An income tax is a
tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called
taxable income Taxable 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. Th ...
). 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 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 imposed on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at ...
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.
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.
History
![Top marginal income tax rate, OWID](https://upload.wikimedia.org/wikipedia/commons/d/d7/Top_marginal_income_tax_rate%2C_OWID.svg)
The concept of taxing income is a modern innovation and presupposes several things: a
money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
economy
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...
, 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 any complex society characterized by the development of a state, social stratification, urbanization, and symbolic systems of communication beyond natural spoken language (namely, a writing system).
Ci ...
, these preconditions did not exist, and taxes were based on other factors. Taxes on
wealth
Wealth is the abundance of Value (economics), valuable financial assets or property, physical possessions which can be converted into a form that can be used for financial transaction, transactions. This includes the core meaning as held in the ...
, social position, and ownership of the
means of production
The means of production is a term which describes land, labor and capital that can be used to produce products (such as goods or services); however, the term can also refer to anything that is used to produce products. It can also be used as an ...
(typically
land and
slaves
Slavery and enslavement are both the state and the condition of being a slave—someone forbidden to quit one's service for an enslaver, and who is treated by the enslaver as property. Slavery typically involves slaves being made to perf ...
) were all common. Practices such as
tithing
A tithing or tything was a historic English legal, administrative or territorial unit, originally ten hides (and hence, one tenth of a hundred). Tithings later came to be seen as subdivisions of a manor or civil parish. The tithing's leader or s ...
, or an offering of
first fruits
First Fruits is a religious offering of the first agricultural produce of the harvest. In classical Greek, Roman, and Hebrew religions, the first fruits were given to priests as an offering to deity. In Christian faiths, the tithe is similarly g ...
, 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
Egypt ( ar, مصر , ), officially the Arab Republic of Egypt, is a transcontinental country spanning the northeast corner of Africa and southwest corner of Asia via a land bridge formed by the Sinai Peninsula. It is bordered by the Mediter ...
.
In the early days of the
Roman Republic
The Roman Republic ( la, Res publica Romana ) was a form of government of Rome and the era of the classical Roman civilization when it was run through public representation of the Roman people. Beginning with the overthrow of the Roman Kin ...
, 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 CE), courtesy name Jujun (), was the founder and the only Emperor of China, emperor of the short-lived Chinese Xin dynasty. He was originally an official and consort kin of the Han dynasty and later ...
of the
Xin Dynasty
The Xin dynasty (; ), also known as Xin Mang () in Chinese historiography, was a short-lived Chinese imperial dynasty which lasted from 9 to 23 AD, established by the Han dynasty consort kin Wang Mang, who usurped the throne of the Emperor Ping o ...
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
The Han dynasty (, ; ) was an imperial dynasty of China (202 BC – 9 AD, 25–220 AD), established by Liu Bang (Emperor Gao) and ruled by the House of Liu. The dynasty was preceded by the short-lived Qin dynasty (221–207 BC) and a warr ...
which followed.
One of the first recorded taxes on income was the
Saladin tithe introduced by
Henry II in 1188 to raise money for the
Third Crusade
The Third Crusade (1189–1192) was an attempt by three European monarchs of Western Christianity (Philip II of France, Richard I of England and Frederick I, Holy Roman Emperor) to reconquer the Holy Land following the capture of Jerusalem by ...
. The tithe demanded that each layperson in
England and Wales
England and Wales () is one of the three legal jurisdictions of the United Kingdom. It covers the constituent countries England and Wales and was formed by the Laws in Wales Acts 1535 and 1542. The substantive law of the jurisdiction is Eng ...
be taxed one tenth of their personal income and moveable property.
In 1641, Portugal introduced a personal income tax called the ''décima''.
Modern era
United Kingdom
The inception date of the modern income tax is typically accepted as 1799, at the suggestion of
Henry Beeke, the future
Dean of Bristol.
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 largest European island and the ninth-largest island in the world. It is ...
by
Prime Minister
A prime minister, premier or chief of cabinet is the head of the cabinet and the leader of the ministers in the executive branch of government, often in a parliamentary or semi-presidential system. Under those systems, a prime minister is not ...
William Pitt the Younger
William Pitt the Younger (28 May 175923 January 1806) was a British statesman, the youngest and last prime minister of Great Britain (before the Acts of Union 1800) and then first prime minister of the United Kingdom (of Great Britain and Ire ...
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. They pitted French First Republic, France against Ki ...
. Pitt's new graduated (progressive) income tax began at a levy of 2
old pence
The British pre-decimal penny was a denomination of sterling coinage worth of one pound or of one shilling. Its symbol was ''d'', from the Roman denarius. It was a continuation of the earlier English penny, and in Scotland it had the same mon ...
in the
pound
Pound or Pounds may refer to:
Units
* Pound (currency), a unit of currency
* Pound sterling, the official currency of the United Kingdom
* Pound (mass), a unit of mass
* Pound (force), a unit of force
* Rail pound, in rail profile
Symbols
* Po ...
() 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 formerly used in the United Kingdom, Australia, New Zealand, other British Commonwealth countries and Ireland, where they were generally equivalent to 12 pence o ...
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 an English Tory statesman who served as Prime Minister of the United Kingdom from 1801 to 1804.
Addington is best known for obtaining the Treaty of Amiens in 1802, an ...
during the
Peace of Amiens
The Treaty of Amiens (french: la paix d'Amiens, ) temporarily ended hostilities between France and the United Kingdom at the end of the War of the Second Coalition. It marked the end of the French Revolutionary Wars; after a short peace it se ...
. Addington had taken over as
prime minister
A prime minister, premier or chief of cabinet is the head of the cabinet and the leader of the ministers in the executive branch of government, often in a parliamentary or semi-presidential system. Under those systems, a prime minister is not ...
in 1801, after Pitt's resignation over
Catholic Emancipation
Catholic emancipation or Catholic relief was a process in the kingdoms of Great Britain and Ireland, and later the combined United Kingdom in the late 18th century and early 19th century, that involved reducing and removing many of the restricti ...
. 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, Belgium, Waterloo (at that time in the United Kingdom of the Netherlands, now in Belgium). A French army under the command of Napoleon was defeated by two of the armie ...
. 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 chancellor, is a senior minister of the Crown within the Government of the United Kingdom, and head of His Majesty's Treasury. As one of the four Great Offices of State, the Chancellor is ...
, 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 in the British Isles that existed between 1801 and 1922, when it included all of Ireland. It was established by the Acts of Union 1800, which merged the Kingdom of Great B ...
, income tax was reintroduced by
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, section 1 and the first schedule. Due to the repeal of those provisions it is now authorised by section 19(2) of the Interpretation Ac ...
. Peel, as a
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 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 politician. In a career lasting over 60 years, he served for 12 years as Prime Minister of the United Kingdom, spread over four non-conse ...
,
Chancellor of the Exchequer
The chancellor of the Exchequer, often abbreviated to chancellor, is a senior minister of the Crown within the Government of the United Kingdom, and head of His Majesty's Treasury. As one of the four Great Offices of State, the Chancellor is ...
from 1852, kept the progressive income tax, and extended it to cover the costs of the
Crimean War
The Crimean War, , was fought from October 1853 to February 1856 between Russia and an ultimately victorious alliance of the Ottoman Empire, France, the United Kingdom and Piedmont-Sardinia.
Geopolitical causes of the war included the de ...
. 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, a federal republic located primarily in North America, composed of 50 states, a city within a fed ...
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 (April 12, 1861 – May 26, 1865; also known by other names) was a civil war in the United States. It was fought between the Union ("the North") and the Confederacy ("the South"), the latter formed by states th ...
(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, 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 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
World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
.
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
Germany,, officially the Federal Republic of Germany, is a country in Central Europe. It is the second most populous country in Europe after Russia, and the most populous member state of the European Union. Germany is situated betwe ...
,
Singapore
Singapore (), officially the Republic of Singapore, is a sovereign island country and 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, borde ...
, 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: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
, 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).
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 (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
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 non-residents
Residents are generally taxed differently from non-residents. Few jurisdictions tax non-residents 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 jurisdictions (notably
Singapore
Singapore (), officially the Republic of Singapore, is a sovereign island country and 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, borde ...
and Hong Kong) tax residents only on income earned in or remitted to the jurisdiction. There may arise a situation where the tax payer has to pay tax in one jurisdiction he or she is tax resident and also pay tax to other country where he or she is non-resident. This creates the situation of Double taxation which needs assessment of Double Taxation Avoidance Agreement entered by the jurisdictions where the tax payer is assessed as resident and non-resident for the same transaction.
Residence is often defined for individuals as presence in the jurisdiction for more than 183 days. Most jurisdictions base residence of entities on either place of organization or place of management and control.
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 ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
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 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 primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
and many of its
states and
Switzerland
). Swiss law does not designate a ''capital'' as such, but the federal parliament and government are installed in Bern, while other federal institutions, such as the federal courts, are in other cities (Bellinzona, Lausanne, Luzern, Neuchâtel ...
, 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 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) or "pay as you go."
Income taxes of workers are often collected by employers under a
withholding or
pay-as-you-earn tax 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
Voluntary may refer to:
* Voluntary (music)
* Voluntary or volunteer, person participating via volunteering/volunteerism
* Voluntary muscle contraction
See also
* Voluntary action
* Voluntariness, in law and philosophy
* Voluntaryism, rejectio ...
.
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 market or series of transactions that has some aspect of illegality or is characterized by noncompliance with an institutional set of rules. If the rule defines the se ...
, 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 North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
,
Germany
Germany,, officially the Federal Republic of Germany, is a country in Central Europe. It is the second most populous country in Europe after Russia, and the most populous member state of the European Union. Germany is situated betwe ...
, 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 primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, 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
Quebec ( ; )According to the Canadian government, ''Québec'' (with the acute accent) is the official name in Canadian French and ''Quebec'' (without the accent) is the province's official name in Canadian English is one of the thirtee ...
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 such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
or
national insurance
National Insurance (NI) is a fundamental component of the welfare state in the United Kingdom. It acts as a form of social security, since payment of NI contributions establishes entitlement to certain state benefits for workers and their famil ...
, 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
![GDP per capita PPP vs PIT 2016](https://upload.wikimedia.org/wikipedia/commons/9/9f/GDP_per_capita_PPP_vs_PIT_2016.svg)
Multiple conflicting theories have been proposed regarding the economic impact of income taxes. Income taxes are widely viewed as a
progressive tax (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 regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdict ...
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 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
dead weight loss
In economics, deadweight loss is the difference in production and consumption of any given product or service including government tax. The presence of deadweight loss is most commonly identified when the quantity produced ''relative'' to the amoun ...
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 into entrepreneurship. While this is not surprising since one of the “unconstituted constituted” rules of thumb 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 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 to pay 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 policymakers of the area.
Additionally, Campodonico, Bonfatti and Pisan (2016) suggest 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 by 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 makes the economy more precarious to crash Henrekson et al. (2010, 9). This logically makes 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 policyholders in increasing economic growth. Evidence from Fazio et al. (2020) contributes 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 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
![Payroll and income tax by country](https://upload.wikimedia.org/wikipedia/commons/4/49/Payroll_and_income_tax_by_country.png)
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, a political philosophy in support of social reform
** Progressivism in the United States, the political philosophy in the American context
* Progressive realism, an American foreign policy par ...
,
proportional, 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 primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, 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
A tax treaty, also called double tax agreement (DTA) or double tax avoidance agreement (DTAA), is an agreement between two countries to avoid or mitigate double taxation. Such treaties may cover a range of taxes including income taxes, inheritance ...
with each other to eliminate or reduce
double taxation.
Countries do not necessarily use the same system of taxation for individuals and corporations. For example,
France
France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
uses a residential system for individuals but a territorial system for corporations, while
Singapore
Singapore (), officially the Republic of Singapore, is a sovereign island country and 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, borde ...
does the opposite, and
Brunei
Brunei ( , ), formally Brunei Darussalam ( ms, Negara Brunei Darussalam, Jawi alphabet, Jawi: , ), is a country located on the north coast of the island of Borneo in Southeast Asia. Apart from its South China Sea coast, it is completely sur ...
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 northwest, Norway to the north, and Russia to the east, with the Gulf of B ...
,
Norway
Norway, officially the Kingdom of Norway, is a Nordic country in Northern Europe, the mainland territory of which comprises the western and northernmost portion of the Scandinavian Peninsula. The remote Arctic island of Jan Mayen and t ...
and
Sweden
Sweden, formally the Kingdom of Sweden,The United Nations Group of Experts on Geographical Names states that the country's formal name is the Kingdom of SwedenUNGEGN World Geographical Names, Sweden./ref> is a Nordic country located on ...
(as of the late-2000s and early 2010s).
In Sweden this information have been published in the annual directory ''
Taxeringskalendern ''Taxeringskalendern'' ( English: ''"the tax annual"'' or ''"the tax calendar"'') is the Swedish blanket term for a directory that contains public information on taxed income from work and capital of all natural persons above 18 years of age in Swed ...
'' since 1905.
See also
*
*
Smart contract
A smart contract is a computer program or a transaction protocol that is intended to automatically execute, control or document events and actions according to the terms of a contract or an agreement. The objectives of smart contracts are the re ...
: can be used in
employment contract
An employment contract or contract of employment is a kind of contract used in labour law to attribute rights and responsibilities between parties to a bargain.
The contract is between an "employee" and an "employer". It has arisen out of the old ...
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 assets. This includes the total value of personal assets, including cash, bank deposits, real estate, assets in insurance and pension plans, ownershi ...
Notes
References
External links
What Is Income Tax Return (ITR) In India*
ttp://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_05/11/2013_526451 Greece - State collected less than half of revenues due last yearTHE EFFECT OF PUBLIC DISCLOSURE ON REPORTED TAXABLE INCOME: EVIDENCE FROM INDIVIDUALS AND CORPORATIONS IN JAPAN
{{Portal bar, Business and economics, Banking, Australia, Germany, Argentina, Japan, United States, Scotland, New England, Communism
Personal taxes