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An income 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 interrelated elements that act accord ...
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 system imposes tax. In other words, the income over which the government imposed tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The ...
). Income tax generally is computed as the product of a tax rate times the taxable income. Taxation rates may vary by type or characteristics of the taxpayer and the type of income. The tax rate may increase as taxable income increases (referred to as graduated or
progressive tax A progressive 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, a legal person is any person A person (plural people or persons) is a being that h ...
rates). The tax imposed on companies is usually known as
corporate tax A corporate tax, also called corporation tax or company tax, is a direct tax Though the actual definitions vary between jurisdictions, in general, a direct tax is a tax imposed upon a person or property as distinct from a tax imposed upon a tran ...
and is commonly levied at a flat rate. Individual income is often taxed at progressive rates where the tax rate applied to each additional unit of income increases (e.g. the first $10,000 of income taxed at 0%, the next $10,000 taxed at 1%, etc.). Most jurisdictions exempt local charitable organizations from tax. Income from investments may be taxed at different (generally lower) rates than other types of income. Credits of various sorts may be allowed that reduce tax. Some jurisdictions impose the higher of an income tax or a tax on an alternative base or measure of income. Taxable income of taxpayers resident in the jurisdiction is generally total income less income producing expenses and other deductions. Generally, only net gain from the sale of property, including goods held for sale, is included in income. The income of a corporation's shareholders usually includes distributions of profits from the corporation. Deductions typically include all income-producing or business expenses including an allowance for recovery of costs of business assets. Many jurisdictions allow notional deductions for individuals and may allow deduction of some personal expenses. Most jurisdictions either do not tax income earned outside the jurisdiction or allow a credit for taxes paid to other jurisdictions on such income. Nonresidents are taxed only on certain types of income from sources within the jurisdictions, with few exceptions. Most jurisdictions require self-assessment of the tax and require payers of some types of income to withhold tax from those payments. Advance payments of tax by taxpayers may be required. Taxpayers not timely paying tax owed are generally subject to significant penalties, which may include jail for individuals or revocation of an entity's legal existence.


History

The concept of taxing income is a modern innovation and presupposes several things: a
money 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">174x174px Money is any item or verifiable record that is generally a ...

money
economy An economy (; ) is an area of the production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products ( ...

economy
, reasonably accurate accounts, a common understanding of receipts, expenses and profits, and an orderly society with reliable records. For most of the history of
civilization  A civilization (or civilisation) is a complex society A complex society is a concept that is shared by a range of disciplines including anthropology, archaeology, history and sociology to describe a stage of social formation. The concep ...

civilization
, these preconditions did not exist, and taxes were based on other factors. Taxes on
wealth Wealth is the abundance of valuable financial asset A financial asset is a non-physical asset whose value is derived from a contractual claim, such as deposit (finance), bank deposits, bond (finance), bonds, and participations in companies' sh ...

wealth
, social position, and ownership of the
means of production The means of production is a concept that encompasses the social use and ownership Ownership is the state or fact of exclusive right In Anglo-Saxon law Anglo-Saxon law (Old English Old English (, ), or Anglo-Saxon, is the earliest record ...
(typically
land Land is the solid surface of Earth that is not permanently submerged in water. Most but not all land is situated at elevations above sea level (variable over geologic time frames) and consists mainly of Earth's crust, crustal components such a ...
and
slaves Slavery and enslavement are both the state and the condition of being a slave, who is someone forbidden to quit their service for an enslaver, and who is treated by the enslaver as their property. Slavery typically involves the enslaved per ...
) were all common. Practices such as
tithing A tithing or tything was a historic English legal, administrative or territorial unit, originally ten hide (unit), hides (and hence, one tenth of a Hundred (country subdivision), hundred). Tithings later came to be seen as subdivisions of a Manoria ...
, or an offering of
first fruits First Fruits is a religious offering of the first agricultural produce of the harvest Harvesting is the process of gathering a ripe crop from the field Field may refer to: Expanses of open ground * Field (agriculture), an area of land use ...

first fruits
, existed from ancient times, and can be regarded as a precursor of the income tax, but they lacked precision and certainly were not based on a concept of net increase.


Early examples

The first income tax is generally attributed to Egypt. In the early days of the
Roman Republic The Roman Republic ( la, Rēs pūblica Rōmāna ) was a state of the classical Roman civilization, run through public In public relations Public relations (PR) is the practice of managing and disseminating information from an indiv ...
, public taxes consisted of modest assessments on owned wealth and property. The tax rate under normal circumstances was 1% and sometimes would climb as high as 3% in situations such as war. These modest taxes were levied against land, homes and other real estate, slaves, animals, personal items and monetary wealth. The more a person had in property, the more tax they paid. Taxes were collected from individuals. In the year 10 AD, Emperor
Wang Mang Wang Mang () (c. 45 – 6 October 23 AD), courtesy name A courtesy name (), also known as a style name, is a name bestowed upon one at adulthood in addition to one's given name. This practice is a tradition in the East Asian cultura ...

Wang Mang
of the
Xin Dynasty The Xin dynasty (; ) was a short-lived Chinese dynasty Dynasties in Chinese history, or Chinese dynasties, were hereditary monarchical regimes that ruled over China during much of its history. From the inauguration of dynastic rule by Yu t ...
instituted an unprecedented income tax, at the rate of 10 percent of profits, for professionals and skilled labor. He was overthrown 13 years later in 23 AD and earlier policies were restored during the reestablished
Han Dynasty#REDIRECT Han dynasty The Han dynasty () was the second Dynasties in Chinese history, imperial dynasty of China (202 BC – 220 AD), established by the rebel leader Liu Bang and ruled by the House of Liu. Preceded by the short-lived Qin dynas ...

Han Dynasty
which followed. One of the first recorded taxes on income was the
Saladin titheThe Saladin tithe, or the Aid of 1188, was 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 ...
introduced by
Henry II Henry II may refer to: Kings *Henry II of England (1133–89), reigned from 1154 *Henry II of Jerusalem and Cyprus (1271–1324), reigned from 1285; king of Jerusalem in name only from 1291 *Henry II of Castile (1334–79), reigned 1366–67 and ...

Henry II
in 1188 to raise money for the
Third Crusade The Third Crusade (1189–1192) was an attempt by three European monarchs of Latin Christianity, Western Christianity (Philip II of France, Richard I of England and Frederick I, Holy Roman Emperor) to reconquer the Holy Land following the Siege o ...
. The tithe demanded that each
layperson In religious organizations, the laity consists of all members who are not part of the clergy Clergy are formal leaders within established religions. Their roles and functions vary in different religious traditions, but usually involve presidin ...
in
England and Wales England and Wales () is a legal jurisdiction covering England and Wales, two of the four countries of the United Kingdom, parts of the United Kingdom. England and Wales forms the constitutional successor to the former Kingdom of England and follows ...

England and Wales
be taxed one tenth of their personal income and moveable property.


Modern era


United Kingdom

The inception date of the modern income tax is typically accepted as 1799, at the suggestion of
Henry Beeke Henry Beeke (6 January 1751 – 9 March 1837) was an English historian, theologian, writer on taxation and finance, and botanist. Career Beeke was elected a scholar of Corpus Christi College, Oxford, Corpus Christi, University of Oxford, Oxford in ...
, the future
Dean of Bristol The Dean of Bristol is the head of the Chapter Chapter or Chapters may refer to: Books * Chapter (books), a main division of a piece of writing or document * Chapter book, a story book intended for intermediate readers, generally age 7–10 * Cha ...
. This income tax was introduced into
Great Britain Great Britain is an island in the North Atlantic Ocean off the northwest coast of continental Europe. With an area of , it is the largest of the British Isles, the List of European islands by area, largest European island, and the List of i ...

Great Britain
by
Prime Minister A prime minister or a premier is the head of the cabinet Cabinet or The Cabinet may refer to: Furniture * Cabinetry, a box-shaped piece of furniture with doors and/or drawers * Display cabinet, a piece of furniture with one or more transpar ...
William Pitt the Younger William Pitt the Younger (28 May 175923 January 1806) was a prominent Tory A Tory () is a person who holds a political philosophy known as Toryism, based on a British version of Traditionalist conservatism, traditionalism and conservatism ...

William Pitt the Younger
in his budget of December 1798, to pay for weapons and equipment for the
French Revolutionary War The French Revolutionary Wars (french: Guerres de la Révolution française) were a series of sweeping military conflicts lasting from 1792 until 1802 and resulting from the French Revolution The French Revolution ( ) was a period of ...
. Pitt's new graduated (progressive) income tax began at a levy of 2
old pence The pre-decimal penny (1d) was a coin A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Ancient Greek, Greek μέταλλον ''métallon'', "mine, quarry, metal") is a material tha ...
in the
pound Pound or Pounds may refer to: Units * Pound (currency) A pound is any of various units of currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Im ...
() on incomes over £60 (equivalent to £ in ), and increased up to a maximum of 2
shilling The shilling is a historical coin, and the name of a unit of modern currencies A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Image:National-De ...
s in the pound (10%) on incomes of over £200. Pitt hoped that the new income tax would raise £10 million a year, but actual receipts for 1799 totalled only a little over £6 million. Pitt's income tax was levied from 1799 to 1802, when it was abolished by
Henry Addington Henry Addington, 1st Viscount Sidmouth, (30 May 175715 February 1844) was a British Tory The Tories were a political faction Politics (from , ) is the set of activities that are associated with making decisions in groups, or othe ...

Henry Addington
during the
Peace of Amiens The Treaty of Amiens (French language, French: ''la paix d'Amiens'') temporarily ended hostilities between French First Republic, France and the United Kingdom of Great Britain and Ireland, United Kingdom at the end of the War of the Second Coa ...
. Addington had taken over as
prime minister A prime minister or a premier is the head of the cabinet Cabinet or The Cabinet may refer to: Furniture * Cabinetry, a box-shaped piece of furniture with doors and/or drawers * Display cabinet, a piece of furniture with one or more transpar ...
in 1801, after Pitt's resignation over
Catholic Emancipation Catholic emancipation or Catholic relief was a process in the kingdoms of Great Britain Great Britain is an island in the North Atlantic Ocean off the northwest coast of continental Europe. With an area of , it is the largest of the Brit ...
. The income tax was reintroduced by Addington in 1803 when hostilities with France recommenced, but it was again abolished in 1816, one year after the
Battle of Waterloo The Battle of Waterloo was fought on Sunday, 18 June 1815, near Waterloo Waterloo most commonly refers to: * Battle of Waterloo, a battle on 18 June 1815 in which Napoleon met his final defeat :* Waterloo, Belgium, a municipality in Belgium fr ...

Battle of Waterloo
. Opponents of the tax, who thought it should only be used to finance wars, wanted all records of the tax destroyed along with its repeal. Records were publicly burned by the
Chancellor of the Exchequer The chancellor of the Exchequer, often abbreviated to the chancellor, is a senior minister of the Crown within the Government of the United Kingdom, and the chief executive officer of HM Treasury, Her Majesty's Treasury. As one of the four Grea ...
, but copies were retained in the basement of the tax court. In the
United Kingdom of Great Britain and Ireland The United Kingdom of Great Britain and Ireland was a sovereign state that existed between 1801 and 1922. It was established by the Acts of Union 1800, which merged the Kingdom of Great Britain and the Kingdom of Ireland into a unified state ...

United Kingdom of Great Britain and Ireland
, income tax was reintroduced by
Sir Robert Peel Sir Robert Peel, 2nd Baronet, (5 February 1788 – 2 July 1850) was a British Conservative Conservatism is an aesthetic Aesthetics, or esthetics (), is a branch of philosophy that deals with the nature of beauty and taste (socio ...

Sir Robert Peel
by the
Income Tax Act 1842 The Income Tax Act 1842The citation of this Act by this short title was authorised by the Short Titles Act 1896 The Short Titles Act 1896 (59 & 60 Vict c 14) is an Acts of Parliament in the United Kingdom, Act of the Parliament of the United Kingdo ...
. Peel, as a
Conservative Conservatism is an aesthetic Aesthetics, or esthetics (), is a branch of philosophy that deals with the nature of beauty and taste (sociology), taste, as well as the philosophy of art (its own area of philosophy that comes out of aest ...

Conservative
, had opposed income tax in the 1841 general election, but a growing budget deficit required a new source of funds. The new income tax, based on Addington's model, was imposed on incomes above £150 (equivalent to £ in ). Although this measure was initially intended to be temporary, it soon became a fixture of the British taxation system. A committee was formed in 1851 under
Joseph Hume Joseph Hume Fellow of the Royal Society, FRS (22 January 1777 – 20 February 1855) was a Scottish surgeon and Radicals (UK), Radical Member of Parliament (United Kingdom), MP.Ronald K. Huch, Paul R. Ziegler 1985 Joseph Hume, the People's M.P.: D ...

Joseph Hume
to investigate the matter, but failed to reach a clear recommendation. Despite the vociferous objection,
William Gladstone William Ewart Gladstone (; 29 December 1809 – 19 May 1898) was a British statesman and Liberal Liberal or liberalism may refer to: Politics *a supporter of liberalism, a political and moral philosophy **Liberalism by country *an a ...
,
Chancellor of the Exchequer The chancellor of the Exchequer, often abbreviated to the chancellor, is a senior minister of the Crown within the Government of the United Kingdom, and the chief executive officer of HM Treasury, Her Majesty's Treasury. As one of the four Grea ...
from 1852, kept the progressive income tax, and extended it to cover the costs of the
Crimean War The Crimean War, , was a military conflict fought from October 1853 to February 1856 in which Russia Russia ( rus, link=no, Россия, Rossiya, ), or the Russian Federation, is a country spanning Eastern Europe and Northern Asia. ...
. By the 1860s, the progressive tax had become a grudgingly accepted element of the United Kingdom fiscal system.


United States

The
US federal government The federal government of the United States (U.S. federal government or U.S. government) is the national government of the United States The United States of America (USA), commonly known as the United States (U.S. or US), or Ameri ...
imposed the first personal income tax on August 5, 1861, to help pay for its war effort in the
American Civil War The American Civil War (also known by other names Other most often refers to: * Other (philosophy), a concept in psychology and philosophy Other or The Other may also refer to: Books * The Other (Tryon novel), ''The Other'' (Tryon nove ...
(3% of all incomes over US$800) (equivalent to $ in ).Revenue Act of 1861, sec. 49, ch. 45, 12 Stat. 292, 309 (Aug. 5, 1861). This tax was repealed and replaced by another income tax in 1862. It was only in 1894 that the first peacetime income tax was passed through the Wilson-Gorman tariff. The rate was 2% on income over $4000 (equivalent to $ in ), which meant fewer than 10% of households would pay any. The purpose of the income tax was to make up for revenue that would be lost by tariff reductions. The US Supreme Court ruled the income tax
unconstitutional Constitutionality is the condition of acting in accordance with an applicable constitution A constitution is an aggregate of fundamental principles or established precedents that constitute the legal basis of a polity, organisation ...
, the 10th amendment forbidding any powers not expressed in the US Constitution, and there being no power to impose any other than a direct tax by apportionment. In 1913, the
Sixteenth Amendment to the United States Constitution The Sixteenth Amendment (Amendment XVI) to the United States Constitution allows United States Congress, Congress to levy an income tax without apportioning it among U.S. state, the states on the basis of population. It was passed by Congress ...
made the income tax a permanent fixture in the U.S. tax system. In fiscal year 1918, annual internal revenue collections for the first time passed the billion-dollar mark, rising to $5.4 billion by 1920. The amount of income collected via income tax has varied dramatically, from 1% in the early days of US income tax to taxation rates of over 90% during WW2.


Timeline of introduction of income tax by country

* 1799–1802: * 1803–1816: * 1840: * 1842: * 1860: * 1861–1872: * 1872: * 1887: * 1891: * 1894–95: * 1900: * 1903: , * 1908: * 1911: * 1913: * 1916: , * 1918: * 1920: , * 1921: * 1924: , * 1932: , * 1934: * 1937: * 1942: * 2007:


Common principles

While tax rules vary widely, there are certain basic principles common to most income tax systems. Tax systems in Canada, China,
Germany ) , image_map = , map_caption = , map_width = 250px , capital = Berlin Berlin (; ) is the Capital city, capital and List of cities in Germany by population, largest city of Germany by both area and population. Its 3,769,495 inh ...
,
Singapore Singapore (), officially the Republic of Singapore, is a sovereign state, sovereign island city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, bor ...
, the United Kingdom, and the United States, among others, follow most of the principles outlined below. Some tax systems, such as
India India, officially the Republic of India (Hindi Hindi (Devanagari: , हिंदी, ISO 15919, ISO: ), or more precisely Modern Standard Hindi (Devanagari: , ISO 15919, ISO: ), is an Indo-Aryan language spoken chiefly in Hindi Belt, ...
, may have significant differences from the principles outlined below. Most references below are examples; see specific articles by jurisdiction (''e.g.'',
Income tax in Australia Income tax in Australia is imposed by the federal government on the taxable income of individuals and corporations. State governments have not imposed income taxes since World War II World War II or the Second World War, often abbr ...
).


Taxpayers and rates

Individuals are often taxed at different rates than corporations. Individuals include only human beings. Tax systems in countries other than
the USA 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 of 50 U.S. state, states, a Washington, D.C., federal di ...
treat an entity as a corporation only if it is legally organized as a corporation. Estates and trusts are usually subject to special tax provisions. Other taxable entities are generally treated as partnerships. In the US, many kinds of entities may elect to be treated as a corporation or a partnership. Partners of partnerships are treated as having income, deductions, and credits equal to their shares of such partnership items. Separate taxes are assessed against each taxpayer meeting certain minimum criteria. Many systems allow married individuals to request joint assessment. Many systems allow controlled groups of locally organized corporations to be jointly assessed. Tax rates vary widely. Some systems impose higher rates on higher amounts of income. Example: Elbonia taxes income below E.10,000 at 20% and other income at 30%. Joe has E.15,000 of income. His tax is E.3,500. Tax rates schedules may vary for individuals based on marital status. In India on the other hand there is a slab rate system, where for income below INR 2.5 lakhs per annum the tax is zero percent, for those with their income in the slab rate of INR 2,50,001 to INR 5,00,000 the tax rate is 5%. In this way the rate goes up with each slab, reaching to 30% tax rate for those with income above INR 15,00,000.


Residents and nonresidents

Residents are generally taxed differently from nonresidents. Few jurisdictions tax nonresidents other than on specific types of income earned within the jurisdiction. See, ''e.g.'', the discussion of taxation by the United States of foreign persons. Residents, however, are generally subject to income tax on all worldwide income. A handful of countries (notably
Singapore Singapore (), officially the Republic of Singapore, is a sovereign state, sovereign island city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, bor ...
and Hong Kong) tax residents only on income earned in or remitted to the country. There may arise a situation where the tax payer has to pay tax in one country where he is tax resident and also pay tax to other country where he is nonresident. This creates the situation of Double taxation which needs assessment of Double Taxation Avoidance Agreement entered by the countries where the tax payer is assessed as resident and nonresident for the same transaction. Residence is often defined for individuals as presence in the country for more than 183 days. Most countries base residence of entities on either place of organization or place of management and control. 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
has three levels of residence.


Defining income

Most systems define income subject to tax broadly for residents, but tax nonresidents only on specific types of income. What is included in income for individuals may differ from what is included for entities. The timing of recognizing income may differ by type of taxpayer or type of income. Income generally includes most types of receipts that enrich the taxpayer, including compensation for services, gain from sale of goods or other property, interest, dividends, rents, royalties, annuities, pensions, and all manner of other items. Many systems exclude from income part or all of
superannuation A pension (, 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 Latium. Through the power of the R ...

superannuation
or other national retirement plan payments. Most tax systems exclude from income health care benefits provided by employers or under national insurance systems.


Deductions allowed

Nearly all income tax systems permit residents to reduce gross income by business and some other types of deductions. By contrast, nonresidents are generally subject to income tax on the gross amount of income of most types plus the net business income earned within the jurisdiction. Expenses incurred in a trading, business, rental, or other income producing activity are generally deductible, though there may be limitations on some types of expenses or activities. Business expenses include all manner of costs for the benefit of the activity. An allowance (as a capital allowance or depreciation deduction) is nearly always allowed for recovery of costs of assets used in the activity. Rules on capital allowances vary widely, and often permit recovery of costs more quickly than ratably over the life of the asset. Most systems allow individuals some sort of notional deductions or an amount subject to zero tax. In addition, many systems allow deduction of some types of personal expenses, such as home mortgage interest or medical expenses.


Business profits

Only net income from business activities, whether conducted by individuals or entities is taxable, with few exceptions. Many countries require business enterprises to prepare financial statements which must be audited. Tax systems in those countries often define taxable income as income per those financial statements with few, if any, adjustments. A few jurisdictions compute net income as a fixed percentage of gross revenues for some types of businesses, particularly branches of nonresidents.


Credits

Nearly all systems permit residents a
credit Credit (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 Latium. Through the power of the R ...
for income taxes paid to other jurisdictions of the same sort. Thus, a credit is allowed at the national level for income taxes paid to other countries. Many income tax systems permit other credits of various sorts, and such credits are often unique to the jurisdiction.


Alternative taxes

Some jurisdictions, particularly 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., ...
and many of its
states 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), ''The State'' (newspaper), a daily newspaper in Columbia, South Carolina, Un ...
and
Switzerland , french: Suisse(sse), it, svizzero/svizzera or , rm, Svizzer/Svizra , government_type = Federalism, Federal semi-direct democracy under an assembly-independent Directorial system, directorial republic , leader_title1 = Fe ...
, impose the higher of regular income tax or an alternative tax. Switzerland and U.S. states generally impose such tax only on corporations and base it on capital or a similar measure.


Administration

Income tax is generally collected in one of two ways: through
withholding Tax withholding, also known as tax retention, Pay-as-You-Go, Pay-as-You-Earn, or a ''Prélèvement à la source'', is income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by th ...
of tax at source and/or through payments directly by taxpayers. Nearly all jurisdictions require those paying employees or nonresidents to withhold income tax from such payments. The amount to be withheld is a fixed percentage where the tax itself is at a fixed rate. Alternatively, the amount to be withheld may be determined by the tax administration of the country or by the payer using formulas provided by the tax administration. Payees are generally required to provide to the payer or the government the information needed to make the determinations. Withholding for employees is often referred to as "pay as you earn" (
PAYE A pay-as-you-earn tax (PAYE), or pay-as-you-go (PAYG) in Australia, is a withholding of taxes on income payments to employees. Amounts withheld are treated as advance payments of income tax An income tax is a tax imposed on individuals or entitie ...
) or "pay as you go." Income taxes of workers are often collected by employers under a
withholding Tax withholding, also known as tax retention, Pay-as-You-Go, Pay-as-You-Earn, or a ''Prélèvement à la source'', is income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by th ...
or
pay-as-you-earn tax A pay-as-you-earn tax (PAYE), or pay-as-you-go (PAYG) in Australia, Ireland, New Zealand, and the United Kingdom, is a withholding of taxes on income payments to employees. Amounts withheld are treated as advance payments of income tax An income ...
system. Such collections are not necessarily final amounts of tax, as the worker may be required to aggregate wage income with other income and/or deductions to determine actual tax. Calculation of the tax to be withheld may be done by the government or by employers based on withholding allowances or formulas. Nearly all systems require those whose proper tax is not fully settled through withholding to self-assess tax and make payments prior to or with final determination of the tax. Self-assessment means the taxpayer must make a computation of tax and submit it to the government. Some countries provide a pre-computed estimate to taxpayers, which the taxpayer can correct as necessary. The proportion of people who pay their income taxes in full, on time, and voluntarily (that is, without being fined or ordered to pay more by the government) is called the voluntary compliance rate. The voluntary compliance rate is higher in the US than in countries like Germany or Italy. In countries with a sizeable
black market A black market, underground economy or shadow economy, is a clandestine ''The ClanDestine'' (also known simply as ''ClanDestine'') is an appellation used to refer to the Destines, a fictional secret family of long-lived superhuman beings ...
, the voluntary compliance rate is very low and may be impossible to properly calculate.


State, provincial, and local

Income taxes are separately imposed by sub-national jurisdictions in several countries with federal systems. These include
Canada Canada is a country in the northern part of North America North America is a continent A continent is any of several large landmasses. Generally identified by convention (norm), convention rather than any strict criteria, ...
,
Germany ) , image_map = , map_caption = , map_width = 250px , capital = Berlin Berlin (; ) is the Capital city, capital and List of cities in Germany by population, largest city of Germany by both area and population. Its 3,769,495 inh ...
, Switzerland, and 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., ...
, where provinces, cantons, or states impose separate taxes. In a few countries, cities also impose income taxes. The system may be integrated (as in Germany) with taxes collected at the federal level. In
Quebec ) , image_shield=Armoiries du Québec.svg , image_flag=Flag of Quebec.svg , coordinates= , AdmittanceDate=July 1, 1867 , AdmittanceOrder=1st, with New Brunswick ("Hope restored") , image_map = New Brunswick in Canada 2.svg , ...
and the United States, federal and state systems are independently administered and have differences in determination of taxable income.


Wage-based taxes

Retirement oriented taxes, such as
Social Security 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 ...
or
national insurance National Insurance (NI) is a fundamental component of the welfare state in the United Kingdom Welfare is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social s ...
, also are a type of income tax, though not generally referred to as such. In the US, these taxes generally are imposed at a fixed rate on wages or self-employment earnings up to a maximum amount per year. The tax may be imposed on the employer, the employee, or both, at the same or different rates. Some jurisdictions also impose a tax collected from employers, to fund unemployment insurance, health care, or similar government outlays.


Economic and policy aspects

Multiple conflicting theories have been proposed regarding the economic impact of income taxes. Income taxes are widely viewed as a
progressive tax A progressive 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, a legal person is any person A person (plural people or persons) is a being that h ...
(the incidence of tax increases as income increases). Some studies have suggested that an income tax doesn't have much effect on the numbers of hours worked.


Criticisms

Tax avoidance Tax avoidance is the legal usage of the 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, inte ...
strategies and loopholes tend to emerge within income tax codes. They get created when taxpayers find legal methods to avoid paying taxes. Lawmakers then attempt to close the loopholes with additional legislation. That leads to a
vicious cycle The terms virtuous circle and vicious circle, also known respectively as virtuous cycle and vicious cycle, refer to complex chains of events that reinforce themselves through a feedback loop Feedback occurs when outputs of a system are rout ...

vicious cycle
of ever more complex avoidance strategies and legislation. The vicious cycle tends to benefit large corporations and wealthy individuals that can afford the professional fees that come with ever more sophisticated tax planning, thus challenging the notion that even a marginal income tax system can be properly called progressive. The higher costs to labour and capital imposed by income tax causes
deadweight loss Deadweight loss, also known as excess burden, is a measure of lost economic efficiency In , economic efficiency is, roughly speaking, a situation in which nothing can be improved without something else being hurt. Depending on the context, it is ...
in an economy, being the loss of economic activity from people deciding not to invest capital or use time productively because of the burden that tax would impose on those activities. There is also a loss from individuals and professional advisors devoting time to tax-avoiding behaviour instead of economically-productive activities.


Criticism within Entrepreneurship

Income Whether this is the earnings a firm receives, or an individual receives, it is subject to tax in many countries in the world. This tax subjection sometimes hinders the process of venturing to entrepreneurship. While this is not surprising since one of the “unconstituted constituted” rule of thumbs for entrepreneurship is that there needs to be self-financing especially at the early stages of the new business. This tax burden on the income of a potential entrepreneur contributes to the lack of drive since there is a self-dependency with financing the business idea. In other cases, it can lead to withdrawal of pursuing that idea since someone else might have been able to overtake them and execute their idea in the project as time passes by Haufler et al (2014, 28). Another way tax affects entrepreneurial entry through income rises from the fact that there is no guarantee of how well the business does. So, if the entrepreneurs are being taxed both for their business and their own personal pay off from the business, they might end up making less or not enough to even re-invest in the business. Additionally, if entrepreneurs are able to jump through the scales of starting and running a business the next phase is typically employing people to work for their business. To be able to employ people, they have to be able to afford paying them and this is normally hard for entrepreneurs especially at the early stages of the business. Djankov et al(2010)  explained that when the income tax is imposed on businesses it discourages entrepreneurs from hiring workers. And this cycle is detrimental to the economy of that region because the reason they might have encouraged innovative entrepreneurs to locate might have been to create jobs in their area which interprets to economic growth. But if they are unable to create jobs and hire workers to join the business, it ultimately counters the initial goal that was meant to be attained by the policy makers of the area. Additionally, Campodonico, Bonfatti and Pisan (2016) suggests that entrepreneurs should be discouraged from incurring debt by borrowing money. Ironically this aforementioned seems to be a source of financing most start-up entrepreneurs go through. Most entrepreneurs turn to debt financing since it is largely available, attainable, and highly recommended their counterparts Henrekson and Sanandaji  (2011, 10). When entrepreneurs are forced to incur debt financing it might be sustainable for a while but on a larger scale if more entrepreneurs take this up, it leads to increased systemic risk and making the economy more precarious to crash Henrekson et al (2010, 9). This logically make sense because it is something that has occurred before in the United States, i.e., the financial crisis in the United States. Apart from the income tax affecting the number of entrepreneurs entering the market, Hedlund (2019) argues that it also affects the quality of ideas of the entrepreneurs entering the market. Hedlund expressed how there are entrepreneurs who partake in innovation to contribute to the social impact rather than just for monetary gain. Therefore, when there are suppressants in the entry policies specifically tax policies it causes a 9.4% - 12.5% reduction in the quality of innovation. Tax credits are part of the incentives that business owners get from the government as a form of subsidy to help curb the costs associated with starting and running a business. Tax credits are simply the upgrade from getting a tax deduction or the better deal given in place of a tax deduction. They are typically granted to businesses rather than individuals except in special situations. A general example of how tax credits work is,  if I received a tax credit of $1000 on my $5000 salary, I would not be taxed anymore, thereby saving $1000. While if I earned $5000 and received a tax deduction of $1000, my net income becomes $4000 and I am still taxed on that $4000 compared to $5000 which would have been more expensive. The explanation above describes how beneficial this tax credit could be if it is granted to entrepreneurs. The possible outcomes will benefit both the entrepreneurs in attaining their goals, as well as the policy holders in increasing economic growth. Evidence from Fazio et al(2020) contribute to this conclusion by expressing that these tax credits not only positively influence the innovators at the beginning of their businesses but in the long run too. Furthermore, there is an argument that when tax credits are given to bigger firms, there is an in-balance in the business ecosystem, which often leads to a crowding out effect rather than a spillover effect Fazio et al (2020). Some might dispute the argument by suggesting that when tax credits are granted to firms in general, there should be a higher amount given to smaller start-up firms compared to the bigger or incumbent firms to level the playing field. These few reasons explained above are why taxes on income should be imminently reduced or completely dissolved to encourage people to participate in entrepreneurial activity within regions. Evidence from the research done by has shown the effectiveness of reducing income taxes and how it played a role in the entrepreneurial growth of the region and on a larger scale, how it helped with the economic growth of that region. The persistence of high-income tax both for the entrepreneur prior to starting a business and the workers employed after the business starts seems to be a major issue to the hindrance of entrepreneurial activity in a location. A possible solution to this problem will be to cut the marginal taxes on the income as suggested by Carrol et al (2000). Although this is a potential solution it should be carried out with a grain of salt to ensure that there is an even playing field for both entrepreneurs and incumbent innovative businesses.


Around the world

Income taxes are used in most countries around the world. The tax systems vary greatly and can be
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 ...
,
proportional Proportionality, proportion or proportional may refer to: Mathematics * Proportionality (mathematics), the property of two variables being in a multiplicative relation to a constant * Ratio, of one quantity to another, especially of a part compared ...
, or regressive, depending on the type of tax. Comparison of tax rates around the world is a difficult and somewhat subjective enterprise. Tax laws in most countries are extremely complex, and tax burden falls differently on different groups in each country and sub-national unit. Of course, services provided by governments in return for taxation also vary, making comparisons all the more difficult. Countries that tax income generally use one of two systems: territorial or residential. In the territorial system, only local income – income from a source inside the country – is taxed. In the residential system, residents of the country are taxed on their worldwide (local and foreign) income, while nonresidents are taxed only on their local income. In addition, a very small number of countries, notably 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., ...
, also tax their nonresident citizens on worldwide income. Countries with a residential system of taxation usually allow deductions or credits for the tax that residents already pay to other countries on their foreign income. Many countries also sign
tax treaties Many countries have entered into tax treaties (also called double tax agreements, or DTAs) with other countries to avoid or mitigate double taxationDouble taxation is the levying of tax by two or more jurisdictions on the same income (in the case of ...
with each other to eliminate or reduce
double taxation Double taxation is the levying of tax by two or more jurisdictions on the same income (in the case of income taxes), asset (in the case of Wealth tax, capital taxes), or financial transaction (in the case of sales taxes). Double liability may be m ...
. Countries do not necessarily use the same system of taxation for individuals and corporations. For example,
France France (), officially the French Republic (french: link=no, République française), is a transcontinental country This is a list of countries located on more than one continent A continent is one of several large landmasses ...

France
uses a residential system for individuals but a territorial system for corporations, while
Singapore Singapore (), officially the Republic of Singapore, is a sovereign state, sovereign island city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, bor ...

Singapore
does the opposite, and
Brunei Brunei ( ; ), officially the Nation of Brunei, the Abode of Peace ( ms, Negara Brunei Darussalam, Jawi alphabet, Jawi: ), is a sovereign state, country located on the north coast of the island of Borneo in Southeast Asia. Apart from its coa ...

Brunei
taxes corporate but not personal income.


Transparency and public disclosure

Public disclosure of personal income tax filings occurs in
Finland Finland ( fi, Suomi ; sv, Finland ), officially the Republic of Finland (; ), is a Nordic country in Northern Europe. It shares land borders with Sweden to the west, Russia to the east, Norway to the north, and is defined by the Gulf of B ...

Finland
,
Norway Norway, officially the Kingdom of Norway,Names in the official and recognised languages: Bokmål Bokmål (, ; literally "book tongue") is an official written standard for the Norwegian language Norwegian (Norwegian: ''norsk'') is a Nort ...

Norway
and
Sweden Sweden ( sv, Sverige ), officially the Kingdom of Sweden ( sv, links=no, Konungariket Sverige ), is a Nordic country The Nordic countries, or the Nordics, are a geographical and cultural region In geography, regions are areas that ...

Sweden
(as of the late-2000s and early 2010s).How much do you make? It'd be no secret in Scandinavia
USA Today ''USA Today'' (stylized in all uppercase) is an American daily middle-market newspaper A middle-market newspaper is a newspaper that caters to readers who like entertainment as well as the coverage of important news events. Middle-market sta ...
, June 18, 2008.
In Sweden this information have been published in the annual directory '' Taxeringskalendern'' since 1905.


See also

* *
Smart contract A smart contract is a computer program or a Transaction Protocol Data Unit, transaction protocol which is intended to automatically execute, control or document legally relevant events and actions according to the terms of a contract or an agreemen ...

Smart contract
: can be used in
employment contract An employment contract or contract of employment is a kind of contract A contract is a legally binding agreement that defines and governs the rights and duties between or among its parties Image:'Hip, Hip, Hurrah! Artist Festival at Skage ...
s and allows some degree of automation *
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 ...


Notes


References


External links


Tax Policy Analysis, OECD Tax Database


* ttp://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_05/11/2013_526451 Greece - State collected less than half of revenues due last year
THE EFFECT OF PUBLIC DISCLOSURE ON REPORTED TAXABLE INCOME: EVIDENCE FROM INDIVIDUALS AND CORPORATIONS IN JAPAN


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