![Total-tax-revenues-gdp](https://upload.wikimedia.org/wikipedia/commons/d/da/Total-tax-revenues-gdp.png)
A tax is a compulsory financial charge or some other type of levy imposed on a
taxpayer
A taxpayer is a person or organization (such as a company) subject to pay a tax. Modern taxpayers may have an Taxpayer Identification Number, identification number, a reference number issued by a government to Citizenship, citizens or Company, f ...
(an individual or
legal entity
In law, a legal person is any person or 'thing' (less ambiguously, any legal entity) that can do the things a human person is usually able to do in law – such as enter into contracts, sue and be sued, own property, and so on. The reason for ...
) by a
government
A government is the system or group of people governing an organized community, generally a state.
In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is a ...
al organization in order to fund
government spending
Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting, the acquisition by governments of goods and services for current use, to directly satisfy the individual o ...
and various
public expenditure
Public expenditure is spending made by the government of a country on collective needs and wants, such as pension, provisions, security, infrastructure, etc. Until the 19th century, public expenditure was limited as laissez faire philosophies be ...
s (regional, local, or national), and tax compliance refers to policy actions and individual behaviour aimed at ensuring that taxpayers are paying the right amount of tax at the right time and securing the correct tax allowances and tax reliefs. The first known taxation took place in Ancient Egypt around 3000–2800 BC.
A failure to pay in a timely manner (
non-compliance), along with evasion of or resistance to taxation, is punishable by
law
Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...
. Taxes consist of
direct
Direct may refer to:
Mathematics
* Directed set, in order theory
* Direct limit of (pre), sheaves
* Direct sum of modules, a construction in abstract algebra which combines several vector spaces
Computing
* Direct access (disambiguation), a ...
or
indirect tax
An indirect tax (such as sales tax, per unit tax, value added tax (VAT), or goods and services tax (GST), excise, consumption tax, tariff) is a tax that is levied upon goods and services before they reach the customer who ultimately pays the i ...
es and may be paid in money or as its labor equivalent.
Most countries have a tax system in place, in order to pay for public, common societal, or agreed national needs and for the functions of government. Some levy a
flat percentage rate of taxation on personal annual income, but most
scale taxes are progressive based on brackets of annual income amounts. Most countries charge a tax on an individual's
income
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
as well as on
corporate income. Countries or subunits often also impose
wealth tax
A wealth tax (also called a capital tax or equity tax) is a tax on an entity's holdings of assets. This includes the total value of personal assets, including cash, bank deposits, real estate, assets in insurance and pension plans, ownershi ...
es,
inheritance tax
An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the estate (money and property) of a person who has died.
International tax law distinguishes between an es ...
es,
estate taxes,
gift tax
In economics, a gift tax is the tax on money or property that one living person or corporate entity gives to another. A gift tax is a type of transfer tax that is imposed when someone gives something of value to someone else. The transfer must ...
es,
property tax
A property tax or millage rate is an ad valorem tax on the value of a property.In the OECD classification scheme, tax on property includes "taxes on immovable property or net wealth, taxes on the change of ownership of property through inheri ...
es,
sales tax
A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a govern ...
es,
use tax
A use tax is a type of tax levied in the United States by numerous state governments. It is essentially the same as a sales tax but is applied not where a product or service was sold but where a merchant bought a product or service and then conve ...
es,
payroll tax
Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their employees. By law, some payroll taxes are the responsibility of the employee and others fall on the em ...
es,
duties
A duty (from "due" meaning "that which is owing"; fro, deu, did, past participle of ''devoir''; la, debere, debitum, whence "debt") is a commitment or expectation to perform some action in general or if certain circumstances arise. A duty may ...
and/or
tariff
A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and poli ...
s.
In economic terms, taxation transfers wealth from households or businesses to the government. This has effects on
economic growth
Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
and
economic welfare
The welfare definition of economics is an attempt by Alfred Marshall, a pioneer of neoclassical economics, to redefine his field of study. This definition expands the field of economic science to a larger study of humanity. Specifically, Marshall's ...
that can be both increased (known as
fiscal multiplier
In economics, the fiscal multiplier (not to be confused with the money multiplier) is the ratio of change in national income arising from a change in government spending. More generally, the exogenous spending multiplier is the ratio of change ...
) or decreased (known as
excess burden of taxation
In economics, the excess burden of taxation, also known as the deadweight cost or deadweight loss of taxation, is one of the economic losses that society suffers as the result of taxes or subsidies. Economic theory posits that distortions change ...
). Consequently, taxation is a highly debated topic by some, although taxation is deemed necessary by general consensus in order for society to function and grow in an orderly and equitable manner, others such as
libertarians
Libertarianism (from french: libertaire, "libertarian"; from la, libertas, "freedom") is a political philosophy that upholds liberty as a core value. Libertarians seek to maximize autonomy and political freedom, and minimize the state's enc ...
and
anarcho-capitalists
Anarcho-capitalism (or, colloquially, ancap) is an anti-statist, libertarian, and anti-political philosophy and economic theory that seeks to abolish centralized states in favor of stateless societies with systems of private property enfor ...
denounce taxation broadly or in its entirety, classifying it as
theft
Theft is the act of taking another person's property or services without that person's permission or consent with the intent to deprive the rightful owner of it. The word ''theft'' is also used as a synonym or informal shorthand term for some ...
or
extortion
Extortion is the practice of obtaining benefit through coercion. In most jurisdictions it is likely to constitute a criminal offence; the bulk of this article deals with such cases. Robbery is the simplest and most common form of extortion, ...
through
coercion
Coercion () is compelling a party to act in an involuntary manner by the use of threats, including threats to use force against a party. It involves a set of forceful actions which violate the free will of an individual in order to induce a desi ...
and the use of
force
In physics, a force is an influence that can change the motion of an object. A force can cause an object with mass to change its velocity (e.g. moving from a state of rest), i.e., to accelerate. Force can also be described intuitively as a p ...
.
Overview
![Pieter Brueghel the Younger, 'Paying the Tax (The Tax Collector)' oil on panel, 1620-1640](https://upload.wikimedia.org/wikipedia/commons/9/96/Pieter_Brueghel_the_Younger%2C_%27Paying_the_Tax_%28The_Tax_Collector%29%27_oil_on_panel%2C_1620-1640._USC_Fisher_Museum_of_Art.jpg)
The legal definition and the economic definition of taxes differ in some ways such that economists do not regard many transfers to governments as taxes. For example, some transfers to the public sector are comparable to prices. Examples include tuition at public universities and fees for utilities provided by local governments. Governments also obtain resources by "creating" money and coins (for example, by printing bills and by minting coins), through voluntary gifts (for example, contributions to public universities and museums), by imposing penalties (such as
traffic fines), by borrowing and confiscating
criminal
In ordinary language, a crime is an unlawful act punishable by a state or other authority. The term ''crime'' does not, in modern criminal law, have any simple and universally accepted definition,Farmer, Lindsay: "Crime, definitions of", in Can ...
proceeds. From the view of economists, a tax is a non-penal, yet compulsory transfer of resources from the private to the
public sector
The public sector, also called the state sector, is the part of the economy composed of both public services and public enterprises. Public sectors include the public goods and governmental services such as the military, law enforcement, infra ...
, levied on a basis of predetermined criteria and without reference to specific benefits received.
In modern taxation systems, governments levy taxes in money; but
in-kind The term in kind (or in-kind) generally refers to goods, services, and transactions not involving money or not measured in monetary terms. It is a part of many spheres, mainly economics, finance, but also politics, work career, food, health and othe ...
and ''
corvée
Corvée () is a form of unpaid, forced labour, that is intermittent in nature lasting for limited periods of time: typically for only a certain number of days' work each year.
Statute labour is a corvée imposed by a state for the purposes of ...
'' taxation are characteristic of traditional or pre-
capitalist
Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, priva ...
states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated in
politics
Politics (from , ) is the set of activities that are associated with making decisions in groups, or other forms of power relations among individuals, such as the distribution of resources or status. The branch of social science that studies ...
and
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
. Tax collection is performed by a government agency such as the
Internal Revenue Service
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...
(IRS) in the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
,
His Majesty's Revenue and Customs
, patch =
, patchcaption =
, logo = HM Revenue & Customs.svg
, logocaption =
, badge =
, badgecaption =
, flag =
, flagcaption =
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, co ...
(HMRC) in the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
, the
Canada Revenue Agency
The Canada Revenue Agency (CRA; ; ) is the revenue service of the Canadian federal government, and most provincial and territorial governments. The CRA collects taxes, administers tax law and policy, and delivers benefit programs and tax credit ...
or the
Australian Taxation Office
The Australian Taxation Office (ATO) is an Australian statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system, superannuati ...
. When taxes are not fully paid, the state may impose civil penalties (such as
fines Fines may refer to:
* Fines, Andalusia, Spanish municipality
* Fine (penalty)
* Fine, a dated term for a premium on a lease of land, a large sum the tenant pays to commute (lessen) the rent throughout the term
*Fines, ore or other products with a s ...
or
forfeiture) or criminal penalties (such as
incarceration
Imprisonment is the restraint of a person's liberty, for any cause whatsoever, whether by authority of the government, or by a person acting without such authority. In the latter case it is "false imprisonment". Imprisonment does not necessari ...
) on the non-paying entity or individual.
Purposes and effects
The levying of taxes aims to raise revenue to fund
governing
Governance is the process of interactions through the laws, norms, power or language of an organized society over a social system ( family, tribe, formal or informal organization, a territory or across territories). It is done by the gove ...
or to alter prices in order to affect
demand
In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specific item ...
. States and their functional equivalents throughout history have used the money provided by taxation to carry out many functions. Some of these include expenditures on economic
infrastructure
Infrastructure is the set of facilities and systems that serve a country, city, or other area, and encompasses the services and facilities necessary for its economy, households and firms to function. Infrastructure is composed of public and priv ...
(
road
A road is a linear way for the conveyance of traffic that mostly has an improved surface for use by vehicles (motorized and non-motorized) and pedestrians. Unlike streets, the main function of roads is transportation.
There are many types of ...
s,
public transport
Public transport (also known as public transportation, public transit, mass transit, or simply transit) is a system of transport for passengers by group travel systems available for use by the general public unlike private transport, typical ...
ation,
sanitation
Sanitation refers to public health conditions related to clean drinking water and treatment and disposal of human excreta and sewage. Preventing human contact with feces is part of sanitation, as is hand washing with soap. Sanitation systems ...
,
legal systems
The contemporary national legal systems are generally based on one of four basic systems: civil law, common law, statutory law, religious law or combinations of these. However, the legal system of each country is shaped by its unique history and ...
,
public security
Public security or public safety is the prevention of and protection from events that could endanger the safety and security of the public from significant danger, injury, or property damage. It is often conducted by a state government to ensure ...
, public
education
Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty. Va ...
, public
health system
Health, according to the World Health Organization, is "a state of complete physical, mental and social well-being and not merely the absence of disease and infirmity".World Health Organization. (2006)''Constitution of the World Health Organiza ...
s),
military
A military, also known collectively as armed forces, is a heavily armed, highly organized force primarily intended for warfare. It is typically authorized and maintained by a sovereign state, with its members identifiable by their distinct ...
,
scientific
Science is a systematic endeavor that builds and organizes knowledge in the form of testable explanations and predictions about the universe.
Science may be as old as the human species, and some of the earliest archeological evidence for ...
research & development
Research and development (R&D or R+D), known in Europe as research and technological development (RTD), is the set of innovative activities undertaken by corporations or governments in developing new services or products, and improving existi ...
,
culture
Culture () is an umbrella term which encompasses the social behavior, institutions, and norms found in human societies, as well as the knowledge, beliefs, arts, laws, customs, capabilities, and habits of the individuals in these groups.Tyl ...
and
the arts
The arts are a very wide range of human practices of creative expression, storytelling and cultural participation. They encompass multiple diverse and plural modes of thinking, doing and being, in an extremely broad range of media. Both ...
,
public works
Public works are a broad category of infrastructure projects, financed and constructed by the government, for recreational, employment, and health and safety uses in the greater community. They include public buildings ( municipal buildings, sc ...
,
distribution Distribution may refer to:
Mathematics
*Distribution (mathematics), generalized functions used to formulate solutions of partial differential equations
* Probability distribution, the probability of a particular value or value range of a vari ...
,
data collection
Data collection or data gathering is the process of gathering and measuring information on targeted variables in an established system, which then enables one to answer relevant questions and evaluate outcomes. Data collection is a research com ...
and
dissemination
To disseminate (from lat. ''disseminare'' "scattering seeds"), in the field of communication, is to broadcast a message to the public without direct feedback from the audience.
Meaning
Dissemination takes on the theory of the traditional view ...
, public
insurance
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
, and the operation of government itself. A government's ability to raise taxes is called its
fiscal capacity Fiscal capacity is the ability of the state to extract revenues to provide public goods and carry out other functions of the state, given an administrative, fiscal accounting structure. In economics and political science, fiscal capacity may be refe ...
.
When
expenditures
An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition is ...
exceed tax
revenue
In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business.
Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...
, a government accumulates
government debt
A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
. A portion of taxes may be used to service past debts. Governments also use taxes to fund
welfare
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
and
public service
A public service is any service intended to address specific needs pertaining to the aggregate members of a community. Public services are available to people within a government jurisdiction as provided directly through public sector agencies ...
s. These services can include
education system
The educational system generally refers to the structure of all institutions and the opportunities for obtaining education within a country. It includes all pre-school institutions, starting from family education, and/or early childhood education ...
s,
pension
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 ...
s for the
elderly
Old age refers to ages nearing or surpassing the life expectancy of human beings, and is thus the end of the human life cycle. Terms and euphemisms for people at this age include old people, the elderly (worldwide usage), OAPs (British usage ...
,
unemployment benefits
Unemployment benefits, also called unemployment insurance, unemployment payment, unemployment compensation, or simply unemployment, are payments made by authorized bodies to unemployment, unemployed people. In the United States, benefits are fun ...
,
transfer payment
In macroeconomics and finance, a transfer payment (also called a government transfer or simply transfer) is a redistribution of income and wealth by means of the government making a payment, without goods or services being received in return. Th ...
s,
subsidies
A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from the government, the ter ...
and
public transportation
Public transport (also known as public transportation, public transit, mass transit, or simply transit) is a system of transport for passengers by group travel systems available for use by the general public unlike private transport, typical ...
.
Energy
In physics, energy (from Ancient Greek: ἐνέργεια, ''enérgeia'', “activity”) is the quantitative property that is transferred to a body or to a physical system, recognizable in the performance of work and in the form of heat a ...
,
water
Water (chemical formula ) is an inorganic, transparent, tasteless, odorless, and nearly colorless chemical substance, which is the main constituent of Earth's hydrosphere and the fluids of all known living organisms (in which it acts as a ...
and
waste management
Waste management or waste disposal includes the processes and actions required to manage waste from its inception to its final disposal.
This includes the collection, transport, treatment and disposal of waste, together with monitoring ...
systems are also common
public utilities
A public utility company (usually just utility) is an organization that maintains the infrastructure for a public service (often also providing a service using that infrastructure). Public utilities are subject to forms of public control and r ...
.
According to the proponents of the
chartalist theory of
money creation
Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region,Such as the Eurozone or ECCAS is increased. In most modern economies, money creation is controlled by the central bank ...
, taxes are not needed for government revenue, as long as the government in question is able to issue
fiat money
Fiat money (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometime ...
. According to this view, the purpose of taxation is to maintain the stability of the currency, express public policy regarding the distribution of wealth, subsidizing certain industries or population groups or isolating the costs of certain benefits, such as highways or social security.
Effects of taxes can be divided into two fundamental categories:
* Taxes cause an
income effect
The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their pref ...
because they reduce
purchasing power
Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...
to taxpayers.
* Taxes cause a
substitution effect
In economics and particularly in consumer choice theory, the substitution effect is one component of the effect of a change in the price of a good upon the amount of that good demanded by a consumer, the other being the income effect.
When a ...
when taxation causes a substitution between taxed goods and untaxed goods.
![Substitution effect](https://upload.wikimedia.org/wikipedia/commons/7/7d/Substitution_effect.png)
If we consider, for instance, two
normal good
In economics, a normal good is a type of a Good (economics), good which experiences an increase in demand due to an increase in income, unlike inferior goods, for which the opposite is observed. When there is an increase in a person's income, for ...
s, ''x'' and ''y,'' whose prices are respectively ''p
x'' and ''p
y'' and an individual budget constraint given by the equation ''xp
x'' + ''yp
y'' = Y, where Y is the income, the slope of the budget constraint, in a graph where is represented good ''x'' on the vertical axis and good ''y'' on the horizontal axes, is equal to -''p
y''/''p
x'' . The initial equilibrium is in the point (C), in which
budget constraint and
indifference curve
In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is ''indifferent''. That is, any combinations of two products indicated by the curve will provide the c ...
are
tangent
In geometry, the tangent line (or simply tangent) to a plane curve at a given point is the straight line that "just touches" the curve at that point. Leibniz defined it as the line through a pair of infinitely close points on the curve. More ...
, introducing an ''
ad valorem tax'' on the ''y'' good (budget constraint: ''p
xx'' + ''p
y''(1 + ''τ'')''y ='' Y'')'', the budget constraint's slope becomes equal to -''p
y''(1 + τ)/''p
x''. The new equilibrium is now in the tangent point (A) with a lower indifferent curve.
As can be noticed the tax's introduction causes two consequences:
# It changes the consumers' real income (less purchasing power)
# It raises the relative price of ''y'' good.
The income effect shows the variation of ''y'' good quantity given by the change of real income. The substitution effect shows the variation of ''y'' good determined by relative prices' variation. This kind of taxation (that causes the substitution effect) can be considered distortionary.
![Income effect](https://upload.wikimedia.org/wikipedia/commons/e/ed/Income_effect.PNG)
Another example can be the introduction of an income
lump-sum tax
A lump-sum tax is a special way of taxation, based on a fixed amount, rather than on the real circumstance of the taxed entity. (''xp
x'' + ''yp
y'' = Y - T), with a parallel shift downward of the budget constraint, can be produced a higher revenue with the same loss of consumers' utility compared with the property tax case, from another point of view, the same revenue can be produced with a lower utility sacrifice. The lower utility (with the same revenue) or the lower revenue (with the same utility) given by a distortionary tax are called excess pressure. The same result, reached with an income lump-sum tax, can be obtained with these following types of taxes (all of them cause only a budget constraint's shift without causing a substitution effect), the budget constraint's slope remains the same (-''p
x''/''p
y''):
* A general tax on consumption: (Budget constraint: ''p
x''(1 + τ)''x'' + ''p
y''(1 + τ)''y ='' Y)
* A proportional income tax: (Budget constraint: ''xp
x'' + ''yp
y'' = Y(1 - ''t''))
When the t and τ rates are chosen respecting this equation (where t is the rate of income tax and tau is the consumption tax's rate):
the effects of the two taxes are the same.
A tax effectively changes the relative prices of products. Therefore, most
economists
An economist is a professional and practitioner in the social science discipline of economics.
The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this field there are ...
, especially
neoclassical economists
Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
, argue that taxation creates
market distortion In neoclassical economics, a market distortion is any event in which a market reaches a market clearing price for an item that is substantially different from the price that a market would achieve while operating under conditions of perfect competi ...
and results in economic inefficiency unless there are (positive or negative) externalities associated with the activities that are taxed that need to be internalized to reach an efficient market outcome. They have therefore sought to identify the kind of tax system that would minimize this distortion. Recent scholarship suggests that in the
United States of America
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territo ...
, the federal government effectively taxes investments in higher education more heavily than it subsidizes higher education, thereby contributing to a shortage of skilled workers and unusually high differences in pre-tax earnings between highly educated and less-educated workers.
Taxes can even have effects on labor supply: we can consider a model in which the consumer chooses the number of hours spent working and the amount spent on consumption. Let us suppose that only one good exists and no income is saved.
Consumers have a given number of hours (H) that is divided between work (L) and free time (F = H - L). The hourly wage is called ''w'' and it tells us the free time's
opportunity cost
In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...
, i.e. the income to which the individual renounces consuming an additional hour of free time. Consumption and hours of work have a positive relationship, more hours of work mean more earnings and, assuming that workers don't save money, more earnings imply an increase in consumption (Y = C = ''w''L). Free time and consumption can be considered as two normal goods (workers have to decide between working one hour more, that would mean consuming more or having one more hour of free time) and the budget constraint is negatively inclined (Y = ''w''(H - F)). The
indifference curve
In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is ''indifferent''. That is, any combinations of two products indicated by the curve will provide the c ...
related to these two goods has a negative slope and free time becomes more and more important with high levels of consumption. This is because a high level of consumption means that people are already spending many hours working, so, in this situation, they need more free time than consume and it implies that they have to be paid with a higher salary to work an additional hour. A proportional income tax, changing budget constraint's slope (now Y = ''w''(1 - ''t'')(H - F)), implies both substitution and income effects. The problem now is that the two effects go in opposite ways: the income effect tells us that, with an income tax, the consumer feels poorer and for this reason he wants to work more, causing an increase in labor offer. On the other hand, the substitution effect tells us that free time, being a normal good, is now more convenient compared to consume and it implies a decrease in labor offer. Therefore, the total effect can be both an increase or a decrease of labor offer, depending on the indifference curve's shape.
![LafferCurve](https://upload.wikimedia.org/wikipedia/commons/9/96/LafferCurve.svg)
The
Laffer curve
In economics, the Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of the government's tax revenue. The Laffer curve assumes that no tax revenue is raised at the extreme tax rates of 0% and ...
depicts the amount of government revenue as a function of the rate of taxation. It shows that for a tax rate above a certain critical rate, government revenue starts decreasing as the tax rate rises, as a consequence of a decline in labor supply. This theory supports that, if the tax rate is above that critical point, a decrease in the tax rate should imply a rise in labor supply that in turn would lead to an increase in government revenue.
Governments use different kinds of taxes and vary the tax rates. They do this in order to distribute the tax burden among individuals or classes of the population involved in taxable activities, such as the
business sector
In economics, the business sector or corporate sector - sometimes popularly called simply "business" - is "the part of the economy made up by companies". It is a subset of the domestic economy, excluding the economic activities of general govern ...
, or to redistribute resources between individuals or classes in the population. Historically, taxes on the poor supported the
nobility
Nobility is a social class found in many societies that have an aristocracy (class), aristocracy. It is normally ranked immediately below Royal family, royalty. Nobility has often been an Estates of the realm, estate of the realm with many e ...
; modern
social-security systems aim to support the poor, the disabled, or the retired by taxes on those who are still working. In addition, taxes are applied to fund foreign aid and military ventures, to influence the
macroeconomic
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
performance of the economy (a government's strategy for doing this is called its
fiscal policy
In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables ...
; see also
tax exemption
Tax exemption is the reduction or removal of a liability to make a compulsory payment that would otherwise be imposed by a ruling power upon persons, property, income, or transactions. Tax-exempt status may provide complete relief from taxes, redu ...
), or to modify patterns of consumption or employment within an economy, by making some classes of the transaction more or less attractive.
A state's tax system often reflects its communal values and the values of those in current political power. To create a system of taxation, a state must make choices regarding the distribution of the tax burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent. In democratic nations where the public elects those in charge of establishing or administering the tax system, these choices reflect the type of community that the public wishes to create. In countries where the public does not have a significant amount of influence over the system of taxation, that system may reflect more closely the values of those in power.
All large
business
Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...
es incur administrative costs in the process of delivering revenue collected from customers to the suppliers of the goods or services being purchased. Taxation is no different, as governments are large organizations; the resource collected from the public through taxation is always greater than the amount which can be used by the government. The difference is called the
compliance cost Compliance costs are all expenses that a company uses up to adhere to government regulations. Compliance costs incorporate salaries of employees in compliance, time and funds spend on announcing, new system necessitated to meet retention, and so on. ...
and includes (for example) the labor cost and other expenses incurred in complying with tax laws and rules. The collection of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism-rehabilitation centers, is called
hypothecation
Hypothec (; german: Hypothek, french: hypothèque, pl, hipoteka, from Lat. ''hypotheca'', from Gk. : hypothēkē), sometimes tacit hypothec, is a term used in civil law systems (e.g. law of entire Continental Europe except Gibraltar
)
, ...
.
Finance minister
A finance minister is an executive or cabinet position in charge of one or more of government finances, economic policy and financial regulation.
A finance minister's portfolio has a large variety of names around the world, such as "treasury", " ...
s often dislike this practice, since it reduces their freedom of action. Some economic theorists regard hypothecation as intellectually dishonest since, in reality, money is
fungible
In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of whose parts is indistinguishable from any other part. Fungible tokens can be exchanged or replaced; for exam ...
. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general fund. In some cases, such taxes are collected in fundamentally inefficient ways, for example, through highway tolls.
Since governments also resolve commercial disputes, especially in countries with
common law
In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipresen ...
, similar arguments are sometimes used to justify a
sales tax
A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a govern ...
or
value added tax
A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end ...
. Some (
libertarians
Libertarianism (from french: libertaire, "libertarian"; from la, libertas, "freedom") is a political philosophy that upholds liberty as a core value. Libertarians seek to maximize autonomy and political freedom, and minimize the state's enc ...
, for example) portray most or all forms of taxes as
immoral
Immorality is the violation of moral laws, norms or standards. It refers to an agent doing or thinking something they know or believe to be wrong. Immorality is normally applied to people or actions, or in a broader sense, it can be applied to gr ...
due to their involuntary (and therefore eventually
coercive or violent) nature. The most extreme anti-tax view,
anarcho-capitalism
Anarcho-capitalism (or, colloquially, ancap) is an anti-statist, libertarian, and anti-political philosophy and economic theory that seeks to abolish centralized states in favor of stateless societies with systems of private property enforce ...
, holds that all social services should be voluntarily bought by the people using them.
Types
The
Organisation for Economic Co-operation and Development
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organization, intergovernmental organisation with 38 member countries ...
(OECD) publishes an analysis of the tax systems of member countries. As part of such analysis, OECD has developed a definition and system of classification of internal taxes, generally followed below. In addition, many countries impose taxes (
tariff
A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and poli ...
s) on the import of goods.
Income
Income tax
Many jurisdictions tax the income of individuals and of
business entities
In law, a legal person is any person or 'thing' (less ambiguously, any legal entity) that can do the things a human person is usually able to do in law – such as enter into contracts, sue and be sued, own property, and so on. The reason for ...
, including
corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
s. Generally, the authorities impose a tax on net profits from a
business
Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...
, on net gains, and on other income. Computation of income subject to tax may be determined under accounting principles used in the jurisdiction, which
tax-law principles in the jurisdiction may modify or replace. The
incidence of taxation varies by system, and some systems may be viewed as
progressive or
regressive. Rates of tax may vary or be constant (flat) by income level. Many systems allow individuals certain personal allowances and other non-business reductions to taxable income, although business deductions tend to be favored over personal deductions.
Tax-collection agencies often collect
personal income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Ta ...
on a
pay-as-you-earn basis, with corrections made after the end of the
tax year
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
. These corrections take one of two forms:
* payments to the government, from taxpayers who have not paid enough during the tax year
*
tax refund
A tax refund or tax rebate is a payment to the taxpayer due to the taxpayer having paid more tax than they owed.
By country
United States
According to the Internal Revenue Service, 77% of tax returns filed in 2004 resulted in a refund check, ...
s from the government to those who have overpaid
Income-tax systems often make deductions available that reduce the total tax liability by reducing total taxable income. They may allow losses from one type of income to count against another - for example, a loss on the stock market may be deducted against taxes paid on wages. Other tax systems may isolate the loss, such that business losses can only be deducted against business income tax by carrying forward the loss to later tax years.
Negative income tax
In economics, a negative income tax (abbreviated NIT) is a
progressive income tax
A progressive tax is a tax in which the tax rate increases as the taxable amount increases.Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), ''Concepts of Taxation'', Dryden Press: Fort Worth, TX The term ''progre ...
system where people earning below a certain amount receive supplemental payment from the government instead of paying taxes to the government.
Capital gains
Most jurisdictions imposing an income tax treat
capital gain
Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares.
...
s as part of income subject to tax. Capital gain is generally a gain on sale of capital assets—that is, those assets not held for sale in the ordinary course of business. Capital assets include personal assets in many jurisdictions. Some jurisdictions provide preferential rates of tax or only partial taxation for capital gains. Some jurisdictions impose different rates or levels of capital-gains taxation based on the length of time the asset was held. Because tax rates are often much lower for capital gains than for ordinary income, there is widespread controversy and dispute about the proper definition of capital.
Corporate
Corporate tax refers to income tax, capital tax, net-worth tax, or other taxes imposed on corporations. Rates of tax and the taxable base for corporations may differ from those for individuals or for other taxable persons.
Social-security contributions
![GDP per capita PPP vs social contributions 2016](https://upload.wikimedia.org/wikipedia/commons/3/38/GDP_per_capita_PPP_vs_social_contributions_2016.svg)
Many countries provide publicly funded retirement or healthcare systems. In connection with these systems, the country typically requires employers and/or employees to make compulsory payments. These payments are often computed by reference to wages or earnings from self-employment. Tax rates are generally fixed, but a different rate may be imposed on employers than on employees. Some systems provide an upper limit on earnings subject to the tax. A few systems provide that the tax is payable only on wages above a particular amount. Such upper or lower limits may apply for retirement but not for health-care components of the tax. Some have argued that such taxes on wages are a form of "forced savings" and not really a tax, while others point to redistribution through such systems between generations (from newer cohorts to older cohorts) and across income levels (from higher income levels to lower income-levels) which suggests that such programs are really taxed and spending programs.
Payroll or workforce
Unemployment and similar taxes are often imposed on employers based on the total payroll. These taxes may be imposed in both the country and sub-country levels.
Wealth
A wealth tax is levied on the total value of personal assets, including: bank deposits, real estate, assets in insurance and pension plans, ownership of
unincorporated businesses,
financial securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
, and personal trusts.
[ (recommending a net wealth tax for the US of 0.05% for the first $100,000 in assets to 0.3% for assets over $1,000,000)] Liabilities (primarily mortgages and other loans) are typically deducted, hence it is sometimes called a net wealth tax.
Property
Recurrent property taxes may be imposed on immovable property (real property) and on some classes of movable property. In addition, recurrent taxes may be imposed on the net wealth of individuals or corporations. Many jurisdictions impose
estate tax
An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the estate (money and property) of a person who has died.
International tax law distinguishes between an es ...
,
gift tax
In economics, a gift tax is the tax on money or property that one living person or corporate entity gives to another. A gift tax is a type of transfer tax that is imposed when someone gives something of value to someone else. The transfer must ...
or other
inheritance tax
An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the estate (money and property) of a person who has died.
International tax law distinguishes between an es ...
es on property at death or at the time of gift transfer. Some jurisdictions impose
taxes on financial or capital transactions.
Property taxes
A property tax (or millage tax) is an
'' ad valorem'' tax levy on the value of a property that the owner of the property is required to pay to a government in which the property is situated. Multiple jurisdictions may tax the same property. There are three general varieties of property: land, improvements to land (immovable man-made things, e.g. buildings), and personal property (movable things).
Real estate
Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
or realty is the combination of land and improvements to the land.
Property taxes are usually charged on a recurrent basis (e.g., yearly). A common type of property tax is an annual charge on the ownership of
real estate
Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
, where the tax base is the estimated value of the property. For a period of over 150 years from 1695, the government of England levied a
window tax
Window tax was a property tax based on the number of windows in a house. It was a significant social, cultural, and architectural force in England, France, and Ireland during the 18th and 19th centuries. To avoid the tax, some houses from the p ...
, with the result that one can still see
listed buildings
In the United Kingdom, a listed building or listed structure is one that has been placed on one of the four statutory lists maintained by Historic England in England, Historic Environment Scotland in Scotland, in Wales, and the Northern Irel ...
with windows bricked up in order to save their owner's money. A similar tax on hearths existed in France and elsewhere, with similar results. The two most common types of event-driven property taxes are
stamp duty
Stamp duty is a tax that is levied on single property purchases or documents (including, historically, the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions). A physical revenu ...
, charged upon change of ownership, and
inheritance tax
An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the estate (money and property) of a person who has died.
International tax law distinguishes between an es ...
, which many countries impose on the estates of the deceased.
In contrast with a tax on real estate (land and buildings), a
land-value tax (or LVT) is levied only on the unimproved value of the land ("land" in this instance may mean either the economic term, i.e., all-natural resources, or the natural resources associated with specific areas of the Earth's surface: "lots" or "land parcels"). Proponents of the land-value tax argue that it is economically justified, as it will not deter production, distort market mechanisms or otherwise create
deadweight loss
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 ...
es the way other taxes do.
When real estate is held by a higher government unit or some other entity not subject to taxation by the local government, the taxing authority may receive a
payment in lieu of taxes A payment in lieu of taxes (usually abbreviated as PILOT, or sometimes as PILT) is a payment made to compensate a government for some or all of the property tax revenue lost due to tax exempt ownership or use of real property.
Canada
The federal g ...
to compensate it for some or all of the foregone tax revenues.
In many jurisdictions (including many American states), there is a general tax levied periodically on residents who own
personal property
property is property that is movable. In common law systems, personal property may also be called chattels or personalty. In civil law systems, personal property is often called movable property or movables—any property that can be moved fr ...
(personalty) within the jurisdiction. Vehicle and boat registration fees are subsets of this kind of tax. The tax is often designed with blanket coverage and large exceptions for things like food and clothing. Household goods are often exempt when kept or used within the household.
Any otherwise non-exempt object can lose its exemption if regularly kept outside the household.
Thus, tax collectors often monitor newspaper articles for stories about wealthy people who have lent art to museums for public display, because the artworks have then become subject to personal property tax.
If an artwork had to be sent to another state for some touch-ups, it may have become subject to personal property tax in ''that'' state as well.
Inheritance
Inheritance tax, estate tax, and death tax or duty are the names given to various taxes that arise on the death of an individual. In United States
tax law
Tax law or revenue law is an area of legal study in which public or sanctioned authorities, such as federal, state and municipal governments (as in the case of the US) use a body of rules and procedures (laws) to assess and collect taxes in a ...
, there is a distinction between an estate tax and an inheritance tax: the former taxes the personal representatives of the deceased, while the latter taxes the beneficiaries of the estate. However, this distinction does not apply in other jurisdictions; for example, if using this terminology UK inheritance tax would be an estate tax.
Expatriation
An expatriation tax is a tax on individuals who renounce their
citizenship
Citizenship is a "relationship between an individual and a state to which the individual owes allegiance and in turn is entitled to its protection".
Each state determines the conditions under which it will recognize persons as its citizens, and ...
or residence. The tax is often imposed based on a deemed disposition of all the individual's property. One example is the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
under the ''
American Jobs Creation Act
The American Jobs Creation Act of 2004 () was a federal tax act that repealed the export tax incentive (ETI), which had been declared illegal by the World Trade Organization several times and sparked retaliatory tariffs by the European Union. It ...
'', where any individual who has a net worth of $2 million or an average income-tax liability of $127,000 who renounces his or her citizenship and leaves the country is automatically assumed to have done so for tax avoidance reasons and is subject to a higher tax rate.
Transfer
Historically, in many countries, a contract needs to have a stamp affixed to make it valid. The charge for the stamp is either a fixed amount or a percentage of the value of the transaction. In most countries, the stamp has been abolished but
stamp duty
Stamp duty is a tax that is levied on single property purchases or documents (including, historically, the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions). A physical revenu ...
remains. Stamp duty is levied in the UK on the purchase of shares and securities, the issue of bearer instruments, and certain partnership transactions. Its modern derivatives,
stamp duty reserve tax
Stamp duty is a tax that is levied on single property purchases or documents (including, historically, the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions). A physical reven ...
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
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 ...
, transfer tax is often charged by the state or local government and (in the case of real property transfers) can be tied to the recording of the deed or other transfer documents.
Wealth (net worth)
Some countries' governments will require a declaration of the taxpayers'
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
(assets and liabilities), and from that exact a tax on
net worth
Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net ...
(assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax may be levied on "
natural
Nature, in the broadest sense, is the physical world or universe. "Nature" can refer to the phenomena of the physical world, and also to life in general. The study of nature is a large, if not the only, part of science. Although humans are p ...
" or "
legal persons."
Goods and services
Value added
A value-added tax (VAT), also known as Goods and Services Tax (G.S.T), Single Business Tax, or Turnover Tax in some countries, applies the equivalent of a sales tax to every operation that creates value. To give an example, sheet steel is imported by a machine manufacturer. That manufacturer will pay the VAT on the purchase price, remitting that amount to the government. The manufacturer will then transform the steel into a machine, selling the machine for a higher price to a wholesale distributor. The manufacturer will collect the VAT on the higher price but will remit to the government only the excess related to the "value-added" (the price over the cost of the sheet steel). The wholesale distributor will then continue the process, charging the retail distributor the VAT on the entire price to the retailer, but remitting only the amount related to the distribution mark-up to the government. The last VAT amount is paid by the eventual retail customer who cannot recover any of the previously paid VAT. For a VAT and sales tax of identical rates, the total tax paid is the same, but it is paid at differing points in the process.
VAT is usually administrated by requiring the company to complete a VAT return, giving details of VAT it has been charged (referred to as input tax) and VAT it has charged to others (referred to as output tax). The difference between output tax and input tax is payable to the Local Tax Authority.
Many tax authorities have introduced automated VAT which has increased
accountability
Accountability, in terms of ethics and governance, is equated with answerability, blameworthiness, liability, and the expectation of account-giving. As in an aspect of governance, it has been central to discussions related to problems in the publ ...
and
auditability
An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
, by utilizing computer systems, thereby also enabling anti-cybercrime offices as well.
Sales
Sales taxes are levied when a commodity is sold to its final consumer. Retail organizations contend that such taxes discourage retail sales. The question of whether they are generally progressive or regressive is a subject of much current debate. People with higher incomes spend a lower proportion of them, so a flat-rate sales tax will tend to be regressive. It is therefore common to exempt food, utilities, and other necessities from sales taxes, since poor people spend a higher proportion of their incomes on these commodities, so such exemptions make the tax more progressive. This is the classic "You pay for what you spend" tax, as only those who spend money on non-exempt (i.e. luxury) items pay the tax.
A small number of U.S. states rely entirely on sales taxes for state revenue, as those states do not levy a state income tax. Such states tend to have a moderate to a large amount of tourism or inter-state travel that occurs within their borders, allowing the state to benefit from taxes from people the state would otherwise not tax. In this way, the state is able to reduce the tax burden on its citizens. The U.S. states that do not levy a state income tax are Alaska, Tennessee, Florida, Nevada, South Dakota, Texas, Washington state, and Wyoming. Additionally, New Hampshire and Tennessee levy state income taxes only on
dividends
A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...
and interest income. Of the above states, only Alaska and New Hampshire do not levy a state sales tax. Additional information can be obtained at th
Federation of Tax Administratorswebsite.
In the United States, there is a growing movement for the replacement of all federal payroll and income taxes (both corporate and personal) with a national retail sales tax and monthly tax rebate to households of citizens and legal resident aliens. The tax proposal is named
FairTax. In Canada, the federal sales tax is called the Goods and Services Tax (GST) and now stands at 5%. The provinces of British Columbia, Saskatchewan, Manitoba, and Prince Edward Island also have a provincial sales tax
ST The provinces of Nova Scotia, New Brunswick, Newfoundland & Labrador, and Ontario have harmonized their provincial sales taxes with the GST—Harmonized Sales Tax
ST and thus is a full VAT. The province of Quebec collects the Quebec Sales Tax
STwhich is based on the GST with certain differences. Most businesses can claim back the GST, HST, and QST they pay, and so effectively it is the final consumer who pays the tax.
Excises
An excise duty is an
indirect tax
An indirect tax (such as sales tax, per unit tax, value added tax (VAT), or goods and services tax (GST), excise, consumption tax, tariff) is a tax that is levied upon goods and services before they reach the customer who ultimately pays the i ...
imposed upon goods during the process of their manufacture, production or distribution, and is usually proportionate to their quantity or value. Excise duties were first introduced into England in the year 1643, as part of a scheme of revenue and taxation devised by parliamentarian
John Pym
John Pym (20 May 1584 – 8 December 1643) was an English politician, who helped establish the foundations of Parliamentary democracy. One of the Five Members whose attempted arrest in January 1642 sparked the First English Civil War, his use ...
and approved by the
Long Parliament
The Long Parliament was an English Parliament which lasted from 1640 until 1660. It followed the fiasco of the Short Parliament, which had convened for only three weeks during the spring of 1640 after an 11-year parliamentary absence. In Septem ...
. These duties consisted of charges on beer, ale, cider, cherry wine, and tobacco, to which list were afterward added paper, soap, candles, malt, hops, and sweets. The basic principle of excise duties was that they were taxes on the production, manufacture, or distribution of articles which could not be taxed through the
customs house
A custom house or customs house was traditionally a building housing the offices for a jurisdictional government whose officials oversaw the functions associated with importing and exporting goods into and out of a country, such as collecting ...
, and revenue derived from that source is called excise revenue proper. The fundamental conception of the term is that of a tax on articles produced or manufactured in a country. In the taxation of such articles of luxury as spirits, beer, tobacco, and cigars, it has been the practice to place a certain duty on the importation of these articles (a
customs duty
A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and polic ...
).
Excises (or exemptions from them) are also used to modify consumption patterns of a certain area (
social engineering). For example, a high excise is used to discourage
alcohol
Alcohol most commonly refers to:
* Alcohol (chemistry), an organic compound in which a hydroxyl group is bound to a carbon atom
* Alcohol (drug), an intoxicant found in alcoholic drinks
Alcohol may also refer to:
Chemicals
* Ethanol, one of sev ...
consumption, relative to other goods. This may be combined with
hypothecation
Hypothec (; german: Hypothek, french: hypothèque, pl, hipoteka, from Lat. ''hypotheca'', from Gk. : hypothēkē), sometimes tacit hypothec, is a term used in civil law systems (e.g. law of entire Continental Europe except Gibraltar
)
, ...
if the proceeds are then used to pay for the costs of treating illness caused by
alcohol use disorder
Alcoholism is, broadly, any drinking of alcohol that results in significant mental or physical health problems. Because there is disagreement on the definition of the word ''alcoholism'', it is not a recognized diagnostic entity. Predomin ...
. Similar taxes may exist on
tobacco
Tobacco is the common name of several plants in the genus '' Nicotiana'' of the family Solanaceae, and the general term for any product prepared from the cured leaves of these plants. More than 70 species of tobacco are known, but the ...
,
pornography
Pornography (often shortened to porn or porno) is the portrayal of sexual subject matter for the exclusive purpose of sexual arousal. Primarily intended for adults, , etc., and they may be collectively referred to as "
sin tax
A sin tax is an excise tax specifically levied on certain goods deemed harmful to society and individuals, such as alcohol, tobacco, drugs, candies, soft drinks, fast foods, coffee, sugar, gambling, and pornography. In contrast to Pigovian ta ...
es". A
carbon tax
A carbon tax is a tax levied on the carbon emissions required to produce goods and services. Carbon taxes are intended to make visible the "hidden" social costs of carbon emissions, which are otherwise felt only in indirect ways like more sev ...
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 Vehicle Excise Duty (VED; also known as "vehicle tax", "car tax", and more controversially as "road tax", and formerly as a "tax disc") is an annual tax that is levied as an excise duty and which must be paid for most types of powered vehicles which ...
is an annual tax on vehicle ownership.
Tariff
An import or export tariff (also called customs duty or impost) is a charge for the movement of goods through a political border. Tariffs discourage
trade
Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market.
An early form of trade, barter, saw the direct excha ...
, and they may be used by governments to protect domestic industries. A proportion of tariff revenues is often hypothecated to pay the government to maintain a navy or border police. The classic ways of cheating a tariff are
smuggling
Smuggling is the illegal transportation of objects, substances, information or people, such as out of a house or buildings, into a prison, or across an international border, in violation of applicable laws or other regulations.
There are various ...
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
An investment policy is any government regulation or law that encourages or discourages foreign investment in the local economy, e.g. currency exchange limits.
Explanation
As globalization integrates the economies of neighboring and of trad ...
, and
agricultural policy
Agricultural policy describes a set of laws relating to domestic agriculture and imports of foreign agricultural products. Governments usually implement agricultural policies with the goal of achieving a specific outcome in the domestic agricultu ...
. A
trade bloc
A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where barriers to trade (tariffs and others) are reduced or eliminated among the participating states.
Trade blocs can be stand-alon ...
is a group of allied countries agreeing to minimize or eliminate tariffs against trade with each other, and possibly to impose protective tariffs on imports from outside the bloc. A
customs union
A customs union is generally defined as a type of trade bloc which is composed of a free trade area with a common external tariff.GATTArticle 24 s. 8 (a)
Customs unions are established through trade pacts where the participant countries set up ...
has a
common external tariff
A common external tariff (CET) must be introduced when a group of countries forms a customs union. The same customs duties, import quotas, preferences or other non-tariff barriers to trade apply to all goods entering the area, regardless of which ...
, and the participating countries share the revenues from tariffs on goods entering the customs union.
In some societies, tariffs also could be imposed by local authorities on the movement of goods between regions (or via specific internal gateways). A notable example is the ''
likin'', which became an important revenue source for local governments in the late
Qing China
The Qing dynasty ( ), officially the Great Qing,, was a Manchu people, Manchu-led Dynasties in Chinese history, imperial dynasty of China and the last orthodox dynasty in Chinese history. It emerged from the Later Jin (1616–1636), La ...
.
Other
License fees
Occupational taxes or license fees may be imposed on businesses or individuals engaged in certain businesses. Many jurisdictions impose a tax on vehicles.
Poll
A poll tax, also called a ''per capita tax'', or ''capitation tax'', is a tax that levies a set amount per individual. It is an example of the concept of
fixed tax
A fixed tax is a lump sum tax that is not measured as a percentage of the tax base (income, wealth, or consumption). Fixed taxes like a poll tax or sin tax are often considered regressive, but could have progressive effects if applied to lu ...
. One of the earliest taxes mentioned in the
Bible
The Bible (from Koine Greek , , 'the books') is a collection of religious texts or scriptures that are held to be sacred in Christianity, Judaism, Samaritanism, and many other religions. The Bible is an anthologya compilation of texts of a ...
of a half-shekel per annum from each adult Jew (Ex. 30:11–16) was a form of the poll tax. Poll taxes are administratively cheap because they are easy to compute and collect and difficult to cheat. Economists have considered poll taxes economically efficient because people are presumed to be in fixed supply and poll taxes, therefore, do not lead to economic distortions. However, poll taxes are very unpopular because poorer people pay a higher proportion of their income than richer people. In addition, the supply of people is in fact not fixed over time: on average, couples will choose to have fewer children if a poll tax is imposed. The introduction of a poll tax in medieval England was the primary cause of the 1381
Peasants' Revolt
The Peasants' Revolt, also named Wat Tyler's Rebellion or the Great Rising, was a major uprising across large parts of England in 1381. The revolt had various causes, including the socio-economic and political tensions generated by the Black ...
. Scotland was the first to be used to test the new poll tax in 1989 with England and Wales in 1990. The change from progressive local taxation based on property values to a single-rate form of taxation regardless of ability to pay (the
Community Charge
The Community Charge, commonly known as the poll tax, was a system of taxation introduced by Margaret Thatcher's government in replacement of domestic rates in Scotland from 1989, prior to its introduction in England and Wales from 1990. It pr ...
, but more popularly referred to as the Poll Tax), led to widespread refusal to pay and to incidents of civil unrest, known colloquially as the '
Poll Tax Riots
The poll tax riots were a series of riots in British towns and cities during protests against the Community Charge (commonly known as the "poll tax"), introduced by the Conservative government of Prime Minister Margaret Thatcher. The largest pr ...
'.
Other
Some types of taxes have been proposed but not actually adopted in any major jurisdiction. These include:
*
Bank tax
A bank tax, or a bank levy, is a tax on banks which was discussed in the context of the financial crisis of 2007–08. The bank tax is levied on the capital at risk of financial institutions, excluding federally insured deposits, with the aim of ...
*
Financial transaction tax
A financial transaction tax (FTT) is a levy on a specific type of financial transaction for a particular purpose. The tax has been most commonly associated with the financial sector for transactions involving intangible property rather than real ...
es including currency transaction taxes
Descriptive labels
Ad valorem and per unit
An ''ad valorem'' tax is one where the tax base is the value of a good, service, or property. Sales taxes, tariffs, property taxes, inheritance taxes, and value-added taxes are different types of ad valorem tax. An ad valorem tax is typically imposed at the time of a transaction (sales tax or value-added tax (VAT)) but it may be imposed on an annual basis (property tax) or in connection with another significant event (inheritance tax or tariffs).
In contrast to ad valorem taxation is a ''per unit'' tax, where the tax base is the quantity of something, regardless of its price. An
excise tax
file:Lincoln Beer Stamp 1871.JPG, upright=1.2, 1871 U.S. Revenue stamp for 1/6 barrel of beer. Brewers would receive the stamp sheets, cut them into individual stamps, cancel them, and paste them over the Bunghole, bung of the beer barrel so when ...
is an example.
Consumption
Consumption tax refers to any tax on non-investment spending and can be implemented by means of a sales tax, consumer value-added tax, or by modifying an income tax to allow for unlimited deductions for investment or savings.
Environmental
This includes
natural resources consumption tax
The natural resource consumption tax is a kind of tax which is aimed to help ensure long run sustainability by increasing awareness of natural resource consumption.
International water
The popular conception of international waters is that the ...
, greenhouse gas tax (
Carbon tax
A carbon tax is a tax levied on the carbon emissions required to produce goods and services. Carbon taxes are intended to make visible the "hidden" social costs of carbon emissions, which are otherwise felt only in indirect ways like more sev ...
), "sulfuric tax", and others. The stated purpose is to reduce the environmental impact by
repricing. Economists describe environmental impacts as negative
externalities
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
. As early as 1920,
Arthur Pigou
Arthur Cecil Pigou (; 18 November 1877 – 7 March 1959) was an English economist. As a teacher and builder of the School of Economics at the University of Cambridge, he trained and influenced many Cambridge economists who went on to take chair ...
suggested a tax to deal with externalities (see also the section on
Increased economic welfare below). The proper implementation of environmental taxes has been the subject of a long-lasting debate.
Proportional, progressive, regressive, and lump-sum
An important feature of tax systems is the percentage of the tax burden as it relates to income or consumption. The terms progressive, regressive, and proportional are used to describe the way the rate progresses from low to high, from high to low, or proportionally. The terms describe a distribution effect, which can be applied to any type of tax system (income or consumption) that meets the definition.
* A
progressive tax
A progressive tax is a tax in which the tax rate increases as the taxable amount increases.Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), ''Concepts of Taxation'', Dryden Press: Fort Worth, TX The term ''progre ...
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
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high ...
, 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
A proportional tax is a tax imposed so that the tax rate is fixed, with no change as the taxable base amount increases or decreases. The amount of the tax is in proportion to the amount subject to taxation. "Proportional" describes a distribution ...
, where the effective tax rate is fixed, while the amount to which the rate is applied increases.
* A lump-sum tax is a tax that is a fixed amount, no matter the change in circumstance of the taxed entity. This in actuality is a regressive tax as those with lower income must use a higher percentage of their income than those with higher income and therefore the effect of the tax reduces as a function of income.
The terms can also be used to apply meaning to the taxation of select consumption, such as a tax on luxury goods and the exemption of basic necessities may be described as having progressive effects as it increases a tax burden on high end consumption and decreases a tax burden on low end consumption.
Direct and indirect
Taxes are sometimes referred to as "direct taxes" or "indirect taxes". The meaning of these terms can vary in different contexts, which can sometimes lead to confusion. An economic definition, by Atkinson, states that "...direct taxes may be adjusted to the individual characteristics of the taxpayer, whereas indirect taxes are levied on transactions irrespective of the circumstances of buyer or seller." According to this definition, for example, income tax is "direct", and sales tax is "indirect".
In law, the terms may have different meanings. In U.S. constitutional law, for instance, direct taxes refer to
poll taxes
A poll tax, also known as head tax or capitation, is a tax levied as a fixed sum on every liable individual (typically every adult), without reference to income or resources.
Head taxes were important sources of revenue for many governments fr ...
and
property tax
A property tax or millage rate is an ad valorem tax on the value of a property.In the OECD classification scheme, tax on property includes "taxes on immovable property or net wealth, taxes on the change of ownership of property through inheri ...
es, which are based on simple existence or ownership. Indirect taxes are imposed on events, rights, privileges, and activities. Thus, a tax on the sale of the property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax.
Fees and effective
Governments may charge user
fee
A fee is the price one pays as remuneration for rights or services. Fees usually allow for overhead, wages, costs, and markup. Traditionally, professionals in the United Kingdom (and previously the Republic of Ireland) receive a fee in contra ...
s, tolls, or other types of assessments in exchange of particular goods, services, or use of property. These are generally not considered taxes, as long as they are levied as payment for a direct benefit to the individual paying. Such fees include:
* Tolls: a fee charged to travel via a
road
A road is a linear way for the conveyance of traffic that mostly has an improved surface for use by vehicles (motorized and non-motorized) and pedestrians. Unlike streets, the main function of roads is transportation.
There are many types of ...
,
bridge
A bridge is a structure built to span a physical obstacle (such as a body of water, valley, road, or rail) without blocking the way underneath. It is constructed for the purpose of providing passage over the obstacle, which is usually somethi ...
,
tunnel
A tunnel is an underground passageway, dug through surrounding soil, earth or rock, and enclosed except for the entrance and exit, commonly at each end. A pipeline is not a tunnel, though some recent tunnels have used immersed tube cons ...
,
canal
Canals or artificial waterways are waterways or engineered channels built for drainage management (e.g. flood control and irrigation) or for conveyancing water transport vehicles (e.g. water taxi). They carry free, calm surface flow un ...
,
waterway
A waterway is any navigable body of water. Broad distinctions are useful to avoid ambiguity, and disambiguation will be of varying importance depending on the nuance of the equivalent word in other languages. A first distinction is necessary b ...
or other transportation facilities. Historically tolls have been used to pay for public bridge, road, and tunnel projects. They have also been used in privately constructed transport links. The toll is likely to be a fixed charge, possibly graduated for vehicle type, or for distance on long routes.
* User fees, such as those charged for use of parks or other government-owned facilities.
* Ruling fees charged by governmental agencies to make determinations in particular situations.
Some scholars refer to certain economic effects as taxes, though they are not levies imposed by governments. These include:
*
Inflation tax
Seigniorage , also spelled seignorage or seigneurage (from the Old French ''seigneuriage'', "right of the lord (''seigneur'') to mint money"), is the difference between the value of money and the cost to produce and distribute it. The term can be ...
: the economic disadvantage suffered by holders of
cash and cash equivalents in one denomination of
currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general def ...
due to the effects of
expansionary monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
*
Financial repression
Financial repression comprises "policies that result in savers earning returns below the rate of inflation" to allow banks to "provide cheap loans to companies and governments, reducing the burden of repayments." It can be particularly effective a ...
: Government policies such as interest-rate caps on government debt, financial regulations such as reserve requirements and capital controls, and barriers to entry in markets where the government owns or controls businesses.
History
![Wells egyptian peasants taxes](https://upload.wikimedia.org/wikipedia/commons/1/13/Wells_egyptian_peasants_taxes.jpg)
The first known system of taxation was in
Ancient Egypt around 3000–2800 BC, in the
First Dynasty of the
Old Kingdom of Egypt
In ancient Egyptian history, the Old Kingdom is the period spanning c. 2700–2200 BC. It is also known as the "Age of the Pyramids" or the "Age of the Pyramid Builders", as it encompasses the reigns of the great pyramid-builders of the Fourth ...
.
[Taxes in the Ancient World](_blank)
University of Pennsylvania Almanac, ''Vol. 48, No. 28, 2 April 2002'' The earliest and most widespread forms of taxation were the
corvée
Corvée () is a form of unpaid, forced labour, that is intermittent in nature lasting for limited periods of time: typically for only a certain number of days' work each year.
Statute labour is a corvée imposed by a state for the purposes of ...
and the
tithe
A tithe (; from Old English: ''teogoþa'' "tenth") is a one-tenth part of something, paid as a contribution to a religious organization or compulsory tax to government. Today, tithes are normally voluntary and paid in cash or cheques or more r ...
. The corvée was
forced labor
Forced labour, or unfree labour, is any work relation, especially in modern or early modern history, in which people are employed against their will with the threat of destitution, detention, violence including death, or other forms of ex ...
provided to the state by peasants too poor to pay other forms of taxation (''labor'' in
ancient Egyptian is a synonym for taxes).
Records from the time document that the Pharaoh would conduct a biennial tour of the kingdom, collecting tithes from the people. Other records are granary receipts on
limestone flakes and papyrus. Early taxation is also described in the
Bible
The Bible (from Koine Greek , , 'the books') is a collection of religious texts or scriptures that are held to be sacred in Christianity, Judaism, Samaritanism, and many other religions. The Bible is an anthologya compilation of texts of a ...
. In
Genesis
Genesis may refer to:
Bible
* Book of Genesis, the first book of the biblical scriptures of both Judaism and Christianity, describing the creation of the Earth and of mankind
* Genesis creation narrative, the first several chapters of the Book of ...
(chapter 47, verse 24 – the
New International Version
The New International Version (NIV) is an English translation of the Bible first published in 1978 by Biblica (formerly the International Bible Society). The ''NIV'' was created as a modern translation, by Bible scholars using the earliest an ...
), it states "But when the crop comes in, give a fifth of it to
Pharaoh
Pharaoh (, ; Egyptian: ''pr ꜥꜣ''; cop, , Pǝrro; Biblical Hebrew: ''Parʿō'') is the vernacular term often used by modern authors for the kings of ancient Egypt who ruled as monarchs from the First Dynasty (c. 3150 BC) until the an ...
. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children". Samgharitr is the name mentioned for the Tax collector in the Vedic texts. In
Hattusa
Hattusa (also Ḫattuša or Hattusas ; Hittite: URU''Ḫa-at-tu-ša'', Turkish: Hattuşaş , Hattic: Hattush) was the capital of the Hittite Empire in the late Bronze Age. Its ruins lie near modern Boğazkale, Turkey, within the great loop of t ...
, the capital of the
Hittite Empire
The Hittites () were an Anatolian people who played an important role in establishing first a kingdom in Kussara (before 1750 BC), then the Kanesh or Nesha kingdom (c. 1750–1650 BC), and next an empire centered on Hattusa in north-centra ...
, grains were collected as a tax from the surrounding lands, and stored in silos as a display of the king's wealth.
In the
Persian Empire
The Achaemenid Empire or Achaemenian Empire (; peo, wikt:𐎧𐏁𐏂𐎶, 𐎧𐏁𐏂, , ), also called the First Persian Empire, was an History of Iran#Classical antiquity, ancient Iranian empire founded by Cyrus the Great in 550 BC. Bas ...
, a regulated and sustainable tax system was introduced by
Darius I the Great
Darius I ( peo, 𐎭𐎠𐎼𐎹𐎺𐎢𐏁 ; grc-gre, Δαρεῖος ; – 486 BCE), commonly known as Darius the Great, was a Persian ruler who served as the third King of Kings of the Achaemenid Empire, reigning from 522 BCE until his d ...
in 500 BC; the
Persia
Iran, officially the Islamic Republic of Iran, and also called Persia, is a country located in Western Asia. It is bordered by Iraq and Turkey to the west, by Azerbaijan and Armenia to the northwest, by the Caspian Sea and Turkmeni ...
n system of taxation was tailored to each
Satrapy
A satrap () was a governor of the provinces of the ancient Median and Achaemenid Empires and in several of their successors, such as in the Sasanian Empire and the Hellenistic empires.
The satrap served as viceroy to the king, though with consid ...
(the area ruled by a Satrap or provincial governor). At differing times, there were between 20 and 30 Satrapies in the Empire and each was assessed according to its supposed productivity. It was the responsibility of the Satrap to collect the due amount and to send it to the treasury, after deducting his expenses (the expenses and the power of deciding precisely how and from whom to raise the money in the province, offer maximum opportunity for rich pickings). The quantities demanded from the various provinces gave a vivid picture of their economic potential. For instance,
Babylon
''Bābili(m)''
* sux, 𒆍𒀭𒊏𒆠
* arc, 𐡁𐡁𐡋 ''Bāḇel''
* syc, ܒܒܠ ''Bāḇel''
* grc-gre, Βαβυλών ''Babylṓn''
* he, בָּבֶל ''Bāvel''
* peo, 𐎲𐎠𐎲𐎡𐎽𐎢 ''Bābiru''
* elx, 𒀸𒁀𒉿𒇷 ''Babi ...
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
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 ...
, 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
The Roman Empire ( la, Imperium Romanum ; grc-gre, Βασιλεία τῶν Ῥωμαίων, Basileía tôn Rhōmaíōn) was the post-Republican period of ancient Rome. As a polity, it included large territorial holdings around the Mediterr ...
) and was required to provide 120,000 measures of grain in addition to 700 talents of silver. This tax was exclusively levied on Satrapies based on their lands, productive capacity and tribute levels.
The
Rosetta Stone
The Rosetta Stone is a stele composed of granodiorite inscribed with three versions of a Rosetta Stone decree, decree issued in Memphis, Egypt, in 196 BC during the Ptolemaic dynasty on behalf of King Ptolemy V Epiphanes. The top and middle te ...
, a tax concession issued by
Ptolemy V
egy, Iwaennetjerwymerwyitu Seteppah Userkare Sekhem-ankhamun Clayton (2006) p. 208.
, predecessor = Ptolemy IV
, successor = Ptolemy VI
, horus = '' ḥwnw-ḫꜤj-m-nsw-ḥr-st-jt.f'Khunukhaiemnisutkhersetitef'' The youth who ...
in 196 BC and written in three languages "led to the most famous decipherment in history—the cracking of hieroglyphics".
In 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 ...
,
taxes were collected from individuals at the rate of between 1% and 3% of the assessed value of their total property. However, since it was extremely difficult to facilitate the collection of the tax, the government auctioned it every year. The winning tax farmers (called ''
publican
In antiquity, publicans (Greek τελώνης ''telōnēs'' (singular); Latin ''publicanus'' (singular); ''publicani'' (plural)) were public contractors, in whose official capacity they often supplied the Roman legions and military, managed the ...
i'') paid the tax revenue to the government in advance and then kept the taxes collected from individuals. The ''publicani'' paid the tax revenue in coins, but collected the taxes using other
exchange media, thus relieving the government of the work to carry out the currency conversion themselves. The revenue payment essentially worked as a loan to the government, which paid interest on it. Although this scheme was a profitable enterprise for the government as well as the ''publicani'', it was later replaced by a direct tax system by the emperor
Augustus
Caesar Augustus (born Gaius Octavius; 23 September 63 BC – 19 August AD 14), also known as Octavian, was the first Roman emperor; he reigned from 27 BC until his death in AD 14. He is known for being the founder of the Roman Pri ...
; after which, each province was obliged to pay 1% tax on wealth and a flat rate on each adult. This brought about regular census and shifted the tax system more towards taxing an individual's income rather than wealth.
Islamic rulers imposed
Zakat
Zakat ( ar, زكاة; , "that which purifies", also Zakat al-mal , "zakat on wealth", or Zakah) is a form of almsgiving, often collected by the Muslim Ummah. It is considered in Islam as a religious obligation, and by Quranic ranking, is ne ...
(a tax on Muslims) and
Jizya
Jizya ( ar, جِزْيَة / ) is a per capita yearly taxation historically levied in the form of financial charge on dhimmis, that is, permanent Kafir, non-Muslim subjects of a state governed by Sharia, Islamic law. The jizya tax has been unde ...
(a
poll tax
A poll tax, also known as head tax or capitation, is a tax levied as a fixed sum on every liable individual (typically every adult), without reference to income or resources.
Head taxes were important sources of revenue for many governments fr ...
on conquered non-Muslims). In India this practice began in the 11th century.
Trends
Numerous records of government tax collection in Europe since at least the 17th century are still available today. But taxation levels are hard to compare to the size and flow of the economy since
production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
numbers are not as readily available. Government expenditures and revenue in France during the 17th century went from about 24.30 million ''
livres
The (; ; abbreviation: ₶.) was one of numerous currencies used in medieval France, and a unit of account (i.e., a monetary unit used in accounting) used in Early Modern France.
The 1262 monetary reform established the as 20 , or 80.88 gr ...
'' in 1600–10 to about 126.86 million ''livres'' in 1650–59 to about 117.99 million ''livres'' in 1700–10 when
government debt
A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
had reached 1.6 billion ''livres''. In 1780–89, it reached 421.50 million ''livres''. Taxation as a percentage of production of final goods may have reached 15–20% during the 17th century in places such as
France
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 ...
, the
Netherlands
)
, anthem = ( en, "William of Nassau")
, image_map =
, map_caption =
, subdivision_type = Sovereign state
, subdivision_name = Kingdom of the Netherlands
, established_title = Before independence
, established_date = Spanish Netherl ...
, and
Scandinavia
Scandinavia; Sámi languages: /. ( ) is a subregion#Europe, subregion in Northern Europe, with strong historical, cultural, and linguistic ties between its constituent peoples. In English usage, ''Scandinavia'' most commonly refers to Denmark, ...
. 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
Peter Mathias, (10 January 1928 – 1 March 2016) was a British economic historian and the former Chichele Professor of Economic History at the University of Oxford. His research focused on the history of industry, business, and technology, ...
and Patrick O'Brien found that the tax burden increased by 85% over this period. Another study confirmed this number, finding that per capita tax revenues had grown almost sixfold over the eighteenth century, but that steady economic growth had made the real burden on each individual only double over this period before the industrial revolution.
Effective tax rates were higher in Britain than France the years before the
French Revolution
The French Revolution ( ) was a period of radical political and societal change in France that began with the Estates General of 1789 and ended with the formation of the French Consulate in November 1799. Many of its ideas are considere ...
, twice in per capita income comparison, but they were mostly placed on international trade. In France, taxes were lower but the burden was mainly on landowners, individuals, and internal trade and thus created far more resentment.
Taxation as a percentage of
GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
2016 was 45.9% in
Denmark
)
, song = ( en, "King Christian stood by the lofty mast")
, song_type = National and royal anthem
, image_map = EU-Denmark.svg
, map_caption =
, subdivision_type = Sovereign state
, subdivision_name = Danish Realm, Kingdom of Denmark
...
, 45.3% in France, 33.2% in the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
, 26% in the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, and among all
OECD
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...
members an average of 34.3%.
Forms
In monetary economies prior to fiat banking, a critical form of taxation was
seigniorage
Seigniorage , also spelled seignorage or seigneurage (from the Old French ''seigneuriage'', "right of the lord (''seigneur'') to mint money"), is the difference between the value of money and the cost to produce and distribute it. The term can be ...
, the tax on the creation of money.
Other obsolete forms of taxation include:
*
Scutage
Scutage is a medieval English tax levied on holders of a knight's fee under the feudal land tenure of knight-service. Under feudalism the king, through his vassals, provided land to knights for their support. The knights owed the king military s ...
, 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 Tallage or talliage (from the French ''tailler, i.e. '' a part cut out of the whole) may have signified at first any tax, but became in England and France a land use or land tenure tax. Later in England it was further limited to assessments by the ...
, a tax on feudal dependents.
*
Tithe
A tithe (; from Old English: ''teogoþa'' "tenth") is a one-tenth part of something, paid as a contribution to a religious organization or compulsory tax to government. Today, tithes are normally voluntary and paid in cash or cheques or more r ...
, 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
Danegeld (; "Danish tax", literally "Dane yield" or tribute) was a tax raised to pay tribute or protection money to the Viking raiders to save a land from being ravaged. It was called the ''geld'' or ''gafol'' in eleventh-century sources. It ...
, 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
Farming or tax-farming is a technique of financial management in which the management of a variable revenue stream is assigned by legal contract to a third party and the holder of the revenue stream receives fixed periodic rents from the contract ...
, the principle of assigning the responsibility for tax revenue collection to private citizens or groups.
*
Socage
Socage () was one of the feudal duties and land tenure forms in the Feudalism, English feudal system. It eventually evolved into the freehold tenure called "free and common socage", which did not involve feudal duties. Farmers held land in excha ...
, a feudal tax system based on land rent.
*
Burgage
Burgage is a medieval land term used in Great Britain and Ireland, well established by the 13th century.
A burgage was a town ("borough" or "burgh") rental property (to use modern terms), owned by a king or lord. The property ("burgage tenement ...
, 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
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or ...
were clamped on beards. Today, one of the most-complicated taxation systems worldwide is in Germany. Three-quarters of the world's taxation literature refers to the German system. Under the German system, there are 118 laws, 185 forms, and 96,000 regulations, spending
€
The euro sign () is the currency sign used for the euro, the official currency of the eurozone and unilaterally adopted by Kosovo and Montenegro. The design was presented to the public by the European Commission on 12 December 1996. It consists ...
3.7 billion to collect the income tax. In the United States, the
IRS
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory tax ...
has about
1,177 forms and instructions, 28.4111 megabytes of
Internal Revenue Code
The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 ...
which contained 3.8 million words as of 1 February 2010, numerous tax regulations in the
Code of Federal Regulations
In the law of the United States, the ''Code of Federal Regulations'' (''CFR'') is the codification of the general and permanent regulations promulgated by the executive departments and agencies of the federal government of the United States. ...
, and supplementary material in the
Internal Revenue Bulletin
The ''Internal Revenue Bulletin'' (also known as the ''IRB''), is a weekly publication of the U.S. Internal Revenue Service that announces "official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Execu ...
. Today, governments in more advanced economies (i.e. Europe and North America) tend to rely more on direct taxes, while developing economies (i.e. several African countries) rely more on indirect taxes.
Economic effects
![GDP per capita PPP vs taxes 2016](https://upload.wikimedia.org/wikipedia/commons/d/d8/GDP_per_capita_PPP_vs_taxes_2016.svg)
In economic terms, taxation transfers
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 ...
from households or businesses to the government of a nation. Adam Smith writes in ''The Wealth of Nations'' that
:"…the economic incomes of private people are of three main types: rent, profit, and wages. Ordinary taxpayers will ultimately pay their taxes from at least one of these revenue sources. The government may intend that a particular tax should fall exclusively on rent, profit, or wages – and that another tax should fall on all three private income sources jointly. However, many taxes will inevitably fall on resources and persons very different from those intended … Good taxes meet four major criteria. They are (1) proportionate to incomes or abilities to pay (2) certain rather than arbitrary (3) payable at times and in ways convenient to the taxpayers and (4) cheap to administer and collect."
The side-effects of taxation (such as economic distortions) and theories about how best to tax are an important subject in
microeconomics
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
. Taxation is almost never a simple transfer of wealth. Economic theories of taxation approach the question of how to maximize
economic welfare
The welfare definition of economics is an attempt by Alfred Marshall, a pioneer of neoclassical economics, to redefine his field of study. This definition expands the field of economic science to a larger study of humanity. Specifically, Marshall's ...
through taxation.
A 2019 study looking at the impact of tax cuts for different income groups, it was tax cuts for low-income groups that had the greatest positive impact on employment growth.
Tax cuts for the wealthiest top 10% had a small impact.
Incidence
Law establishes from whom a tax is collected. In many countries, taxes are imposed on businesses (such as
corporate 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 ...
es or portions of
payroll tax
Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their employees. By law, some payroll taxes are the responsibility of the employee and others fall on the em ...
es). However, who ultimately pays the tax (the tax "burden") is determined by the marketplace as taxes become
embedded into production costs. Economic theory suggests that the economic effect of tax does not necessarily fall at the point where it is legally levied. For instance, a tax on employment paid by employers will impact the employee, at least in the long run. The greatest share of the tax burden tends to fall on the most inelastic factor involved—the part of the transaction which is affected least by a change in price. So, for instance, a tax on wages in a town will (at least in the long run) affect property-owners in that area.
Depending on how quantities supplied and demanded to vary with price (the "elasticities" of supply and demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the buyer (in the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will be paid by the supplier. If the elasticity of demand is low, more will be paid by the customer; and, contrariwise for the cases where those elasticities are high. If the seller is a competitive firm, the tax burden is distributed over the
factors of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relat ...
depending on the elasticities thereof; this includes workers (in the form of lower wages), capital investors (in the form of loss to shareholders), landowners (in the form of lower rents), entrepreneurs (in the form of lower wages of superintendence) and customers (in the form of higher prices).
To show this relationship, suppose that the market price of a product is $1.00 and that a $0.50 tax is imposed on the product that, by law, is to be collected from the seller. If the product has an elastic demand, a greater portion of the tax will be absorbed by the seller. This is because goods with elastic demand cause a large decline in quantity demanded a small increase in price. Therefore, in order to stabilize sales, the seller absorbs more of the additional tax burden. For example, the seller might drop the price of the product to $0.70 so that, after adding in the tax, the buyer pays a total of $1.20, or $0.20 more than he did before the $0.50 tax was imposed. In this example, the buyer has paid $0.20 of the $0.50 tax (in the form of a post-tax price) and the seller has paid the remaining $0.30 (in the form of a lower pre-tax price).
Increased economic welfare
Government spending
The purpose of taxation is to provide for
government spending
Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting, the acquisition by governments of goods and services for current use, to directly satisfy the individual o ...
without
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
. The provision of
public goods
In economics, a public good (also referred to as a social good or collective good)Oakland, W. H. (1987). Theory of public goods. In Handbook of public economics (Vol. 2, pp. 485-535). Elsevier. is a good that is both non-excludable and non-riva ...
such as
road
A road is a linear way for the conveyance of traffic that mostly has an improved surface for use by vehicles (motorized and non-motorized) and pedestrians. Unlike streets, the main function of roads is transportation.
There are many types of ...
s and other
infrastructure
Infrastructure is the set of facilities and systems that serve a country, city, or other area, and encompasses the services and facilities necessary for its economy, households and firms to function. Infrastructure is composed of public and priv ...
,
school
A school is an educational institution designed to provide learning spaces and learning environments for the teaching of students under the direction of teachers. Most countries have systems of formal education, which is sometimes compuls ...
s, a
social safety net
The social safety net (SSN) consists of non-contributory assistance existing to improve lives of vulnerable families and individuals experiencing poverty and destitution. Examples of SSNs are previously-contributory social pensions, in-kind and fo ...
, public
health system
Health, according to the World Health Organization, is "a state of complete physical, mental and social well-being and not merely the absence of disease and infirmity".World Health Organization. (2006)''Constitution of the World Health Organiza ...
s, national defense,
law enforcement
Law enforcement is the activity of some members of government who act in an organized manner to enforce the law by discovering, deterring, rehabilitating, or punishing people who violate the rules and norms governing that society. The term en ...
, and a
courts system increases the
economic welfare
The welfare definition of economics is an attempt by Alfred Marshall, a pioneer of neoclassical economics, to redefine his field of study. This definition expands the field of economic science to a larger study of humanity. Specifically, Marshall's ...
of society if the benefit outweighs the costs involved.
Pigovian
The existence of a tax can ''increase'' economic efficiency in some cases. If there is a
negative externality
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
associated with a good (meaning that it has negative effects not felt by the consumer) then a free market will trade too much of that good. By taxing the good, the government can raise revenue to address specific problems while increasing overall welfare.
The goal is to tax people when they're creating societal costs in addition to their personal costs. By taxing goods with negative externalities, the government attempts to increase economic efficiency while raising revenues.
This type of tax is called a
Pigovian tax
A Pigouvian tax (also spelled Pigovian tax) is a tax on any market activity that generates negative externalities (i.e., external costs incurred by the producer that are not included in the market price). The tax is normally set by the government ...
, after economist
Arthur Pigou
Arthur Cecil Pigou (; 18 November 1877 – 7 March 1959) was an English economist. As a teacher and builder of the School of Economics at the University of Cambridge, he trained and influenced many Cambridge economists who went on to take chair ...
who wrote about it in his 1920 book "The Economics of Welfare".
Pigovian taxes might target the undesirable production of
greenhouse gas
A greenhouse gas (GHG or GhG) is a gas that Absorption (electromagnetic radiation), absorbs and Emission (electromagnetic radiation), emits radiant energy within the thermal infrared range, causing the greenhouse effect. The primary greenhouse ...
es which cause
climate change
In common usage, climate change describes global warming—the ongoing increase in global average temperature—and its effects on Earth's climate system. Climate change in a broader sense also includes previous long-term changes to E ...
(namely a
carbon tax
A carbon tax is a tax levied on the carbon emissions required to produce goods and services. Carbon taxes are intended to make visible the "hidden" social costs of carbon emissions, which are otherwise felt only in indirect ways like more sev ...
), polluting fuels (such as
petrol
Gasoline (; ) or petrol (; ) (see ) is a transparent, petroleum-derived flammable liquid that is used primarily as a fuel in most spark-ignited internal combustion engines (also known as petrol engines). It consists mostly of organic co ...
), water or air pollution (namely an
ecotax
An environmental tax, ecotax (short for ecological taxation), or green tax is a tax levied on activities which are considered to be harmful to the environment and is intended to promote environmentally friendly activities via economic incentives. ...
), goods which incur public healthcare costs (such as
alcohol
Alcohol most commonly refers to:
* Alcohol (chemistry), an organic compound in which a hydroxyl group is bound to a carbon atom
* Alcohol (drug), an intoxicant found in alcoholic drinks
Alcohol may also refer to:
Chemicals
* Ethanol, one of sev ...
or
tobacco
Tobacco is the common name of several plants in the genus '' Nicotiana'' of the family Solanaceae, and the general term for any product prepared from the cured leaves of these plants. More than 70 species of tobacco are known, but the ...
), and excess demand of certain public goods (such as
traffic congestion pricing). The idea is to aim taxes at people that cause an above-average amount of societal
harm
Harm is a moral and legal concept.
Bernard Gert construes harm as any of the following:
* pain
* death
* disability
*mortality
* loss of abil ity or freedom
* loss of pleasure.
Joel Feinberg gives an account of harm as setbacks to intere ...
so the
free market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any o ...
incorporates all
cost
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which ...
s as opposed to only personal costs, with the benefit of lowering the overall tax burden for people who cause less societal harm.
Reduced inequality
Progressive taxation generally reduces
economic inequality
There are wide varieties of economic inequality, most notably income inequality measured using the distribution of income (the amount of money people are paid) and wealth inequality measured using the distribution of wealth (the amount of we ...
, even when the tax revenue is not
redistributed from higher-income individuals to lower-income individuals. However, in a highly specific condition, progressive taxation increases
economic inequality
There are wide varieties of economic inequality, most notably income inequality measured using the distribution of income (the amount of money people are paid) and wealth inequality measured using the distribution of wealth (the amount of we ...
when lower-income individuals consume
goods
In economics, goods are items that satisfy human wants
and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not tran ...
and
services
Service may refer to:
Activities
* Administrative service, a required part of the workload of university faculty
* Civil service, the body of employees of a government
* Community service, volunteer service for the benefit of a community or a p ...
produced by higher-income individuals, who in turn consume only from other higher-income individuals (
trickle-up effect
The trickle-up effect or trickle-up economics is an economic policy proposition that final demand among a broad population can stimulate national income in an economy. The trickle-up effect states that policies that directly benefit lower income in ...
).
Reduced economic welfare
Most taxes (see
below) have
side effects
In medicine, a side effect is an effect, whether therapeutic or adverse, that is secondary to the one intended; although the term is predominantly employed to describe adverse effects, it can also apply to beneficial, but unintended, consequence ...
that reduce
economic welfare
The welfare definition of economics is an attempt by Alfred Marshall, a pioneer of neoclassical economics, to redefine his field of study. This definition expands the field of economic science to a larger study of humanity. Specifically, Marshall's ...
, either by mandating unproductive labor (compliance costs) or by creating distortions to economic incentives (
deadweight 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 ...
and
perverse incentive
A perverse incentive is an incentive that has an unintended and undesirable result that is contrary to the intentions of its designers. The cobra effect is the most direct kind of perverse incentive, typically because the incentive unintentionall ...
s).
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
A flat tax (short for flat-rate tax) is a tax with a single rate on the taxable amount, after accounting for any deductions or exemptions from the tax base. It is not necessarily a fully proportional tax. Implementations are often progressiv ...
proposals).
Deadweight costs
![Tax deadweight](https://upload.wikimedia.org/wikipedia/commons/9/96/Tax_deadweight.gif)
In the absence of negative
externalities
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
, the introduction of taxes into a market reduces
economic efficiency
In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts:
* Allocative or Pareto efficiency: any changes made to assist one person would harm another.
* Productive efficiency: no addit ...
by causing
deadweight 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 a competitive market, the
price
A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...
of a particular
economic good
In economics, goods are items that satisfy human wants
and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not tran ...
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 welfare definition of economics is an attempt by Alfred Marshall, a pioneer of neoclassical economics, to redefine his field of study. This definition expands the field of economic science to a larger study of humanity. Specifically, Marshall's ...
; the individuals or businesses involved are less well off than before the tax. The
tax burden
In economics, tax incidence or tax burden is the effect of a particular tax on the distribution of economic welfare. Economists distinguish between the entities who ultimately bear the tax burden and those on whom tax is initially imposed. The t ...
and the amount of deadweight cost is dependent on the
elasticity of supply and demand for the good taxed.
Most taxes—including
income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
and
sales tax
A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a govern ...
—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 incentive
In general, incentives are anything that persuade a person to alter their behaviour. It is emphasised that incentives matter by the basic law of economists and the laws of behaviour, which state that higher incentives amount to greater levels of ...
s. Such taxes include the
land value tax
A land value tax (LVT) is a levy on the value of land (economics), land without regard to buildings, personal property and other land improvement, improvements. It is also known as a location value tax, a point valuation tax, a site valuation ta ...
, where the tax is on a good in completely inelastic supply. By taxing the value of unimproved land as opposed to what's built on it, a land value tax does not increase taxes on landowners for improving their land. This is opposed to traditional property taxes which reward land abandonment and disincentivize construction, maintenance, and repair. Another example of a tax with few deadweight costs is a
lump sum tax
A poll tax, also known as head tax or capitation, is a tax levied as a fixed sum on every liable individual (typically every adult), without reference to income or resources.
Head taxes were important sources of revenue for many governments f ...
such as a
poll tax
A poll tax, also known as head tax or capitation, is a tax levied as a fixed sum on every liable individual (typically every adult), without reference to income or resources.
Head taxes were important sources of revenue for many governments fr ...
(head tax) which is paid by all adults regardless of their choices. Arguably a
windfall profits tax
A windfall tax is a higher tax rate on profits that ensue from a sudden windfall gain to a particular company or industry. There have been windfall taxes in various countries across the world, including Mongolia, Australia, and on wind power i ...
which is entirely unanticipated can also fall into this category.
Deadweight loss does not account for the effect taxes have in leveling the business playing field. Businesses that have more money are better suited to fend off competition. It is common that an industry with a small amount of very large corporations has a very high barrier of entry for new entrants coming into the marketplace. This is due to the fact that the larger the corporation, the better its position to negotiate with suppliers. Also, larger companies may be able to operate at low or even negative profits for extended periods of time, thus pushing out competition. More progressive taxation of profits, however, would reduce such barriers for new entrants, thereby increasing competition and ultimately benefiting consumers.
Perverse incentives
Complexity of the tax code in developed economies offers perverse
tax incentive
A tax incentive is an aspect of a government's taxation policy designed to incentivize or encourage a particular economic activity by reducing tax payments.
Tax incentives can have both positive and negative impacts on an economy. Among the posit ...
s. The more details of
tax policy
Tax policy includes the guidelines developed by a government regarding how taxes are imposed, in what amounts, and on whom. It has both microeconomic and macroeconomic aspects. The macroeconomic aspect concerns the overall quantity of taxes t ...
there are, the more opportunities for legal
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 ...
and illegal
tax evasion
Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts, and others. Tax evasion often entails the deliberate misrepresentation of the taxpayer's affairs to the tax authorities to reduce the taxp ...
. 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 incentive
A perverse incentive is an incentive that has an unintended and undesirable result that is contrary to the intentions of its designers. The cobra effect is the most direct kind of perverse incentive, typically because the incentive unintentionall ...
s also occur because of non-taxable 'hidden' transactions; for instance, a sale from one company to another might be liable for
sales tax
A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a govern ...
, but if the same goods were shipped from one branch of a corporation to another, no tax would be payable.
To address these issues, economists often suggest simple and transparent tax structures that avoid providing loopholes. Sales tax, for instance, can be replaced with a
value added tax
A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end ...
which disregards intermediate transactions.
In developing countries
Following Nicolas Kaldor's research, public finance in developing countries is strongly tied to
state capacity
State capacity is the ability of a government to accomplish policy goals, either generally or in reference to specific aims. A state that lacks capacity is defined as a fragile state or, in a more extreme case, a failed state. Higher state capacity ...
and financial development. As state capacity develops, states not only increase the level of taxation but also the pattern of taxation. With the increase of larger tax bases and the diminish of the importance of trading tax, while income tax gains more importance.
According to Tilly's argument, state capacity evolves as a response to the emergence of war. War is an incentive for states to raise taxes and strengthen states' capacity. Historically, many taxation breakthroughs took place during wartime. The introduction of income tax in Britain was due to the Napoleonic War in 1798. The US first introduced income tax during the Civil War.
Taxation is constrained by the fiscal and legal capacities of a country.
Fiscal and legal capacities also complement each other. A well-designed tax system can minimize efficiency loss and boost economic growth. With better compliance and better support to financial institutions and individual property, the government will be able to collect more tax. Although wealthier countries have higher tax revenue, economic growth does not always translate to higher tax revenue. For example, in India, increases in exemptions lead to the stagnation of income tax revenue at around 0.5% of GDP since 1986.
Researchers for
EPS PEAKS
EPS, EPs or Eps may refer to:
Commerce and finance
* Earnings per share
* Electronic Payment Services, in Hong Kong, Macau, and Shenzhen, China
* Express Payment System, in the Philippines
Education
* Edmonton Public Schools, in Edmonton, Al ...
stated that the core purpose of taxation is revenue mobilization, providing resources for National Budgets, and forming an important part of macroeconomic management. They said
economic theory
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...
has focused on the need to 'optimize' the system through balancing efficiency and equity, understanding the impacts on production, and consumption as well as distribution,
redistribution, and
welfare
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
.
They state that taxes and tax reliefs have also been used as a tool for behavioral change, to influence
investment decisions
Investment Decisions, also known as Capital Investment Decisions are the most important financial decisions that an enterprise makes to utilize its funds to secure benefits over a period of time. It’s an integral component of the strategic decisi ...
,
labor supply
In mainstream economic theories, the labour supply is the total hours (adjusted for intensity of effort) that workers wish to work at a given real wage rate. It is frequently represented graphically by a labour supply curve, which shows hypotheti ...
,
consumption patterns, and positive and negative economic spill-overs (externalities), and ultimately, the promotion of economic growth and development. The tax system and its administration also play an important role in state-building and governance, as a principal form of 'social contract' between the state and citizens who can, as taxpayers, exert accountability on the state as a consequence.
The researchers wrote that domestic revenue forms an important part of a developing country's public financing as it is more stable and predictable than
Overseas Development Assistance and necessary for a country to be self-sufficient. They found that domestic revenue flows are, on average, already much larger than ODA, with aid worth less than 10% of collected taxes in Africa as a whole.
However, in a quarter of African countries Overseas Development Assistance does exceed tax collection, with these more likely to be non-resource-rich countries. This suggests countries making the most progress replacing aid with tax revenue tend to be those benefiting disproportionately from rising prices of energy and commodities.
The author
found tax revenue as a percentage of GDP varying greatly around a global average of 19%. This data also indicates countries with higher GDP tend to have higher tax to GDP ratios, demonstrating that higher income is associated with more than proportionately higher tax revenue. On average, high-income countries have tax revenue as a percentage of GDP of around 22%, compared to 18% in middle-income countries and 14% in low-income countries.
In high-income countries, the highest tax-to-GDP ratio is in
Denmark
)
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...
at 47% and the lowest is in Kuwait at 0.8%, reflecting low taxes from strong oil revenues. The long-term average performance of tax revenue as a share of GDP in low-income countries has been largely stagnant, although most have shown some improvement in more recent years. On average, resource-rich countries have made the most progress, rising from 10% in the mid-1990s to around 17% in 2008. Non-resource-rich countries made some progress, with average tax revenues increasing from 10% to 15% over the same period.
Many low-income countries have a tax-to-GDP ratio of less than 15% which could be due to low tax potentials, such as a limited taxable economic activity, or low tax effort due to policy choice, non-compliance, or administrative constraints.
Some low-income countries have relatively high tax-to-GDP ratios due to resource tax revenues (e.g.
Angola
, national_anthem = " Angola Avante"()
, image_map =
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, capital = Luanda
, religion =
, religion_year = 2020
, religion_ref =
, coordina ...
) or relatively efficient tax administration (e.g.
Kenya
)
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, image_map =
, map_caption =
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, capital = Nairobi
, coordinates =
, largest_city = Nairobi
, ...
,
Brazil
Brazil ( pt, Brasil; ), officially the Federative Republic of Brazil (Portuguese: ), is the largest country in both South America and Latin America. At and with over 217 million people, Brazil is the world's fifth-largest country by area ...
) whereas some middle-income countries have lower tax-to-GDP ratios (e.g.
Malaysia
Malaysia ( ; ) is a country in Southeast Asia. The federation, federal constitutional monarchy consists of States and federal territories of Malaysia, thirteen states and three federal territories, separated by the South China Sea into two r ...
) which reflect a more tax-friendly policy choice.
While overall tax revenues have remained broadly constant, the global trend shows trade taxes have been declining as a proportion of total revenues(IMF, 2011), with the share of revenue shifting away from border trade taxes towards domestically levied
sales taxes
A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a gover ...
on goods and services. Low-income countries tend to have a higher dependence on trade taxes, and a smaller proportion of income and consumption taxes when compared to high-income countries.
One indicator of the taxpaying experience was captured in the 'Doing Business' survey, which compares the total tax rate, time spent complying with tax procedures, and the number of payments required through the year, across 176 countries. The 'easiest' countries in which to pay taxes are located in the Middle East with the
UAE
The United Arab Emirates (UAE; ar, اَلْإِمَارَات الْعَرَبِيَة الْمُتَحِدَة ), or simply the Emirates ( ar, الِْإمَارَات ), is a country in Western Asia (The Middle East). It is located at th ...
ranking first, followed by
Qatar
Qatar (, ; ar, قطر, Qaṭar ; local vernacular pronunciation: ), officially the State of Qatar,) is a country in Western Asia. It occupies the Qatar Peninsula on the northeastern coast of the Arabian Peninsula in the Middle East; it sh ...
and
Saudi Arabia
Saudi Arabia, officially the Kingdom of Saudi Arabia (KSA), is a country in Western Asia. It covers the bulk of the Arabian Peninsula, and has a land area of about , making it the fifth-largest country in Asia, the second-largest in the A ...
, most likely reflecting low tax regimes in those countries. Countries in
Sub-Saharan Africa
Sub-Saharan Africa is, geographically, the area and regions of the continent of Africa that lies south of the Sahara. These include West Africa, East Africa, Central Africa, and Southern Africa. Geopolitically, in addition to the List of sov ...
are among the 'hardest' to pay with the
Central African Republic
The Central African Republic (CAR; ; , RCA; , or , ) is a landlocked country in Central Africa. It is bordered by Chad to the north, Sudan to the northeast, South Sudan to the southeast, the DR Congo to the south, the Republic of th ...
,
Republic of Congo
The Republic of the Congo (french: République du Congo, ln, Republíki ya Kongó), also known as Congo-Brazzaville, the Congo Republic or simply either Congo or the Congo, is a country located in the western coast of Central Africa to the w ...
,
Guinea
Guinea ( ),, fuf, 𞤘𞤭𞤲𞤫, italic=no, Gine, wo, Gine, nqo, ߖߌ߬ߣߍ߫, bm, Gine officially the Republic of Guinea (french: République de Guinée), is a coastal country in West Africa. It borders the Atlantic Ocean to the we ...
and
Chad
Chad (; ar, تشاد , ; french: Tchad, ), officially the Republic of Chad, '; ) is a landlocked country at the crossroads of North and Central Africa. It is bordered by Libya to the north, Sudan to the east, the Central African Republic ...
in the bottom 5, reflecting higher total tax rates and a greater administrative burden to comply.
Key facts
The below facts were compiled by EPS PEAKS researchers:
*
Trade liberalization
Free trade is a trade policy that does not restrict imports or exports. It can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold econ ...
has led to a decline in trade taxes as a share of total revenues and GDP.
* Resource-rich countries tend to collect more revenue as a share of GDP, but this is more volatile. Sub-Saharan African countries that are resource-rich have performed better tax collecting than non-resource-rich countries, but revenues are more volatile from year to year.
By strengthening revenue management, there are huge opportunities for investment for development and growth.
* Developing countries have an informal sector representing an average of around 40%, perhaps up to 60% in some. Informal sectors feature many small informal traders who may not be efficient in bringing into the tax net since the cost of collection is high and revenue potential limited (although there are broader governance benefits). There is also an issue of non-compliant companies who are 'hard to tax', evading taxes and should be brought into the tax net.
[IMF, 2011, Revenue Mobilization in Developing Countries, Fiscal Affairs Department]
* In many low-income countries, the majority of revenue is collected from a narrow tax base, sometimes because of a limited range of taxable economic activities. There is therefore dependence on few taxpayers, often multinationals, that can exacerbate the revenue challenge by minimizing their tax liability, in some cases abusing a lack of capacity in revenue authorities, sometimes through
transfer pricing abuse.
* Developing and developed countries face huge challenges in taxing multinationals and international citizens. Estimates of tax revenue losses from evasion and avoidance in developing countries are limited by a lack of data and methodological shortcomings, but some estimates are significant.
* Countries use incentives to attract investment but doing this may be unnecessarily giving up revenue as evidence suggests that investors are influenced more by economic fundamentals like market size, infrastructure, and skills, and only marginally by tax incentives (IFC investor surveys).
For example, even though the
Government of Armenia
A government is the system or group of people governing an organized community, generally a State (polity), state.
In the case of its broad associative definition, government normally consists of legislature, Executive (government), e ...
supports the IT sector and seeks to improve the investment climate, the small size of the domestic market, low wages, low demand for productivity enhancement tools, financial constraints, high software piracy rates, and other factors make growth in this sector a slow process. Meaning that tax incentives do not contribute to the development of the sector as much as it is thought to contribute. Support towards the IT industry and tax incentives were established in the 2000s in
Armenia
Armenia (), , group=pron officially the Republic of Armenia,, is a landlocked country in the Armenian Highlands of Western Asia.The UNbr>classification of world regions places Armenia in Western Asia; the CIA World Factbook , , and ''Ox ...
, and this example showcases that such policies are not the guarantee of rapid economic growth.
* In low-income countries, compliance costs are high, they are lengthy processes, frequent tax payments, bribes and corruption.
* Administrations are often under-resourced, resources aren't effectively targeted on areas of greatest impact, and mid-level management is weak. Coordination between domestic and customs is weak, which is especially important for VAT. Weak administration, governance, and corruption tend to be associated with low revenue collections (IMF, 2011).
* Evidence on the effect of aid on tax revenues is inconclusive. Tax revenue is more stable and sustainable than aid. While a disincentive effect of aid on revenue may be expected and was supported by some early studies, recent evidence does not support that conclusion, and in some cases, points towards higher tax revenue following support for revenue mobilization.
* Of all regions, Africa has the highest total tax rates borne by the business at 57.4% of the profit on average but has reduced the most since 2004, from 70%, partly due to introducing VAT and this is likely to have a beneficial effect on attracting investment.
* Fragile states are less able to expand tax revenue as a percentage of GDP and any gains are more difficult to sustain. Tax administration tends to collapse if conflict reduces state-controlled territory or reduces productivity. As economies are rebuilt after conflicts, there can be good progress in developing effective tax systems.
Liberia
Liberia (), officially the Republic of Liberia, is a country on the West African coast. It is bordered by Sierra Leone to Liberia–Sierra Leone border, its northwest, Guinea to its north, Ivory Coast to its east, and the Atlantic Ocean ...
expanded from 10.6% of GDP in 2003 to 21.3% in 2011.
Mozambique
Mozambique (), officially the Republic of Mozambique ( pt, Moçambique or , ; ny, Mozambiki; sw, Msumbiji; ts, Muzambhiki), is a country located in southeastern Africa bordered by the Indian Ocean to the east, Tanzania to the north, Malawi ...
increased from 10.5% of GDP in 1994 to around 17.7% in 2011.
Summary
Aid interventions in revenue can support revenue mobilization for growth, improve tax system design and administrative effectiveness, and strengthen governance and compliance.
The author of the Economics Topic Guide found that the best aid modalities for revenue depend on country circumstances, but should aim to align with government interests and facilitate effective planning and implementation of activities under evidence-based tax reform. Lastly, she found that identifying areas for further reform requires country-specific diagnostic assessment: broad areas for developing countries identified internationally (e.g. IMF) include, for example, property taxation for local revenues, strengthening expenditure management, and effective taxation of extractive industries and multinationals.
Views
Support
According to most
political philosophies, taxes are justified as they fund activities that are necessary and beneficial to
society
A society is a group of individuals involved in persistent social interaction, or a large social group sharing the same spatial or social territory, typically subject to the same political authority and dominant cultural expectations. Socie ...
. Additionally,
progressive tax
A progressive tax is a tax in which the tax rate increases as the taxable amount increases.Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), ''Concepts of Taxation'', Dryden Press: Fort Worth, TX The term ''progre ...
ation can be used to reduce
economic inequality
There are wide varieties of economic inequality, most notably income inequality measured using the distribution of income (the amount of money people are paid) and wealth inequality measured using the distribution of wealth (the amount of we ...
in a society. According to this view, taxation in modern nation-states benefit the majority of the population and
social development. A common presentation of this view, paraphrasing various statements by
Oliver Wendell Holmes Jr.
Oliver Wendell Holmes Jr. (March 8, 1841 – March 6, 1935) was an American jurist and legal scholar who served as an associate justice of the Supreme Court of the United States from 1902 to 1932.Holmes was Acting Chief Justice of the Un ...
is "Taxes are the price of civilization".
It can also be argued that in a
democracy
Democracy (From grc, δημοκρατία, dēmokratía, ''dēmos'' 'people' and ''kratos'' 'rule') is a form of government in which the people have the authority to deliberate and decide legislation (" direct democracy"), or to choose gov ...
, because the government is the party performing the act of imposing taxes, society as a whole decides how the tax system should be organized. The
American Revolution
The American Revolution was an ideological and political revolution that occurred in British America between 1765 and 1791. The Americans in the Thirteen Colonies formed independent states that defeated the British in the American Revolut ...
's "
No taxation without representation
"No taxation without representation" is a political slogan that originated in the American Revolution, and which expressed one of the primary grievances of the American colonists for Great Britain. In short, many colonists believed that as they ...
" slogan implied this view. For traditional
conservatives
Conservatism is a cultural, social, and political philosophy that seeks to promote and to preserve traditional institutions, practices, and values. The central tenets of conservatism may vary in relation to the culture and civilization in ...
, 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
An adage (; Latin: adagium) is a memorable and usually philosophical aphorism that communicates an important truth derived from experience, custom, or both, and that many people consider true and credible because of its longeval tradition, i.e. ...
of
public finance
Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achie ...
, "An old tax is a good tax".
Conservatives advocate the "fundamental conservative premise that no one should be excused from paying for government, lest they come to believe that government is costless to them with the certain consequence that they will demand more government 'services'."
Social democrats
Social democracy is a political, social, and economic philosophy within socialism that supports political and economic democracy. As a policy regime, it is described by academics as advocating economic and social interventions to promote so ...
generally favor higher levels of taxation to fund public provision of a wide range of services such as universal
health care
Health care or healthcare is the improvement of health via the prevention, diagnosis, treatment, amelioration or cure of disease, illness, injury, and other physical and mental impairments in people. Health care is delivered by health profe ...
and education, as well as the provision of a range of
welfare benefits
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 specifical ...
. As argued by
Anthony Crosland
Charles Anthony Raven Crosland (29 August 191819 February 1977) was a British Labour Party politician and author. A social democrat on the right wing of the Labour Party, he was a prominent socialist intellectual. His influential book '' The ...
and others, the capacity to tax income from capital is a central element of the social democratic case for a
mixed economy
A mixed economy is variously defined as an economic system blending elements of a market economy with elements of a planned economy, markets with state interventionism, or private enterprise with public enterprise. Common to all mixed economi ...
as against
Marxist
Marxism is a Left-wing politics, left-wing to Far-left politics, far-left method of socioeconomic analysis that uses a Materialism, materialist interpretation of historical development, better known as historical materialism, to understand S ...
arguments for comprehensive public ownership of capital. American
libertarians
Libertarianism (from french: libertaire, "libertarian"; from la, libertas, "freedom") is a political philosophy that upholds liberty as a core value. Libertarians seek to maximize autonomy and political freedom, and minimize the state's enc ...
recommend a minimal level of taxation in order to maximize the protection of
liberty
Liberty is the ability to do as one pleases, or a right or immunity enjoyed by prescription or by grant (i.e. privilege). It is a synonym for the word freedom.
In modern politics, liberty is understood as the state of being free within society fr ...
.
Compulsory taxation of individuals, such as
income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
, is often justified on grounds including territorial
sovereignty
Sovereignty is the defining authority within individual consciousness, social construct, or territory. Sovereignty entails hierarchy within the state, as well as external autonomy for states. In any state, sovereignty is assigned to the perso ...
, and the
social contract
In moral and political philosophy
Political philosophy or political theory is the philosophical study of government, addressing questions about the nature, scope, and legitimacy of public agents and institutions and the relationships betw ...
. Defenders of business taxation argue that it is an efficient method of taxing income that ultimately flows to individuals, or that separate taxation of
business
Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...
is justified on the grounds that commercial activity necessarily involves the use of publicly established and maintained economic infrastructure, and that businesses are in effect charged for this use.
Georgist
Georgism, also called in modern times Geoism, and known historically as the single tax movement, is an economic ideology holding that, although people should own the value they produce themselves, the economic rent derived from land—including ...
economists argue that all of the
economic rent
In economics, economic rent is any payment (in the context of a market transaction) to the owner of a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment m ...
collected from natural resources (land, mineral extraction, fishing quotas, etc.) is unearned income, and belongs to the community rather than any individual. They advocate a high tax (the "Single Tax") on land and other natural resources to return this unearned income to the state, but no other taxes.
Against
Because payment of tax is compulsory and enforced by the legal system, rather than voluntary like
crowdfunding
Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over was raised worldwide by crow ...
, some political philosophies view taxation as theft, extortion, slavery, as a violation of
property rights
The right to property, or the right to own property (cf. ownership) is often classified as a human right for natural persons regarding their possessions. A general recognition of a right to private property is found more rarely and is typically ...
, or tyranny, accusing the government of levying taxes via
force
In physics, a force is an influence that can change the motion of an object. A force can cause an object with mass to change its velocity (e.g. moving from a state of rest), i.e., to accelerate. Force can also be described intuitively as a p ...
and
coercive
Coercion () is compelling a party to act in an involuntary manner by the use of threats, including threats to use force against a party. It involves a set of forceful actions which violate the free will of an individual in order to induce a desi ...
means.
Objectivists
Objectivism is a philosophical system developed by Russian-American writer and philosopher Ayn Rand. She described it as "the concept of man as a heroic being, with his own happiness as the moral purpose of his life, with productive achievement ...
,
anarcho-capitalists
Anarcho-capitalism (or, colloquially, ancap) is an anti-statist, libertarian, and anti-political philosophy and economic theory that seeks to abolish centralized states in favor of stateless societies with systems of private property enfor ...
, and
right-wing libertarians see taxation as government aggression through the lens of the
non-aggression principle
The non-aggression principle (NAP), also called the non-aggression axiom, is a concept in which aggression, defined as initiating or threatening any forceful interference (violating or breaching conduct) against either an individual, their propert ...
. 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
Ludwig Heinrich Edler von Mises (; 29 September 1881 – 10 October 1973) was an Austrian School economist, historian, logician, and Sociology, sociologist. Mises wrote and lectured extensively on the societal contributions of classical liberali ...
, "society as a whole" should not make such decisions, due to
methodological individualism
In the social sciences, methodological individualism is the principle that subjective individual motivation explains social phenomena, rather than class or group dynamics which are illusory or artificial and therefore cannot truly explain marke ...
. Libertarian opponents of taxation claim that governmental protection, such as police and defense forces might be replaced by
market
Market is a term used to describe concepts such as:
*Market (economics), system in which parties engage in transactions according to supply and demand
*Market economy
*Marketplace, a physical marketplace or public market
Geography
*Märket, an ...
alternatives such as
private defense agencies
A private defense agency (PDA) is a theoretical enterprise which would provide personal protection and military defense services to individuals who would pay for its services. PDAs are advocated in anarcho-capitalism as a way of enforcing the sy ...
,
arbitration
Arbitration is a form of alternative dispute resolution (ADR) that resolves disputes outside the judiciary courts. The dispute will be decided by one or more persons (the 'arbitrators', 'arbiters' or 'arbitral tribunal'), which renders the ' ...
agencies or
voluntary contributions.
Murray Rothbard
Murray Newton Rothbard (; March 2, 1926 – January 7, 1995) was an American economist of the Austrian School, economic historian, political theorist, and activist. Rothbard was a central figure in the 20th-century American libertarian m ...
argued in ''The Ethics of Liberty'' in 1982 that taxation is theft and that tax resistance is therefore legitimate: "Just as no one is morally required to answer a robber truthfully when he asks if there are any valuables in one's house, so no one can be morally required to answer truthfully similar questions asked by the state, e.g., when filling out income tax returns."
Many view government spending as an inefficient use of capital, and that the same projects that the government seeks to develop can be developed by private companies at much lower costs. This line of argument holds that government workers are not as personally invested in the efficiency of the projects, so the overspending happens at every step of the way. In the same regard, many public officials are not elected for their project management skills, so the projects can be mishandled. In the United States, President George W. Bush proposed in his 2009 budget "to terminate or reduce 151 discretionary programs" which were inefficient or ineffective.
Additionally, critics of taxation note that the process of taxation, not only unjustly takes money of citizens, it also unjustly takes considerable time away from citizens. For example, it is estimated by the American Action Forum that Americans spend 6.5 billion hours annually preparing their taxes. This is equivalent of roughly 741,501 years of life lost every year to complete tax forms and other related paperwork.
Socialism
Karl Marx assumed that taxation would be unnecessary after the advent of communism and looked forward to the "withering away of the state". In socialist economies such as that of China, taxation played a minor role, since most government income was derived from the ownership of enterprises, and it was argued by some that monetary taxation was not necessary.
While the morality of taxation is sometimes questioned, most arguments about taxation revolve around the degree and method of taxation and associated
government spending
Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting, the acquisition by governments of goods and services for current use, to directly satisfy the individual o ...
, not taxation itself.
Choice
Tax choice is the theory that taxpayers should have more control with how their individual taxes are allocated. If taxpayers could choose which government organizations received their taxes,
opportunity cost
In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...
decisions would integrate their dispersed knowledge, partial knowledge. For example, a taxpayer who allocated more of his taxes on public education would have less to allocate on public healthcare. Supporters argue that allowing taxpayers to demonstrated preference, demonstrate their preferences would help ensure that the government success, government succeeds at efficiently producing the public goods that taxpayers truly value. This would end real estate speculation, business cycles, unemployment and distribute wealth much more evenly. Joseph Stiglitz's Henry George Theorem predicts its sufficiency because—as George also noted—public spending raises land value.
Geoism
Geoists (Georgists and geolibertarians) state that taxation should primarily collect
economic rent
In economics, economic rent is any payment (in the context of a market transaction) to the owner of a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment m ...
, in particular the land value taxation, value of land, for both reasons of economic efficiency as well as morality. The efficiency of using
economic rent
In economics, economic rent is any payment (in the context of a market transaction) to the owner of a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment m ...
for taxation is (as economists agree) due to the fact that such taxation cannot be passed on and does not create any dead-weight loss, and that it removes the incentive to speculate on land.
Its morality is based on the Geoist premise that private property is justified for products of labor but not for land (economics), land and natural resources.
Economist and social reformer Henry George opposed
sales taxes
A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a gover ...
and protective tariffs for their negative impact on trade. He also believed in the right of each person to the fruits of their own labor and productive investment. Therefore, income from Wage labour, paid labor and proper capital (economics), capital should remain untaxed. For this reason many Geoists—in particular those that call themselves geolibertarian—share the view with libertarians that these types of taxation (but not all) are immoral and Taxation as theft, even theft. George stated there should be one single tax: the Land Value Tax, which is considered both efficient and moral.
Demand for specific land is dependent on nature, but even more so on the presence of communities, trade, and government infrastructure, particularly in urban area, urban environments. Therefore, the
economic rent
In economics, economic rent is any payment (in the context of a market transaction) to the owner of a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment m ...
of land is not the product of one particular individual and it may be claimed for public expenses. According to George, this would end real estate bubbles, business cycles, unemployment and distribute wealth much more evenly.
Joseph Stiglitz's Henry George Theorem predicts its sufficiency for financing public goods because those raise land value.
John Locke stated that whenever labor is mixed with natural resources, such as is the case with improved land, private property is justified under the Lockean proviso, proviso that there must be enough other natural resources of the same quality available to others. Geoists state that the Lockean proviso is violated wherever land value is greater than zero. Therefore, under the assumed principle of equal rights of all people to natural resources, the occupier of any such land must compensate the rest of society to the amount of that value. For this reason, geoists generally believe that such payment cannot be regarded as a true 'tax', but rather a compensation or
fee
A fee is the price one pays as remuneration for rights or services. Fees usually allow for overhead, wages, costs, and markup. Traditionally, professionals in the United Kingdom (and previously the Republic of Ireland) receive a fee in contra ...
. This means that while Geoists also regard taxation as an instrument of social justice, contrary to social democrats and social liberals they do not regard it as an instrument of redistribution (economics), redistribution but rather a 'predistribution' or simply a correct distribution of the commons.
Modern geoists note that land (economics), land in the classical economic meaning of the word referred to all natural resources, and thus also includes resources such as mineral deposits, water bodies and the electromagnetic spectrum, to which privileged access also generates
economic rent
In economics, economic rent is any payment (in the context of a market transaction) to the owner of a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment m ...
that must be compensated. Under the same reasoning most of them also consider pigouvian taxes as compensation for environmental damage or privilege as acceptable and even necessary.
Theories
Laffer curve
In
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity (that taxable income will change in response to changes in the rate of taxation). The curve is constructed by thought experiment. First, the amount of tax revenue raised at the extreme tax rates of 0% and 100% is considered. It is clear that a 0% tax rate raises no revenue, but the Laffer curve hypothesis is that a 100% tax rate will also generate no revenue because at such a rate there is no longer any incentive for a rational taxpayer to earn any income, thus the revenue raised will be 100% of nothing. If both a 0% rate and 100% rate of taxation generate no revenue, it follows from the extreme value theorem that there must exist at least one rate in between where tax revenue would be a maximum. The Laffer curve is typically represented as a graph that starts at 0% tax, zero revenue, rises to a maximum rate of revenue raised at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate.
One potential result of the Laffer curve is that increasing tax rates beyond a certain point will become counterproductive for raising further tax revenue. A hypothetical Laffer curve for any given economy can only be estimated and such estimates are sometimes controversial. The New Palgrave Dictionary of Economics reports that estimates of revenue-maximizing tax rates have varied widely, with a mid-range of around 70%.
Optimal
Most governments take revenue that exceeds that which can be provided by non-distortionary taxes or through taxes that give a double dividend. Optimal taxation theory is the branch of economics that considers how taxes can be structured to give the least deadweight costs, or to give the best outcomes in terms of social welfare. The Ramsey problem deals with minimizing deadweight costs. Because deadweight costs are related to the
elasticity of supply and demand for a good, it follows that putting the highest tax rates on the goods for which there are most inelastic supply and demand will result in the least overall deadweight costs. Some economists sought to integrate optimal tax theory with the social welfare function, which is the economic expression of the idea that equality is valuable to a greater or lesser extent. If individuals experience diminishing returns from income, then the optimum distribution of income for society involves a progressive income tax. James Mirrlees, Mirrlees optimal income tax is a detailed theoretical model of the optimum progressive income tax along these lines. Over the last years the validity of the theory of optimal taxation was discussed by many political economists.
Rates
Taxes are most often levied as a percentage, called the ''tax rate''. An important distinction when talking about tax rates is to distinguish between the Tax rate#Marginal, marginal rate and the Tax rate#Effective, effective tax rate. The effective rate is the total tax paid divided by the total amount the tax is paid on, while the marginal rate is the rate paid on the next dollar of income earned. For example, if income is taxed on a formula of 5% from $0 up to $50,000, 10% from $50,000 to $100,000, and 15% over $100,000, a wikt:taxpayer, taxpayer with income of $175,000 would pay a total of $18,750 in taxes.
:Tax calculation
::(0.05*50,000) + (0.10*50,000) + (0.15*75,000) = 18,750
:The "effective rate" would be 10.7%:
::18,750/175,000 = 0.107
: The "marginal rate" would be 15%.
See also
* Advance tax ruling
* DIRTI 5
* Excess burden of taxation
* Fiscal capacity
* Fiscal incidence
* Fiscal sociology
* Government budget balance
* International taxation
* List of taxes
* Price ceiling
* Price floor
* Revolutionary tax
* Tax competition
* Tax exporting
* Tax haven
* Taxpayer receipt
* Tax revenue
* Tax resistance
* Tax shelter
By country or region
* List of countries by tax rates
*List of countries by tax revenue as percentage of GDP
*Revenue service
* :Taxation by country
References
Further reading
My taxes go where? How countries spend your money (17 February 2015), ''The BBC''
*
* Genschel, Philipp; Seelkopf, Laura, eds. (2022).
Global Taxation: How Modern Taxes Conquered the World'. Oxford University Press.
* Seelkopf, L., Bubek, M., Eihmanis, E. ''et al.'' doi:10.1007/s11558-019-09359-9, The rise of modern taxation: A new comprehensive dataset of tax introductions worldwide. ''Rev Int Organ'' (2019).
External links
Tax introduction database – A dataset of the introduction of taxes in 220 countries, 1750-2018.OECD tax statisticsOECD portal on TaxICTD/UNU-WIDER, Government Revenue Datasetcompilation of tax data mainly from
OECD
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...
and International Monetary Fund, IMF
Tax Levy Featured - Managing through an IRS tax levy So what is an IRS tax levy?
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3rd-millennium BC establishments in Egypt
Egyptian inventions
30th-century BC establishments