, or globalisation ( Commonwealth ...
, and
agricultural policy Agricultural policy describes a set of laws relating to domestic agriculture Agriculture is the science, art and practice of cultivating plants and livestock. Agriculture was the key development in the rise of sedentism, sedentary human civ ...
. A
trade bloc A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization An intergovernmental organization (IGO) is an organization composed primarily of sovereign states (referred to as ''member states'') ...
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 A customs union is generally defined as a type of trade bloc A trade bloc is a type of trade pact, intergovernmental agreement, often part of a regional intergovernmental organization, where barriers to trade (tariffs and Non-tariff barriers to tr ...

customs union
has a
common external tariff A common external tariff A tariff is a tax imposed by a government A government is the system or group of people governing an organized community, generally a State (polity), state. In the case of its broad associative definition, g ...
, and the participating countries share the revenues from tariffs on goods entering the customs union. In some societies, tariffs also could be imposed by local authorities on the movement of goods between regions (or via specific internal gateways). A notable example is the '' likin'', which became an important revenue source for local governments in the late
Qing China The Qing dynasty, officially the Great Qing (), was the last dynasty A dynasty (, ) is a sequence of rulers from the same family,''Oxford English Dictionary'', "dynasty, ''n''." Oxford University Press Oxford University Pre ...
.


Other


License fees

Occupational taxes or license fees may be imposed on businesses or individuals engaged in certain businesses. Many jurisdictions impose a tax on vehicles.


Poll

A poll tax, also called a ''per capita tax'', or ''capitation tax'', is a tax that levies a set amount per individual. It is an example of the concept of fixed tax. One of the earliest taxes mentioned in the
Bible The Bible (from Koine Greek Koine Greek (, , Greek approximately ;. , , , lit. "Common Greek"), also known as Alexandrian dialect, common Attic, Hellenistic or Biblical Greek, was the koiné language, common supra-regional form of Gree ...

Bible
of a half-shekel per annum from each adult Jew (Ex. 30:11–16) was a form of the 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 and poll taxes, therefore, do not lead to economic distortions. However, poll taxes are very unpopular because 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 The Peasants' Revolt, also named Wat Tyler's Rebellion or the Great Rising, was a major uprising across large parts of England in 1381. The revolt had various causes, including the socio-economic and political tensions generated by the Black ...
. Scotland was the first to be used to test the new poll tax in 1989 with England and Wales in 1990. The change from progressive local taxation based on property values to a single-rate form of taxation regardless of ability to pay (the
Community Charge The Community Charge, commonly known as the poll tax, was a system of taxation introduced by Margaret Thatcher's government in replacement of Rates in the United Kingdom#Domestic rates, domestic rates in Local government in Scotland, Scotland fr ...
, but more popularly referred to as the Poll Tax), led to widespread refusal to pay and to incidents of civil unrest, known colloquially as the '
Poll Tax Riots The poll tax riots were a series of riots in British towns and cities during protests against the Community Charge (colloquially known as the "poll tax"), introduced by the Conservative government of Prime Minister Margaret Thatcher ...
'.


Other

Some types of taxes have been proposed but not actually adopted in any major jurisdiction. These include: *
Bank tax A bank tax, or a bank levy, is a tax on bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly perform ...
*
Financial transaction tax A financial transaction tax is a levy on a specific type of financial transaction A financial transaction is an agreement, or communication, carried out between a buyer and a seller to Trade, exchange an asset for payment. It involves a cha ...
es including currency transaction taxes


Descriptive labels


Ad valorem and per unit

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). In contrast to ad valorem taxation is a ''per unit'' tax, where the tax base is the quantity of something, regardless of its price. An
excise tax file:Lincoln Beer Stamp 1871.JPG, upright=1.2, 1871 U.S. Revenue stamp for 1/6 barrel of beer. Brewers would receive the stamp sheets, cut them into individual stamps, cancel them, and paste them over the bung of the beer barrel so when the barrel ...
is an example.


Consumption

Consumption tax refers to any tax on non-investment spending and can be implemented by means of a sales tax, consumer value-added tax, or by modifying an income tax to allow for unlimited deductions for investment or savings.


Environmental

This includes
natural resources consumption tax The natural resource consumption tax is a kind of tax which is aimed to help ensure long run sustainability by increasing awareness of natural resource Consumption (economics), consumption. International water The popular conception of internation ...
, greenhouse gas tax (
Carbon tax A carbon tax is a tax levied on the carbon Carbon (from la, carbo "coal") is a with the C and 6. It is lic and —making four s available to form s. It belongs to group 14 of the periodic table. Carbon makes up only about 0.025 pe ...

Carbon tax
), "sulfuric tax", and others. The stated purpose is to reduce the environmental impact by repricing. Economists describe environmental impacts as negative
externalities In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
. As early as 1920,
Arthur Pigou Arthur Cecil Pigou (; 18 November 1877 – 7 March 1959) was an English economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and c ...

Arthur Pigou
suggested a tax to deal with externalities (see also the section on Increased economic welfare below). The proper implementation of environmental taxes has been the subject of a long-lasting debate.


Proportional, progressive, regressive, and lump-sum

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 describe a distribution effect, which can be applied to any type of tax system (income or consumption) that meets the definition. * A progressive tax is a tax imposed so that the effective 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 effective tax rate decreases as the amount to which the rate is applied increases. This effect is commonly produced where means testing is used to withdraw tax allowances or state benefits. * In between is a proportional tax, where the effective tax rate is fixed, while the amount to which the rate is applied increases. * A lump-sum tax is a tax that is a fixed amount, no matter the change in circumstance of the taxed entity. This in actuality is a regressive tax as those with lower income must use a higher percentage of their income than those with higher income and therefore the effect of the tax reduces as a function of income. The terms can also be used to apply meaning to the taxation of select consumption, such as a tax on luxury goods and the exemption of basic necessities may be described as having progressive effects as it increases a tax burden on high end consumption and decreases a tax burden on low end consumption.


Direct and indirect

Taxes are sometimes referred to as "direct taxes" or "indirect taxes". The meaning of these terms can vary in different contexts, which can sometimes lead to confusion. An economic definition, by Atkinson, states that "...direct taxes may be adjusted to the individual characteristics of the taxpayer, whereas indirect taxes are levied on transactions irrespective of the circumstances of buyer or seller." According to this definition, for example, income tax is "direct", and sales tax is "indirect". In law, the terms may have different meanings. In U.S. constitutional law, for instance, direct taxes refer to Tax per head, poll taxes and
property tax A property tax or millage rate is an ad valorem tax An ''ad valorem'' tax (Latin language, Latin for "according to value") is a tax whose amount is based on the value of a transaction or of property. It is typically imposed at the time of a ...
es, which are based on simple existence or ownership. Indirect taxes are imposed on events, rights, privileges, and activities. Thus, a tax on the sale of the property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax.


Fees and effective

Governments may charge user fees, tolls, or other types of assessments in exchange of particular goods, services, or use of property. These are generally not considered taxes, as long as they are levied as payment for a direct benefit to the individual paying. Such fees include: * Tolls: a fee charged to travel via a Toll road, road, Toll bridge, bridge, Toll tunnel, tunnel, canal, waterway or other transportation facilities. Historically tolls have been used to pay for public 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. * User fees, such as those charged for use of parks or other government-owned facilities. * Ruling fees charged by governmental agencies to make determinations in particular situations. Some scholars refer to certain economic effects as taxes, though they are not levies imposed by governments. These include: * Inflation tax: the economic disadvantage suffered by holders of cash and cash equivalents in one denomination of currency due to the effects of expansionary monetary policy * Financial repression: Government policies such as interest-rate caps on government debt, financial regulations such as reserve requirements and capital controls, and barriers to entry in markets where the government owns or controls businesses.


History

The first known system of taxation was in Ancient Egypt around 3000–2800 BC, in the First Dynasty of Egypt, First Dynasty of the Old Kingdom of Egypt. The earliest and most widespread forms of taxation were the
corvée Corvée () is a form of unpaid, forced labour Unfree labour, or forced labour, is any work relation, especially in modern or early modern history, in which people are employed against their will with the threat of destitution, detention, ...

corvée
and the tithe. The corvée was Unfree labor, forced labour provided to the state by peasants too poor to pay other forms of taxation (''labor'' in Ancient Egyptian literature, ancient Egyptian is a synonym for taxes). Records from the time document that the Pharaoh would conduct a biennial tour of the kingdom, collecting tithes from the people. Other records are granary receipts on Ostracon#Egyptian limestone and potsherd ostraca, limestone flakes and papyrus. Early taxation is also described in the
Bible The Bible (from Koine Greek Koine Greek (, , Greek approximately ;. , , , lit. "Common Greek"), also known as Alexandrian dialect, common Attic, Hellenistic or Biblical Greek, was the koiné language, common supra-regional form of Gree ...

Bible
. In Book of Genesis, 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". Samgharitr is the name mentioned for the Tax collector in the Vedic texts. In Hattusa, the capital of the Hittite Empire, grains were collected as a tax from the surrounding lands, and stored in silos as a display of the king's wealth. In the Achaemenid Empire, Persian Empire, a regulated and sustainable tax system was introduced by Darius I the Great in 500 BC; the Persian system of taxation was tailored to each Satrapy (the area ruled by a Satrap or provincial governor). At differing times, there were between 20 and 30 Satrapies in the Empire and each was assessed according to its supposed productivity. It was the responsibility of the Satrap to collect the due amount and to send it to the treasury, after deducting his expenses (the expenses and the power of deciding precisely how and from whom to raise the money in the province, offer maximum opportunity for rich pickings). The quantities demanded from the various provinces gave a vivid picture of their economic potential. For instance, Babylon was assessed for the highest amount and for a startling mixture of commodities; 1,000 Talent (measurement), silver talents and four months supply of food for the army. India, a province fabled for its gold, was to supply gold dust equal in value to the very large amount of 4,680 silver talents. Egypt was known for the wealth of its crops; it was to be the granary of the Persian Empire (and, later, of the Roman Empire) and was required to provide 120,000 measures of grain in addition to 700 talents of silver. This tax was exclusively levied on Satrapies based on their lands, productive capacity and tribute levels. The Rosetta Stone, a tax concession issued by Ptolemy V in 196 BC and written in three languages "led to the most famous decipherment in history—the cracking of hieroglyphics". Islamic rulers imposed Zakat (a tax on Muslims) and Jizya (a Tax per head, poll tax on conquered non-Muslims). In India this practice began in the 11th century.


Trends

Numerous records of government tax collection in Europe since at least the 17th century are still available today. But taxation levels are hard to compare to the size and flow of the economy since gross domestic product, production numbers are not as readily available. 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
government debt In public finance, government debt, also known as public interest, public debt, national debt and sovereign debt, is the total amount of debt owed at a point in time by a government or sovereign state to lenders. Government debt can be owed to ...
had reached 1.6 billion ''livres''. In 1780–89, it reached 421.50 million ''livres''. Taxation as a percentage of production of final goods may have reached 15–20% during the 17th century in places such as 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 sixfold 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. Effective 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, 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 Gross domestic product, GDP 2016 was 45.9% in Denmark, 45.3% in France, 33.2% in the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shorth ...

United Kingdom
, 26% in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
, and among all OECD members an average of 34.3%.


Forms

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, which is paid in lieu of military service; strictly speaking, it is 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-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). This should not be confused with the modern practice of the same name which is normally voluntary. * (Feudal) aids, a type of tax or due that was paid by a vassal to his lord during feudal times. * Danegeld, a medieval land tax originally raised to pay off raiding Danes and later used to fund military expenditures. * Carucage, a tax which replaced the Danegeld in England. * Tax farming, the principle of assigning the responsibility for tax revenue collection to private citizens or groups. * Socage, a feudal tax system based on land rent. * Burgage, a feudal tax system based on land rent. Some principalities taxed windows, doors, or cabinets to reduce consumption of imported glass and hardware. Armoires, hutch (furniture), hutches, and wardrobes were employed to evade taxes on doors and cabinets. In some 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, beard tax, 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. Under the German system, there are 118 laws, 185 forms, and 96,000 regulations, spending Euro, €3.7 billion to collect the income tax. In the United States, the Internal Revenue Service, IRS has about IRS tax forms, 1,177 forms and instructions, 28.4111 megabytes of Internal Revenue Code which contained 3.8 million words as of 1 February 2010, numerous tax regulations in the Code of Federal Regulations, and supplementary material in the Internal Revenue Bulletin. Today, governments in more advanced economies (i.e. Europe and North America) tend to rely more on direct taxes, while developing economies (i.e. several African countries) rely more on indirect taxes.


Economic effects

In economic terms, taxation transfers wealth from households or businesses to the government of a nation. Adam Smith writes in ''The Wealth of Nations'' that :"…the economic incomes of private people are of three main types: rent, profit, and wages. Ordinary taxpayers will ultimately pay their taxes from at least one of these revenue sources. The government may intend that a particular tax should fall exclusively on rent, profit, or wages – and that another tax should fall on all three private income sources jointly. However, many taxes will inevitably fall on resources and persons very different from those intended … Good taxes meet four major criteria. They are (1) proportionate to incomes or abilities to pay (2) certain rather than arbitrary (3) payable at times and in ways convenient to the taxpayers and (4) cheap to administer and collect." The side-effects of taxation (such as economic distortions) and theories about how best to tax are an important subject in microeconomics. Taxation is almost never a simple transfer of wealth. Economic theories of taxation approach the question of how to maximize Welfare economics, economic welfare through taxation. A 2019 study looking at the impact of tax cuts for different income groups, it was tax cuts for low-income groups that had the greatest positive impact on employment growth. Tax cuts for the wealthiest top 10% had a small impact.


Incidence

Law establishes from whom a tax is collected. In many countries, taxes are imposed on businesses (such as corporate taxes or portions of
payroll tax Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their employees. By law, some payroll taxes are the responsibility of the employee and others fall on the em ...
es). However, who ultimately pays the tax (the tax "burden") is determined by the marketplace as taxes become Effect of taxes and subsidies on price, embedded into production costs. Economic theory suggests that the economic effect of tax does not necessarily fall at the point where it is legally levied. For instance, a tax on employment paid by employers will impact the employee, at least in the long run. The greatest share of the tax burden tends to fall on the most inelastic factor involved—the part of the transaction which is affected least by a change in price. So, for instance, a tax on wages in a town will (at least in the long run) affect property-owners in that area. Depending on how quantities supplied and demanded to 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 is distributed over 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), entrepreneurs (in the form of lower wages of superintendence) and customers (in the form of higher prices). To show this relationship, suppose that the market price of a product is $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 has an elastic demand, a greater portion of the tax will be absorbed by the seller. This is because goods with elastic demand cause a large decline in quantity demanded a small increase in price. Therefore, in order to stabilize sales, the seller absorbs more of the additional tax burden. 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).


Increased economic welfare


Government spending

The purpose of taxation is to provide for
government spending Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting A variety of measures of national income and output are used in economics to estimate total economic activit ...
without inflation. The provision of Public good (economics), public goods such as Road, roads and other
infrastructure Infrastructure is the set of fundamental facilities and systems that support the sustainable functionality of households and firms. Serving a country, city, or other area, including the services and facilities necessary for its economy An ec ...

infrastructure
, School, schools, a social safety net, public
health systems A health system, also known as health care system or healthcare system, is the organization An organization, or organisation (Commonwealth English The use of the English language English is a of the , originally spoken by t ...
, national defense, law enforcement, and a Judiciary, courts system increases the economic welfare of society if the benefit outweighs the costs involved.


Pigovian

The existence of a tax can ''increase'' economic efficiency in some cases. If there is a negative externality associated with a good (meaning that it has negative effects not felt by the consumer) then a free market will trade too much of that good. By taxing the good, the government can raise revenue to address specific problems while increasing overall welfare. The goal is to tax people when they're creating societal costs in addition to their personal costs. By taxing goods with negative externalities, the government attempts to increase economic efficiency while raising revenues. This type of tax is called a Pigovian tax, after economist Arthur Cecil Pigou, Arthur Pigou who wrote about it in his 1920 book "The Economics of Welfare". Pigovian taxes might target the undesirable production of Greenhouse gas, greenhouse gases which cause climate change (namely a
carbon tax A carbon tax is a tax levied on the carbon Carbon (from la, carbo "coal") is a with the C and 6. It is lic and —making four s available to form s. It belongs to group 14 of the periodic table. Carbon makes up only about 0.025 pe ...

carbon tax
), polluting fuels (such as petrol), water or air pollution (namely an ecotax), goods which incur public healthcare costs (such as Alcoholic drink, alcohol or
tobacco Tobacco is the common name of several plants in the genus Genus /ˈdʒiː.nəs/ (plural genera /ˈdʒen.ər.ə/) is a taxonomic rank In biological classification In biology, taxonomy () is the scientific study of naming, defini ...

tobacco
), and excess demand of certain public goods (such as congestion charging, traffic congestion pricing). The idea is to aim taxes at people that cause an above-average amount of societal harm so the free market incorporates all Cost, costs as opposed to only personal costs, with the benefit of lowering the overall tax burden for people who cause less societal harm.


Reduced inequality

Progressive taxation generally reduces economic inequality, even when the tax revenue is not Redistribution of income and wealth, redistributed from higher-income individuals to lower-income individuals. However, in a highly specific condition, progressive taxation increases economic inequality when lower-income individuals consume goods and Service (economics), services produced by higher-income individuals, who in turn consume only from other higher-income individuals (trickle-up effect).


Reduced economic welfare

Most taxes (see #Deadweight costs of taxation, below) have side effects that reduce economic welfare, either by mandating unproductive labor (compliance costs) or by creating distortions to economic incentives (
deadweight loss Image:Deadweight-loss-price-ceiling.svg, 250px, Deadweight loss created by a binding price ceiling. The producer surplus always decreases, but the consumer surplus may or may not increase; however, the decrease in producer surplus must be greater th ...
and perverse incentives).


Cost of compliance

Although governments must spend money on tax collection activities, some of the costs, particularly for keeping records and filling out forms, are borne by businesses and by private individuals. These are collectively called costs of compliance. More complex tax systems tend to have higher compliance costs. This fact can be used as the basis for practical or moral arguments in favor of tax simplification (such as the
FairTax FairTax was a single rate tax proposal in 2005, 2008 and 2009 in the United States that includes complete dismantling of the Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service of the United States federa ...
or OneTax, and some flat tax proposals).


Deadweight costs

In the absence of negative Externality, externalities, the introduction of taxes into a market reduces economic efficiency by causing
deadweight loss Image:Deadweight-loss-price-ceiling.svg, 250px, Deadweight loss created by a binding price ceiling. The producer surplus always decreases, but the consumer surplus may or may not increase; however, the decrease in producer surplus must be greater th ...
. In a competitive market, the price of a particular Good (economics), economic good adjusts to ensure that all trades which benefit both the buyer and the seller of a good occur. The introduction of a tax causes the price received by the seller to be less than the cost to the buyer by the amount of the tax. This causes fewer transactions to occur, which reduces welfare economics, economic welfare; the individuals or businesses involved are less well off than before the tax. The tax burden and the amount of deadweight cost is dependent on the elasticity (economics), elasticity of supply and demand for the good taxed. Most taxes—including income tax and
sales tax A sales tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelate ...
—can have significant deadweight costs. The only way to avoid deadweight costs in an economy that is generally competitive is to refrain from taxes that change economic incentives. Such taxes include the land value tax, where the tax is on a good in completely inelastic supply. By taxing the value of unimproved land as opposed to what's built on it, a land value tax does not increase taxes on landowners for improving their land. This is opposed to traditional property taxes which reward land abandonment and disincentivize construction, maintenance, and repair. Another example of a tax with few deadweight costs is a lump sum tax such as a Tax per head, poll tax (head tax) which is paid by all adults regardless of their choices. Arguably a windfall profits tax which is entirely unanticipated can also fall into this category. Deadweight loss does not account for the effect taxes have in leveling the business playing field. Businesses that have more money are better suited to fend off competition. It is common that an industry with a small amount of very large corporations has a very high barrier of entry for new entrants coming into the marketplace. This is due to the fact that the larger the corporation, the better its position to negotiate with suppliers. Also, larger companies may be able to operate at low or even negative profits for extended periods of time, thus pushing out competition. More progressive taxation of profits, however, would reduce such barriers for new entrants, thereby increasing competition and ultimately benefiting consumers.


Perverse incentives

Complexity of the tax code in developed economies offers perverse tax incentives. The more details of tax policy there are, the more opportunities for legal tax avoidance and illegal tax evasion. These not only result in lost revenue but involve additional costs: for instance, payments made for tax advice are essentially deadweight costs because they add no wealth to the economy. Perverse incentives also occur because of non-taxable 'hidden' transactions; for instance, a sale from one company to another might be liable for
sales tax A sales tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelate ...
, but if the same goods were shipped from one branch of a corporation to another, no tax would be payable. To address these issues, economists often suggest simple and transparent tax structures that avoid providing loopholes. Sales tax, for instance, can be replaced with a
value added tax A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law L ...
which disregards intermediate transactions.


In developing countries

Following Nicolas Kaldor's research, public finance in developing countries is strongly tied to state capacity and financial development. As state capacity develops, states not only increase the level of taxation but also the pattern of taxation. With the increase of larger tax bases and the diminish of the importance of trading tax, while income tax gains more importance. According to Tilly's argument, state capacity evolves as a response to the emergence of war. War is an incentive for states to raise taxes and strengthen states' capacity. Historically, many taxation breakthroughs took place during wartime. The introduction of income tax in Britain was due to the Napoleonic War in 1798. The US first introduced income tax during the Civil War. Taxation is constrained by the fiscal and legal capacities of a country. Fiscal and legal capacities also complement each other. A well-designed tax system can minimize efficiency loss and boost economic growth. With better compliance and better support to financial institutions and individual property, the government will be able to collect more tax. Although wealthier countries have higher tax revenue, economic growth does not always translate to higher tax revenue. For example, in India, increases in exemptions lead to the stagnation of income tax revenue at around 0.5% of GDP since 1986. Researchers for EPS PEAKS stated that the core purpose of taxation is revenue mobilisation, providing resources for National Budgets, and forming an important part of macroeconomic management. They said economic theory has focused on the need to 'optimize' the system through balancing efficiency and equity, understanding the impacts on production, and consumption as well as distribution, Redistribution (economics), redistribution, and
welfare Welfare (or commonly, social welfare) is a type of government support intended to ensure that members of a society can meet basic human needs Maslow's hierarchy of needs is an idea in psychology Psychology is the science of mind and ...
. They state that taxes and tax reliefs have also been used as a tool for behavioral change, to influence investment decisions, labor supply, consumption patterns, and positive and negative economic spill-overs (externalities), and ultimately, the promotion of economic growth and development. The tax system and its administration also play an important role in state-building and governance, as a principal form of 'social contract' between the state and citizens who can, as taxpayers, exert accountability on the state as a consequence. The researchers wrote that domestic revenue forms an important part of a developing country's public financing as it is more stable and predictable than Overseas Development Assistance and necessary for a country to be self-sufficient. They found that domestic revenue flows are, on average, already much larger than ODA, with aid worth less than 10% of collected taxes in Africa as a whole. However, in a quarter of African countries Overseas Development Assistance does exceed tax collection, with these more likely to be non-resource-rich countries. This suggests countries making the most progress replacing aid with tax revenue tend to be those benefiting disproportionately from rising prices of energy and commodities. The author found tax revenue as a percentage of GDP varying greatly around a global average of 19%. This data also indicates countries with higher GDP tend to have higher tax to GDP ratios, demonstrating that higher income is associated with more than proportionately higher tax revenue. On average, high-income countries have tax revenue as a percentage of GDP of around 22%, compared to 18% in middle-income countries and 14% in low-income countries. In high-income countries, the highest tax-to-GDP ratio is in Denmark at 47% and the lowest is in Kuwait at 0.8%, reflecting low taxes from strong oil revenues. The long-term average performance of tax revenue as a share of GDP in low-income countries has been largely stagnant, although most have shown some improvement in more recent years. On average, resource-rich countries have made the most progress, rising from 10% in the mid-1990s to around 17% in 2008. Non-resource-rich countries made some progress, with average tax revenues increasing from 10% to 15% over the same period. Many low-income countries have a tax-to-GDP ratio of less than 15% which could be due to low tax potentials, such as a limited taxable economic activity, or low tax effort due to policy choice, non-compliance, or administrative constraints. Some low-income countries have relatively high tax-to-GDP ratios due to resource tax revenues (e.g. Angola) or relatively efficient tax administration (e.g. Kenya, Brazil) whereas some middle-income countries have lower tax-to-GDP ratios (e.g. Malaysia) which reflect a more tax-friendly policy choice. While overall tax revenues have remained broadly constant, the global trend shows trade taxes have been declining as a proportion of total revenues(IMF, 2011), with the share of revenue shifting away from border trade taxes towards domestically levied sales taxes on goods and services. Low-income countries tend to have a higher dependence on trade taxes, and a smaller proportion of income and consumption taxes when compared to high-income countries. One indicator of the taxpaying experience was captured in the 'Doing Business' survey, which compares the total tax rate, time spent complying with tax procedures, and the number of payments required through the year, across 176 countries. The 'easiest' countries in which to pay taxes are located in the Middle East with the UAE ranking first, followed by Qatar and Saudi Arabia, most likely reflecting low tax regimes in those countries. Countries in Sub-Saharan Africa are among the 'hardest' to pay with the Central African Republic, Republic of Congo, Guinea and Chad in the bottom 5, reflecting higher total tax rates and a greater administrative burden to comply.


Key facts

The below facts were compiled by EPS PEAKS researchers: * Trade liberalisation has led to a decline in trade taxes as a share of total revenues and GDP. * Resource-rich countries tend to collect more revenue as a share of GDP, but this is more volatile. Sub-Saharan African countries that are resource-rich have performed better tax collecting than non-resource-rich countries, but revenues are more volatile from year to year. By strengthening revenue management, there are huge opportunities for investment for development and growth. * Developing countries have an informal sector representing an average of around 40%, perhaps up to 60% in some. Informal sectors feature many small informal traders who may not be efficient in bringing into the tax net since the cost of collection is high and revenue potential limited (although there are broader governance benefits). There is also an issue of non-compliant companies who are 'hard to tax', evading taxes and should be brought into the tax net.IMF, 2011, Revenue Mobilization in Developing Countries, Fiscal Affairs Department * In many low-income countries, the majority of revenue is collected from a narrow tax base, sometimes because of a limited range of taxable economic activities. There is therefore dependence on few taxpayers, often multinationals, that can exacerbate the revenue challenge by minimizing their tax liability, in some cases abusing a lack of capacity in revenue authorities, sometimes through Transfer pricing, transfer pricing abuse. * Developing and developed countries face huge challenges in taxing multinationals and international citizens. Estimates of tax revenue losses from evasion and avoidance in developing countries are limited by a lack of data and methodological shortcomings, but some estimates are significant. * Countries use incentives to attract investment but doing this may be unnecessarily giving up revenue as evidence suggests that investors are influenced more by economic fundamentals like market size, infrastructure, and skills, and only marginally by tax incentives (IFC investor surveys). For example, even though the Armenian government supports the IT sector and improves the investment climate, the small size of the domestic market, low wages, low demand for productivity enhancement tools, financial constraints, high software piracy rates, and other factors make growth in this sector a slow process. Meaning that tax incentives do not contribute to the development of the sector as much as it is thought to contribute. * In low-income countries, compliance costs are high, they are lengthy processes, frequent tax payments, bribes and corruption. * Administrations are often under-resourced, resources aren't effectively targeted on areas of greatest impact, and mid-level management is weak. Coordination between domestic and customs is weak, which is especially important for VAT. Weak administration, governance, and corruption tend to be associated with low revenue collections (IMF, 2011). * Evidence on the effect of aid on tax revenues is inconclusive. Tax revenue is more stable and sustainable than aid. While a disincentive effect of aid on revenue may be expected and was supported by some early studies, recent evidence does not support that conclusion, and in some cases, points towards higher tax revenue following support for revenue mobilization. * Of all regions, Africa has the highest total tax rates borne by the business at 57.4% of the profit on average but has reduced the most since 2004, from 70%, partly due to introducing VAT and this is likely to have a beneficial effect on attracting investment. * Fragile states are less able to expand tax revenue as a percentage of GDP and any gains are more difficult to sustain. Tax administration tends to collapse if conflict reduces state-controlled territory or reduces productivity. As economies are rebuilt after conflicts, there can be good progress in developing effective tax systems. Liberia expanded from 10.6% of GDP in 2003 to 21.3% in 2011. Mozambique increased from 10.5% of GDP in 1994 to around 17.7% in 2011.


Summary

Aid interventions in revenue can support revenue mobilization for growth, improve tax system design and administrative effectiveness, and strengthen governance and compliance. The author of the Economics Topic Guide found that the best aid modalities for revenue depend on country circumstances, but should aim to align with government interests and facilitate effective planning and implementation of activities under evidence-based tax reform. Lastly, she found that identifying areas for further reform requires country-specific diagnostic assessment: broad areas for developing countries identified internationally (e.g. IMF) include, for example, property taxation for local revenues, strengthening expenditure management, and effective taxation of extractive industries and multinationals.


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Support

According to most Political philosophy, political philosophies, taxes are justified as they fund activities that are necessary and beneficial to society. Additionally, progressive taxation can be used to reduce economic inequality in a society. According to this view, taxation in modern nation-states benefit the majority of the population and Social change, social development. A common presentation of this view, paraphrasing various statements by Oliver Wendell Holmes Jr. is "Taxes are the price of civilization". It can also be argued that in a democracy, because the government is the party performing the act of imposing taxes, society as a whole decides how the tax system should be organized. The American Revolution's "No taxation without representation" slogan implied this view. For traditional conservatives, the payment of taxation is justified as part of the general obligations of citizens to obey the law and support established institutions. The conservative position is encapsulated in perhaps the most famous adage of public finance, "An old tax is a good tax". Conservatives advocate the "fundamental conservative premise that no one should be excused from paying for government, lest they come to believe that government is costless to them with the certain consequence that they will demand more government 'services'." Social democrats generally favor higher levels of taxation to fund public provision of a wide range of services such as universal health care and education, as well as the provision of a range of Welfare state, welfare benefits. As argued by Anthony Crosland and others, the capacity to tax income from capital is a central element of the social democratic case for a mixed economy as against Marxist arguments for comprehensive public ownership of capital. American Libertarianism in the United States, libertarians recommend a minimal level of taxation in order to maximize the protection of liberty. Compulsory taxation of individuals, such as income tax, is often justified on grounds including territorial sovereignty, and the social contract. Defenders of business taxation argue that it is an efficient method of taxing income that ultimately flows to individuals, or that separate taxation of
business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trad ...

business
is justified on the grounds that commercial activity necessarily involves the use of publicly established and maintained economic infrastructure, and that businesses are in effect charged for this use. Georgist economists argue that all of the economic rent collected from natural resources (land, mineral extraction, fishing quotas, etc.) is unearned income, and belongs to the community rather than any individual. They advocate a high tax (the "Single Tax") on land and other natural resources to return this unearned income to the state, but no other taxes.


Against

Because payment of tax is compulsory and enforced by the legal system, rather than voluntary like crowdfunding, some political philosophies view taxation as theft, extortion, (or as taxation as slavery, slavery, or as a violation of property rights), or tyranny, accusing the government of levying taxes via force (law), force and coercive means. Objectivism, Objectivists, anarcho-capitalism, anarcho-capitalists, and right-wing libertarians see taxation as government aggression (see non-aggression principle). The view that democracy legitimizes taxation is rejected by those who argue that all forms of government, including laws chosen by democratic means, are fundamentally oppressive. According to Ludwig von Mises, "society as a whole" should not make such decisions, due to methodological individualism. Libertarian opponents of taxation claim that governmental protection, such as police and defense forces might be replaced by Market (economics), market alternatives such as Private defense agency, private defense agencies, arbitration agencies or Voluntary taxation, voluntary contributions. Many view government spending as an inefficient use of capital, and that the same projects that the government seeks to develop can be developed by private companies at much lower costs. This line of argument holds that government workers are not as personally invested in the efficiency of the projects, so the overspending happens at every step of the way. In the same regard, many public officials are not elected for their project management skills, so the projects can be mishandled. In the United States, President George W. Bush proposed in his 2009 budget "to terminate or reduce 151 discretionary programs" which were inefficient or ineffective.


Socialism

Karl Marx assumed that taxation would be unnecessary after the advent of communism and looked forward to the "withering away of the state". In socialist economies such as that of China, taxation played a minor role, since most government income was derived from the ownership of enterprises, and it was argued by some that monetary taxation was not necessary. While the morality of taxation is sometimes questioned, most arguments about taxation revolve around the degree and method of taxation and associated
government spending Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting A variety of measures of national income and output are used in economics to estimate total economic activit ...
, not taxation itself.


Choice

Tax choice is the theory that taxpayers should have more control with how their individual taxes are allocated. If taxpayers could choose which government organizations received their taxes,
opportunity cost In microeconomic theory Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Produ ...
decisions would integrate their dispersed knowledge, partial knowledge. For example, a taxpayer who allocated more of his taxes on public education would have less to allocate on public healthcare. Supporters argue that allowing taxpayers to demonstrated preference, demonstrate their preferences would help ensure that the government success, government succeeds at efficiently producing the public goods that taxpayers truly value. This would end real estate speculation, business cycles, unemployment and distribute wealth much more evenly. Joseph Stiglitz's Henry George Theorem predicts its sufficiency because—as George also noted—public spending raises land value.


Geoism

Geoists (Georgists and geolibertarians) state that taxation should primarily collect economic rent, in particular the land value taxation, value of land, for both reasons of economic efficiency as well as morality. The efficiency of using economic rent for taxation is (as economists agree) due to the fact that such taxation cannot be passed on and does not create any dead-weight loss, and that it removes the incentive to speculate on land. Its morality is based on the Geoist premise that private property is justified for products of labour but not for land (economics), land and natural resources. Economist and social reformer Henry George opposed sales taxes and protective tariffs for their negative impact on trade. He also believed in the right of each person to the fruits of their own labour and productive investment. Therefore, income from Wage labour, labour and proper capital (economics), capital should remain untaxed. For this reason many Geoists—in particular those that call themselves geolibertarian—share the view with libertarians that these types of taxation (but not all) are immoral and Taxation as theft, even theft. George stated there should be one single tax: the Land Value Tax, which is considered both efficient and moral. Demand for specific land is dependent on nature, but even more so on the presence of communities, trade, and government infrastructure, particularly in urban area, urban environments. Therefore, the economic rent of land is not the product of one particular individual and it may be claimed for public expenses. According to George, this would end real estate bubbles, business cycles, unemployment and distribute wealth much more evenly. Joseph Stiglitz's Henry George Theorem predicts its sufficiency for financing public goods because those raise land value. John Locke stated that whenever labour is mixed with natural resources, such as is the case with improved land, private property is justified under the Lockean proviso, proviso that there must be enough other natural resources of the same quality available to others. Geoists state that the Lockean proviso is violated wherever land value is greater than zero. Therefore, under the assumed principle of equal rights of all people to natural resources, the occupier of any such land must compensate the rest of society to the amount of that value. For this reason, geoists generally believe that such payment cannot be regarded as a true 'tax', but rather a compensation or fee. This means that while Geoists also regard taxation as an instrument of social justice, contrary to social democrats and social liberals they do not regard it as an instrument of redistribution (economics), redistribution but rather a 'predistribution' or simply a correct distribution of the commons. Modern geoists note that land (economics), land in the classical economic meaning of the word referred to all natural resources, and thus also includes resources such as mineral deposits, water bodies and the electromagnetic spectrum, to which privileged access also generates economic rent that must be compensated. Under the same reasoning most of them also consider pigouvian taxes as compensation for environmental damage or privilege as acceptable and even necessary.


Theories


Laffer curve

In
economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interact ...

economics
, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity (that taxable income will change in response to changes in the rate of taxation). The curve is constructed by thought experiment. First, the amount of tax revenue raised at the extreme tax rates of 0% and 100% is considered. It is clear that a 0% tax rate raises no revenue, but the Laffer curve hypothesis is that a 100% tax rate will also generate no revenue because at such a rate there is no longer any incentive for a rational taxpayer to earn any income, thus the revenue raised will be 100% of nothing. If both a 0% rate and 100% rate of taxation generate no revenue, it follows from the extreme value theorem that there must exist at least one rate in between where tax revenue would be a maximum. The Laffer curve is typically represented as a graph that starts at 0% tax, zero revenue, rises to a maximum rate of revenue raised at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate. One potential result of the Laffer curve is that increasing tax rates beyond a certain point will become counterproductive for raising further tax revenue. A hypothetical Laffer curve for any given economy can only be estimated and such estimates are sometimes controversial. The New Palgrave Dictionary of Economics reports that estimates of revenue-maximizing tax rates have varied widely, with a mid-range of around 70%.


Optimal

Most governments take revenue that exceeds that which can be provided by non-distortionary taxes or through taxes that give a double dividend. Optimal taxation theory is the branch of economics that considers how taxes can be structured to give the least deadweight costs, or to give the best outcomes in terms of social welfare. The Ramsey problem deals with minimizing deadweight costs. Because deadweight costs are related to the elasticity (economics), elasticity of supply and demand for a good, it follows that putting the highest tax rates on the goods for which there are most inelastic supply and demand will result in the least overall deadweight costs. Some economists sought to integrate optimal tax theory with the social welfare function, which is the economic expression of the idea that equality is valuable to a greater or lesser extent. If individuals experience diminishing returns from income, then the optimum distribution of income for society involves a progressive income tax. James Mirrlees, Mirrlees optimal income tax is a detailed theoretical model of the optimum progressive income tax along these lines. Over the last years the validity of the theory of optimal taxation was discussed by many political economists.


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 Tax rate#Marginal, marginal rate and the Tax rate#Effective, effective tax 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 $0 up to $50,000, 10% from $50,000 to $100,000, and 15% over $100,000, a wikt:taxpayer, 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%.


See also

* Advance tax ruling * DIRTI 5 * Excess burden of taxation * Fiscal capacity * Fiscal incidence * Fiscal sociology * Government budget balance * International taxation * List of taxes * Price ceiling * Price floor * Revolutionary tax * Tax competition * Tax exporting * Tax haven * Taxpayer receipt * Tax revenue * Tax resistance * Tax shelter


By country or region

* List of countries by tax rates *List of countries by tax revenue as percentage of GDP *Revenue service * :Taxation by country


References


Further reading


My taxes go where? How countries spend your money
(17 February 2015), ''The BBC'' * * Seelkopf, L., Bubek, M., Eihmanis, E. ''et al.'' doi:10.1007/s11558-019-09359-9, The rise of modern taxation: A new comprehensive dataset of tax introductions worldwide. ''Rev Int Organ'' (2019).


External links


Tax introduction database – A dataset of the introduction of taxes in 220 countries, 1750-2018.

OECD tax statistics

OECD portal on Tax

ICTD/UNU-WIDER, Government Revenue Dataset
compilation of tax data mainly from OECD and International Monetary Fund, IMF {{Authority control Tax, 3rd-millennium BC establishments in Egypt Egyptian inventions 30th-century BC establishments