An INCOME TAX is a tax imposed on individuals or entities (taxpayers
) that varies with their respective income or profits (taxable income
). Many jurisdictions refer to income tax on business entities as
companies tax or corporate tax . Partnerships generally are not taxed;
rather, the partners are taxed on their share of partnership items.
Taxable income of taxpayers resident in the jurisdiction is generally total income less income producing expenses and other deductions. Generally, only net gain from sale of property, including goods held for sale, is included in income. Income of a corporation's shareholders usually includes distributions of profits from the corporation. Deductions typically include all income producing or business expenses including an allowance for recovery of costs of business assets. Many jurisdictions allow notional deductions for individuals, and may allow deduction of some personal expenses. Most jurisdictions either do not tax income earned outside the jurisdiction or allow a credit for taxes paid to other jurisdictions on such income. Nonresidents are taxed only on certain types of income from sources within the jurisdictions, with few exceptions.
Most jurisdictions require self-assessment of the tax and require payers of some types of income to withhold tax from those payments. Advance payments of tax by taxpayers may be required. Taxpayers not timely paying tax owed are generally subject to significant penalties, which may include jail for individuals or revocation of an entity's legal existence.
* 1 History
* 1.1 Early examples
* 1.2 Modern era
* 1.2.1 United Kingdom * 1.2.2 United States
* 2 Common principles
* 2.1 Taxpayers and rates * 2.2 Residents and nonresidents * 2.3 Defining income * 2.4 Deductions allowed * 2.5 Business profits * 2.6 Credits * 2.7 Alternative taxes * 2.8 Administration * 2.9 State, provincial, and local * 2.10 Wage based taxes
* 3 Economic and policy aspects
* 3.1 Criticisms
* 4 Around the world * 5 Transparency and public disclosure * 6 See also * 7 References * 8 Notes * 9 External links
The concept of taxing income is a modern innovation and presupposes several things: a money economy , reasonably accurate accounts , a common understanding of receipts, expenses and profits , and an orderly society with reliable records.
For most of the history of civilization , these preconditions did not exist, and taxes were based on other factors. Taxes on wealth , social position, and ownership of the means of production (typically land and slaves ) were all common. Practices such as tithing , or an offering of first fruits , existed from ancient times, and can be regarded as a precursor of the income tax, but they lacked precision and certainly were not based on a concept of net increase.
The first income tax is generally attributed to Egypt. In the early
days of the
In the year 10 AD, Emperor Wang Mang of the Xin Dynasty instituted an unprecedented income tax, at the rate of 10 percent of profits, for professionals and skilled labor. He was overthrown 13 years later in 23 AD and earlier policies were restored during the reestablished Han Dynasty which followed.
One of the first recorded taxes on income was the Saladin tithe introduced by Henry II in 1188 to raise money for the Third Crusade . The tithe demanded that each layperson in England and Wales be taxed one tenth of their personal income and moveable property.
William Pitt the Younger
The inception date of the modern income tax is typically accepted as
1799, at the suggestion of
Henry Beeke , the future
Dean of Bristol .
This income tax was introduced into Great Britain by Prime Minister
William Pitt the Younger
Pitt's income tax was levied from 1799 to 1802, when it was abolished
Henry Addington during the
Peace of Amiens . Addington had taken
over as prime minister in 1801, after Pitt's resignation over Catholic
Emancipation . The income tax was reintroduced by Addington in 1803
when hostilities with
In the United
Kingdom of Great Britain
A committee was formed in 1851 under
Joseph Hume to investigate the
matter, but failed to reach a clear recommendation. Despite the
William Gladstone , Chancellor of the Exchequer
from 1852, kept the progressive income tax, and extended it to cover
the costs of the
The US federal government imposed the first personal income tax, on August 5, 1861 , to help pay for its war effort in the American Civil War - (3% of all incomes over US$800) (equivalent to $21,324 in 2016). This tax was repealed and replaced by another income tax in 1862. It was only in 1894 that the first peacetime income tax was passed through the Wilson-Gorman tariff . The rate was 2% on income over $4000 (equivalent to $110,723.08 in 2016), which meant fewer than 10% of households would pay any. The purpose of the income tax was to make up for revenue that would be lost by tariff reductions. The US Supreme Court ruled the income tax unconstitutional , the 10th amendment forbidding any powers not expressed in the US Constitution, and there being no power to impose any other than a direct tax by apportionment.
In 1913, the Sixteenth Amendment to the United States Constitution made the income tax a permanent fixture in the U.S. tax system. In fiscal year 1918, annual internal revenue collections for the first time passed the billion-dollar mark, rising to $5.4 billion by 1920.
While tax rules vary widely, there are certain basic principles
common to most income tax systems.
TAXPAYERS AND RATES
Individuals are often taxed at different rates than corporations.
Individuals include only human beings.
Separate taxes are assessed against each taxpayer meeting certain minimum criteria. Many systems allow married individuals to request joint assessment . Many systems allow controlled groups of locally organized corporations to be jointly assessed.
RESIDENTS AND NONRESIDENTS
Residents are generally taxed differently from nonresidents. Few
jurisdictions tax nonresidents other than on specific types of income
earned within the jurisdiction. See, e.g., the discussion of taxation
by the United States of foreign persons . Residents, however, are
generally subject to income tax on all worldwide income. A very few
Residence is often defined for individuals as presence in the country for more than 183 days. Most countries base residence of entities on either place of organization or place of management and control. The United Kingdom has three levels of residence.
Most systems define income subject to tax broadly for residents, but tax nonresidents only on specific types of income. What is included in income for individuals may differ from what is included for entities. The timing of recognizing income may differ by type of taxpayer or type of income.
Income generally includes most types of receipts that enrich the taxpayer, including compensation for services, gain from sale of goods or other property, interest, dividends, rents, royalties, annuities, pensions, and all manner of other items. Many systems exclude from income part or all of superannuation or other national retirement plan payments. Most tax systems exclude from income health care benefits provided by employers or under national insurance systems.
Nearly all income tax systems permit residents to reduce gross income by business and some other types of deductions. By contrast, nonresidents are generally subject to income tax on the gross amount of income of most types plus the net business income earned within the jurisdiction.
Expenses incurred in a trading, business, rental, or other income producing activity are generally deductible, though there may be limitations on some types of expenses or activities. Business expenses include all manner of costs for the benefit of the activity. An allowance (as a capital allowance or depreciation deduction) is nearly always allowed for recovery of costs of assets used in the activity. Rules on capital allowances vary widely, and often permit recovery of costs more quickly than ratably over the life of the asset.
Most systems allow individuals some sort of notional deductions or an amount subject to zero tax. In addition, many systems allow deduction of some types of personal expenses, such as home mortgage interest or medical expenses.
Only net income from business activities, whether conducted by
individuals or entities is taxable, with few exceptions. Many
countries require business enterprises to prepare financial statements
which must be audited.
Nearly all systems permit residents a credit for income taxes paid to other jurisdictions of the same sort. Thus, a credit is allowed at the national level for income taxes paid to other countries. Many income tax systems permit other credits of various sorts, and such credits are often unique to the jurisdiction.
Some jurisdictions, particularly the United States and many of its states and Switzerland , impose the higher of regular income tax or an alternative tax. Switzerland and U.S. states generally impose such tax only on corporations and base it on capital or a similar measure.
Nearly all systems require those whose proper tax is not fully settled through withholding to self assess tax and make payments prior to or with final determination of the tax. Self-assessment means the taxpayer must make a computation of tax and submit it to the government.
STATE, PROVINCIAL, AND LOCAL
Income taxes are separately imposed by sub-national jurisdictions in several countries with federal systems. These include Canada , Germany , Switzerland, and the United States , where provinces, cantons, or states impose separate taxes. In a few countries, cities also impose income taxes. The system may be integrated (as in Germany) with taxes collected at the federal level. In Quebec and the United States, federal and state systems are independently administered and have differences in determination of taxable income.
WAGE BASED TAXES
See also: Payroll tax
Income taxes of workers are often collected by employers under a withholding or Pay-as-you-earn tax system. Such collections are not necessarily final amounts of tax, as the worker may be required to aggregate wage income with other income and/or deductions to determine actual tax. Calculation of the tax to be withheld may be done by the government or by employers based on withholding allowances or formulas.
Retirement oriented taxes, such as Social Security or national insurance , also are a type of income tax, though not generally referred to as such. These taxes generally are imposed at a fixed rate on wages or self-employment earnings up to a maximum amount per year. The tax may be imposed on the employer, the employee, or both, at the same or different rates.
Some jurisdictions also impose a tax collected from employers, to fund unemployment insurance, health care, or similar government outlays.
ECONOMIC AND POLICY ASPECTS
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Multiple conflicting theories have been proposed regarding the economic impact of income taxes. Income taxes are widely viewed as a progressive tax (the incidence of tax increases as income increases).
The higher costs to labour and capital imposed by income tax causes deadweight loss in an economy, being the loss of economic activity from people deciding not to invest capital or use time productively because of the burden that tax would impose on those activities. There is also a loss from individuals and professional advisors devoting time to tax-avoiding behaviour instead of economically-productive activities.
AROUND THE WORLD
Income taxes are used in most countries around the world. The tax
systems vary greatly and can be progressive , proportional , or
regressive , depending on the type of tax. Comparison of tax rates
around the world is a difficult and somewhat subjective enterprise.
Countries that tax income generally use one of two systems: territorial or residential. In the territorial system, only local income – income from a source inside the country – is taxed. In the residential system, residents of the country are taxed on their worldwide (local and foreign) income, while nonresidents are taxed only on their local income. In addition, a very small number of countries, notably the United States , also tax their nonresident citizens on worldwide income.
Countries with a residential system of taxation usually allow deductions or credits for the tax that residents already pay to other countries on their foreign income. Many countries also sign tax treaties with each other to eliminate or reduce double taxation .
Countries do not necessarily use the same system of taxation for
individuals and corporations. For example,
TRANSPARENCY AND PUBLIC DISCLOSURE
* Category:Income taxes * Wealth tax
* ^ 2 Breasted, Ancient Records, Volume 2, paragraph 719-742
* ^ Roman Taxes. Unrv.com. Retrieved on 2014-04-12.
* ^ "Saladin Tithe".
* ^ Peter Harris (2006).
* ^ The Germany system is typical in this regard.