A tax (from the Latin
taxo; "I estimate") is a financial charge or other levy
imposed upon a taxpayer (an individual or
legal entity) by a
state or the functional equivalent of a state such that failure
to pay is punishable by law. Taxes are also imposed by many
administrative divisions. Taxes consist of
direct or
indirect taxes and may be paid in money or as its labour
equivalent.
According to
Black's Law Dictionary, a tax is a "pecuniary burden laid upon
individuals or property owners to support the government [...] a payment
exacted by legislative authority." It "is not a voluntary payment or
donation, but an enforced contribution, exacted pursuant to legislative
authority" and is "any contribution imposed by government [...] whether
under the name of toll, tribute, tallage, gabel, impost, duty, custom,
excise, subsidy, aid, supply, or other name."[1]
Overview
Pieter Brueghel the Younger, The tax collector, 1640
The legal definition and the economic definition of taxes differ in
that economists do not consider many transfers to governments to be
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 (e.g., printing bills and minting coins),
through voluntary gifts (e.g., contributions to public universities and
museums), by imposing penalties (e.g., traffic fines), by borrowing, and
by confiscating wealth. From the view of economists, a tax is a
non-penal, yet compulsory transfer of resources from the private to the
Public sector levied on a basis of predetermined criteria and
without reference to specific benefit received.
In modern taxation systems, taxes are levied in money; but,
in-kind
and
corvée taxation are characteristic of traditional or pre-capitalist
states and their functional equivalents. The method of taxation and the
government expenditure of taxes raised is often highly debated in
politics and
economics. Tax collection is performed by a government agency such
as
Canada Revenue Agency, the
Internal Revenue Service (IRS) in the
United States, or
Her Majesty's Revenue and Customs (HMRC) in the
United Kingdom. When taxes are not fully paid, civil penalties (such
as
fines or
forfeiture) or criminal penalties (such as
incarceration)[2]
may be imposed on the non-paying entity or individual.
Tax rates
Taxes are most often levied as a percentage, called the tax rate.
An important distinction when talking about tax rates is to distinguish
between the marginal rate and the effective (average) rate. The
effective rate is the total tax paid divided by the total amount the tax
is paid on, while the marginal rate is the rate paid on the next dollar
of income earned. For example, if income is taxed on a formula of 5%
from $0 up to $50,000, 10% from $50,000 to $100,000, and 15% over
$100,000, a
taxpayer with income of $175,000 would pay a total of $18,750 in
taxes.
- Tax calculation
- (0.05*50,000) + (0.10*50,000) + (0.15*75,000) = 18,750
- The "effective rate" would be 10.7%:
- 18,750/175,000 = 0.107
- The "marginal rate" would be 15%.
Purposes and
effects
Money provided by taxation has been used by states and their
functional equivalents throughout history to carry out many functions.
Some of these include expenditures on war, the enforcement of
law and
public order, protection of
property, economic infrastructure (roads,
legal tender, enforcement of contracts, etc.),
public works,
social engineering, subsidies, and the operation of government
itself. Governments also use taxes to fund
welfare and
public services. A portion of taxes also go to pay off the state's
debt and the interest this debt accumulates. These services can include
education systems,
health care systems,
pensions
for the elderly,
unemployment benefits, and
public transportation.
Energy,
water and
waste management systems are also common
public utilities. Colonial and modernizing states have also used
cash taxes to draw or force reluctant subsistence producers into cash
economies.
Governments use different kinds of taxes and vary the tax rates. This
is done to distribute the tax burden among individuals or classes of the
population involved in taxable activities, such as
business, or to redistribute resources between individuals or
classes in the population. Historically, the
nobility were supported by taxes on the poor; modern
social security systems are intended to support the poor, the
disabled, or the retired by taxes on those who are still working. In
addition, taxes are applied to fund foreign aid and military ventures,
to influence the
macroeconomic performance of the economy (the government's strategy
for doing this is called its
fiscal policy; see also
tax exemption), or to modify patterns of consumption or employment
within an economy, by making some classes of transaction more or less
attractive.
A nation's tax system is often a reflection of its communal values
or/and the values of those in power. To create a system of taxation, a
nation 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 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 be more of a reflection on the
values of those in power.
All large businesses 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, the
resource collected from the public through taxation is always greater
than the amount which can be used by the government. The difference is
called
compliance cost, and includes for example the labour cost and
other expenses incurred in complying with tax laws and rules. The
collection of a tax in order to spend it on a specified purpose, for
example collecting a tax on alcohol to pay directly for alcoholism
rehabilitation centres, is called
hypothecation. This practice is often disliked by
finance ministers, since it reduces their freedom of action. Some
economic theorists consider the concept to be intellectually dishonest
since, in reality, money is
fungible. Furthermore, it often happens that taxes or excises
initially levied to fund some specific government programs are then
later diverted to the government general fund. In some cases, such taxes
are collected in fundamentally inefficient ways, for example highway
tolls.
Some economists, especially
neo-classical economists, argue that all taxation creates
market distortion and results in economic inefficiency. They have
therefore sought to identify the kind of tax system that would minimize
this distortion.
Since governments also resolve commercial disputes, especially in
countries with
common law, similar arguments are sometimes used to justify a
sales
tax or
value added tax. Others (e.g.
libertarians) argue that most or all forms of taxes are
immoral due to their involuntary (and therefore eventually
coercive/violent) nature. The most extreme anti-tax view is
anarcho-capitalism, in which the provision of all social
services should be voluntarily bought by the person(s) using them.
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 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.[3][4][5]
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."[6]
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
poll taxes and
property taxes, which are based on simple existence or ownership.
Indirect taxes are imposed on events, rights, privileges, and
activities.[7]
Thus, a tax on the sale of property would be considered an indirect tax,
whereas the tax on simply owning the property itself would be a direct
tax.
Kinds of taxes
The
Organisation for Economic Co-operation and Development (OECD)
publishes an analysis of tax systems of member countries. As part of
such analysis, OECD developed a definition and system of classification
of internal taxes,[8]
generally followed below. In addition, many countries impose taxes (tariffs)
on the import of goods.
Taxes on income
Income tax
Many jurisdictions tax the income of individuals and business
entities, including corporations. Generally the tax is imposed on net
profits from business, net gains, and other income. Computation of
income subject to tax may be determined under accounting principles used
in the jurisdiction, which may be modified or replaced by
tax law
principles in the jurisdiction. The incidence of taxation varies by
system, and some systems may be viewed as
progressive or
regressive. Rates of tax may vary or be constant (flat) by income
level. Many systems allow individuals certain personal allowances and
other nonbusiness reductions to taxable income.
Personal income tax is often collected on a
pay-as-you-earn basis, with small corrections made soon after the
end of the
tax year. These corrections take one of two forms: payments to the
government, for taxpayers who have not paid enough during the tax year;
and
tax refunds from the government for those who have overpaid. Income
tax systems will often have deductions available that lessen the total
tax liability by reducing total taxable income. They may allow losses
from one type of income to be counted against another. For example, a
loss on the stock market may be deducted against taxes paid on wages.
Other tax systems may isolate the loss, such that business losses can
only be deducted against business tax by carrying forward the loss to
later tax years.
Negative income
tax
In
economics, a negative income tax (abbreviated NIT) is
a
progressive income tax system where people earning below a certain
amount receive supplemental pay from the government instead of paying
taxes to the government.
Capital gains tax
Most jurisdictions imposing an income tax treat
capital gains as part of income subject to tax. Capital gain is
generally gain on sale of capital assets, i.e., 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.
Corporate tax
Main article:
Corporate tax
Corporate tax refers to income, capital, net worth, or other taxes
imposed on corporations. Rates of tax and the taxable base for
corporations may differ from those for individuals or other taxable
persons.
Social
security contributions
Many countries provide publicly funded retirement or health care
systems.[9]
In connection with these systems, the country typically requires
employers and/or employees to make compulsory payments.[10]
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.[11]
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 health care components of the tax.
Taxes
on payroll or workforce
Unemployment and similar taxes are often imposed on employers based
on total payroll. These taxes may be imposed in both the country and
sub-country levels.[12]
Taxes on property
Recurrent [property taxes] may be imposed on immovable property (real
property) and some classes of movable property. In addition, recurrent
taxes may be imposed on net wealth of individuals or corporations.[13]
Many jurisdictions impose
estate tax,
gift
tax or other
inheritance taxes on property at death or gift transfer. Some
jurisdictions impose taxes on financial or capital transactions.
Property tax
Main article:
Property tax
A property tax (or millage tax) is an
ad valorem tax levy on the value of 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 or realty is the combination of land and
improvements to 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, where the tax base is the estimated value of the
property. For a period of over 150 years from 1695 a
window tax was levied in England, with the result that one can still
see
listed buildings with windows bricked up in order to save their
owners money. A similar tax on hearths existed in France and elsewhere,
with similar results. The two most common type of event driven property
taxes are
stamp duty, charged upon change of ownership, and
inheritance tax, which is imposed in many countries on the estates
of the deceased.
In contrast with a tax on real estate (land and buildings), a
land value tax is levied only on the unimproved value of the land
("land" in this instance may mean either the economic term, i.e., all
natural resources, or the natural resources associated with specific
areas of the Earth's surface: "lots" or "land parcels"). Proponents of
land value tax argue that it is economically justified, as it will not
deter production, distort market mechanisms or otherwise create
deadweight losses the way other taxes do.[14]
When real estate is held by a higher government unit or some other
entity not subject to taxation by the local government, the taxing
authority may receive a
payment in lieu of taxes to compensate it for some or all of the
foregone tax revenue.
In many jurisdictions (including many American states), there is a
general tax levied periodically on residents who own
personal property (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.[15]
Any otherwise non-exempt object can lose its exemption if regularly kept
outside the household.[15]
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.[15]
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.[15]
Inheritance tax
Inheritance tax, estate tax, and death tax or duty are the names
given to various taxes which arise on the death of an individual. In
United States
tax law,
there is a distinction between an estate tax and an inheritance tax: the
former taxes the personal representatives of the deceased, while the
latter taxes the beneficiaries of the estate. However, this distinction
does not apply in other jurisdictions; for example, if using this
terminology UK inheritance tax would be an estate tax.
Expatriation tax
An Expatriation Tax is a tax on individuals who renounce their
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 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.[16]
Transfer tax
Main article:
Transfer tax
Historically, in many countries, a contract needed to have a stamp
affixed to make it valid. The charge for the stamp was either a fixed
amount or a percentage of the value of the transaction. In most
countries the stamp has been abolished but
stamp duty remains. Stamp duty is levied in the UK on the purchase
of shares and securities, the issue of bearer instruments, and certain
partnership transactions. Its modern derivatives,
stamp duty reserve tax and
stamp duty land tax, are respectively charged on transactions
involving securities and land. Stamp duty has the effect of discouraging
speculative purchases of assets by decreasing liquidity. In the
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) tax
Some countries' governments will require declaration of the tax
payers'
balance sheet (assets and liabilities), and from that exact a tax on
net
worth (assets minus liabilities), as a percentage of the net worth,
or a percentage of the net worth exceeding a certain level. The tax may
be levied on "natural"
or
legal "persons". An example is France's
ISF.
Taxes on
goods and services
Value added tax (Goods and Services Tax)
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. If input tax is greater than output tax the company can
claim back money from the Local Tax Authority.
Sales taxes
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 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,[17]
Washington state, and Wyoming. Additionally, New Hampshire and Tennessee
levy state income taxes only on
dividends and interest income. Of the above states, only Alaska and
New Hampshire do not levy a state sales tax. Additional information can
be obtained at the
Federation of Tax Administrators website.
In the United States, there is a growing movement[18]
for the replacement of all federal payroll and income taxes (both
corporate and personal) with a national retail sales tax and monthly tax
rebate to households of citizens and legal resident aliens. The tax
proposal is named
FairTax.
In Canada, the federal sales tax is called the Goods and Services tax
(GST) and now stands at 5%. The provinces of British Columbia,
Saskatchewan, Manitoba, and Prince Edward Island also have a provincial
sales tax [PST]. The provinces of Nova Scotia, New Brunswick,
Newfoundland & Labrador, and Ontario have harmonized their provincial
sales taxes with the GST—Harmonized Sales Tax [HST], and thus is a full
VAT. The province of Quebec collects the Quebec Sales Tax [QST] 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
Unlike an ad valorem, an excise is not a function of the value
of the product being taxed. Excise taxes are based on the quantity, not
the value, of product purchased. For example, in the United States, the
Federal government imposes an excise tax of 18.4 cents per U.S. gallon
(4.86¢/L) of gasoline, while state governments levy an additional 8 to
28 cents per U.S. gallon. Excises on particular commodities are
frequently
hypothecated. For example, a
fuel
excise (use
tax) is often used to pay for
public transportation, especially
roads and
bridges
and for the protection of the environment. A special form of
hypothecation arises where an excise is used to compensate a party to a
transaction for alleged uncontrollable abuse; for example, a
blank media tax is a tax on recordable media such as
CD-Rs,
whose proceeds are typically allocated to
copyright holders. Critics charge that such taxes blindly tax those
who make legitimate and illegitimate usages of the products; for
instance, a person or corporation using CD-R's for data archival should
not have to subsidize the producers of popular music.
Excises (or exemptions from them) are also used to modify consumption
patterns (social
engineering). For example, a high excise is used to discourage
alcohol consumption, relative to other goods. This may be combined
with hypothecation if the proceeds are then used to pay for the costs of
treating illness caused by alcohol abuse. Similar taxes may exist on
tobacco,
pornography, etc., and they may be collectively referred to as "sin
taxes". A
carbon tax is a tax on the consumption of carbon-based non-renewable
fuels, such as petrol, diesel-fuel, jet fuels, and natural gas. The
object is to reduce the release of carbon into the atmosphere. In the
United Kingdom,
vehicle excise duty is an annual tax on vehicle ownership.
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, and they may be used by governments to protect domestic
industries. A proportion of tariff revenues is often hypothecated to pay
government to maintain a navy or border police. The classic ways of
cheating a tariff are
smuggling or declaring a false value of goods.
Tax, tariff and trade rules in modern times are usually set together
because of their common impact on
industrial policy,
investment policy, and
agricultural policy. A
trade bloc is a group of allied countries agreeing to minimize or
eliminate tariffs against trade with each other, and possibly to impose
protective tariffs on imports from outside the bloc. A
customs union has a
common external tariff, and the participating countries share the
revenues from tariffs on goods entering the customs union.
Other taxes
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 tax
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 of
a half-shekel per annum from each adult Jew (Ex. 30:11-16) was a form of
poll tax. Poll taxes are administratively cheap because they are easy to
compute and collect and difficult to cheat. Economists have considered
poll taxes economically efficient because people are presumed to be in
fixed supply. However, poll taxes are very unpopular because 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.[19][not
in citation given] The introduction of a poll tax
in medieval England was the primary cause of the 1381
Peasants' Revolt. Scotland was the first to be used to test the new
poll tax in 1989 with England and Wales in 1990. The change from a
progressive local taxation based on property values to a single-rate
form of taxation regardless of ability to pay (the
Community Charge, but more popularly referred to as the Poll Tax),
led to widespread refusal to pay and to incidents of civil unrest, known
colloquially as the 'Poll
Tax Riots'.
Other
Some types of taxes have been proposed but not actually adopted in
any major jurisdiction. These include:
Descriptive labels given some taxes
Ad valorem
An ad valorem tax is one where the tax base is the value of a
good, service, or property. Sales taxes, tariffs, property taxes,
inheritance taxes, and value added taxes are different types of ad
valorem tax. An ad valorem tax is typically imposed at the time of a
transaction (sales tax or value added tax (VAT)) but it may be imposed
on an annual basis (property tax) or in connection with another
significant event (inheritance tax or tariffs). An alternative to ad
valorem taxation is an excise tax, where the tax base is the quantity of
something, regardless of its price.
Consumption tax
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 tax
This includes
natural resources consumption tax, greenhouse gas tax (Carbon
tax), "sulfuric tax", and others. The stated purpose is to reduce
the environmental impact by
repricing.
Fees and
effective taxes
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.[20]
Such fees include:
- Tolls: a fee charged to travel via a
road,
bridge,
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:
History
The first known system of taxation was in Ancient Egypt around
3000 BC - 2800 BC in the first dynasty of the Old Kingdom.[23]
The earliest and most widespread form of taxation was the
corvée
and tithe.
The corvée was
forced labour provided to the state by peasants too poor to pay
other forms of taxation (labour in
ancient Egyptian is a synonym for taxes).[24]
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
limestone flakes and papyrus.[25]
Early taxation is also described in the
Bible. In
Genesis (chapter 47, verse 24 - the
New International Version), it states "But when the crop comes in,
give a fifth of it to
Pharaoh.
The other four-fifths you may keep as seed for the fields and as food
for yourselves and your households and your children".
Joseph was telling the people of
Egypt how
to divide their crop, providing a portion to the Pharaoh. A share (20%)
of the crop was the tax.
Later, in the
Persian Empire, a regulated and sustainable tax system was
introduced by
Darius I the Great in 500 BC;[26]
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 emperor, 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
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 was exclusively a tax levied
on subject peoples.
Persians and
Medes
paid no tax, but, they were liable at any time to serve in the
army.[27]
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".[28]
In India, Islamic rulers imposed
jizya (a
poll tax on non-Muslims) starting in the 11th century. It was
abolished by
Akbar.
Taxation levels
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
production numbers are not as readily available, however. 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 had reached 1.6 billion livres. In 1780–89,
it reached 421.50 million livres.[29]
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.
Average tax rates were higher in Britain than France the years
before the
French Revolution, twice in per capita income comparison, but they
were mostly placed on international trade. In France, taxes were lower
but the burden was mainly on landowners, individuals, and internal trade
and thus created far more resentment.[30]
Taxation as a percentage of
GDP in 2003 was 56.1% in
Denmark,
54.5% in France, 49.0% in the
Euro area,
42.6% in the
United Kingdom, 35.7% in the
United States, 35.2% in
Ireland, and among all
OECD members an average of 40.7%.[31][32]
Forms of taxation
In monetary economies prior to fiat banking, a critical form of
taxation was
seigniorage, the tax on the creation of money.
Other obsolete forms of taxation include:
-
Scutage, 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, 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,
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.[citation
needed] There are 118 laws, 185 forms, and 96,000
regulations, spending
€3.7
billion to collect the income tax. Today, governments in more advanced
economies (i.e. Europe and North America) tend to rely more on direct
taxes, while developing economies (i.e. India and 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. The
side-effects of taxation 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
economic welfare through taxation.
Tax incidence
Main article:
Tax incidence
Law establishes from whom a tax is collected. In many countries,
taxes are imposed on business (such as
corporate taxes or portions of
payroll taxes). However, who ultimately pays the tax (the tax
"burden") is determined by the marketplace as taxes become
embedded into production costs. 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 on 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 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 for 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).[33]
Increased
economic welfare
Government
spending
The purpose of taxation is to provide for
government spending without
inflation. The provision of public goods such as roads and other
infrastructure, schools, a
social safety net, health care for the indigent, national defense,
law enforcement, and a courts system increases the economic welfare of
society.
Pigovian taxes
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 increase
overall welfare as well as raising revenue. This type of tax is called a
Pigovian tax, after economist
Arthur Pigou.
Possible Pigovian taxes include those on polluting fuels (like
petrol), taxes on goods which incur public healthcare costs (such as
alcohol
or
tobacco), and charges for existing 'free' public goods (like
congestion charging) are another possibility.
Reduced inequality
Progressive taxation may reduce
economic inequality. This effect occurs even when the tax revenue
isn't
redistributed.
Reduced
economic welfare
Most taxes have
side effects that reduce
economic welfare, either by mandating unproductive labor (compliance
costs) or by creating distortions to economic incentives (deadweight
loss and
perverse incentives).[citation
needed]
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
or OneTax,
and some
flat
tax proposals).
Deadweight costs of taxation
Diagram illustrating deadweight costs of taxes
In the absence of negative
externalities, the introduction of taxes into a market reduces
economic efficiency by causing
deadweight loss. In a competitive market the
price of
a particular
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
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 of supply and demand for the good taxed.
Most taxes—including
income tax and
sales
tax—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,[34]
where the tax is on a good in completely inelastic supply, a
lump sum tax such as a
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. Business that have more money are
better suited to fend off competition. It is common that an industry
having a few but very large corporations have a very high barrier of
entry of new entrants in the marketplace. This is due to the fact that
the larger the corporation the better the position of it to negotiate
with suppliers. Also the financial position can provide the means for
the company to be able to operate for extended periods of time with very
low or negative profits, in order to push the competition out of
business. The taxation of profits in a progressive manner would reduce
the barriers for entry in a specific market for new entrants thereby
increasing competition. This would ultimately benefit the consumers
since increased competition benefits consumers.[35]
Perverse
incentives
Complexity of the tax code in developed economies offer 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, 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 which avoid providing loopholes. Sales tax,
for instance, can be replaced with a
value added tax which disregards intermediate transactions.
Reduced production
If a tax is paid on outsourced services that is not also charged on
services performed for oneself, then it may be cheaper to perform the
services oneself than to pay someone else—even considering losses in
economic efficiency.[36][37]
For example, suppose jobs A and B are both valued at $1 on the
market. And suppose that because of your unique abilities, you can do
job A twice over (100% extra output) in the same effort as it would take
you to do job B. But job B is the one that you need done right now.
Under perfect division of labor, you would do job A and somebody else
would do job B. Your unique abilities would always be rewarded.
Income taxation has the worst effect on division of labor in the form
of barter. Suppose that the person doing job B is actually interested in
having job A done for him. Now suppose you could amazingly do job A four
times over, selling half your work on the market for cash just to pay
your tax bill. The other half of the work you do for somebody who does
job B twice over but he has to sell off half to pay his tax bill. You're
left with one unit of job B, but only if you were 400% as productive
doing job A! In this case of 50% tax on barter income, anything less
than 400% productivity will cause the division of labor to fail.
In summary, depending on the situation a 50% tax rate can cause the
division of labor to fail even where productivity gains of up to 300%
would have resulted. Even a mere 30% tax rate can negate the advantage
of a 100% productivity gain.[38]
Views on taxation
Support for
taxation
According to most
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 development.[40]
A common presentation of this view, paraphrasing various statements by
Oliver Wendell Holmes, Jr. is "Taxes are the price of civilization".[41]
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.[42]
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".[43]
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'.".[44]
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 benefits.[45]
As argued by
Tony 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.[citation
needed] Many
libertarians recommend a minimal level of taxation in order to
maximize the protection of
liberty.[citation
needed]
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 is justified on the grounds that commercial activity
necessarily involves use of publicly established and maintained economic
infrastructure, and that businesses are in effect charged for this use.[46]
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.
Opposition to
taxation
Because payment of tax is compulsory and enforced by the legal
system, some political philosophies view
taxation as theft (or as
slavery, or as a violation of
property rights), or tyranny, accusing the government of levying
taxes via
force and
coercive means.[47]
Voluntaryists,
individualist anarchists,
objectivists,
anarcho-capitalists, and
libertarians see taxation as government aggression (see
zero 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.[48]
Libertarian opponents of taxation claim that governmental protection,
such as police and defense forces might be replaced by
market
alternatives such as
private defense agencies,
arbitration agencies or
voluntary contributions.[49]
Walter E. Williams, professor of economics at George Mason
University, stated "Government income redistribution programs produce
the same result as theft. In fact, that's what a thief does; he
redistributes income. The difference between government and thievery is
mostly a matter of legality."[50]
Taxation has also been opposed by
communists and
socialists.
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.[51]
While the morality of taxation is sometimes questioned, most arguments
about taxation revolve around the degree and method of taxation and
associated
government spending, not taxation itself.
Tax choice
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Supporters of tax choice believe that taxpayers should have more of a
say how their taxes are spent in the public sector. If taxpayers could
choose which government organizations they gave their taxes to then
their
opportunity cost decisions would integrate their
partial knowledge. For example, a taxpayer who spent more of his
taxes on
public education would have less money to spend on
public healthcare. Allowing taxpayers to
reveal their preferences would help ensure that the
government succeeds at efficiently producing the
public goods that taxpayers truly value.
Theories on
taxation
Laffer curve
Main article:
Laffer curve
In
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 which 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%.[52]
Optimal tax
Main article:
Optimal tax
Most governments take revenue which exceeds that which can be
provided by non-distortionary taxes or through taxes which 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 of supply and demand for a good, it follows that putting
the highest tax rates on the goods for which there is 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.
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. Canegrati (2007) demonstrated that if we move from
the assumption that governments do not maximise the welfare of society
but the probability of winning elections, the tax rates in equilibrium
are lower for the most powerful groups of society, instead of being the
lowest for the poorest as in the optimal theory of direct taxation
developed by Atkinson and
Joseph Stiglitz. See
Canegrati's formulae.