An income tax is a tax imposed on individuals or entities (taxpayers)
that varies with 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.
Tax may be
imposed by both a country and subdivisions. Most jurisdictions exempt
locally organized charitable organizations from tax.
Income tax generally is computed as the product of a tax rate times
taxable income. The tax rate may increase as taxable income increases
(referred to as graduated or progressive rates). Taxation rates may
vary by type or characteristics of the taxpayer. Capital gains may be
taxed at different rates than other income. Credits of various sorts
may be allowed that reduce tax. Some jurisdictions impose the higher
of an income tax or a tax on an alternative base or measure of income.
Taxable income of taxpayers resident in the jurisdiction is generally
total income less income producing expenses and other deductions.
Generally, only net gain from 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.
timely paying tax owed are generally subject to significant penalties,
which may include jail for individuals or revocation of an entity's
1.1 Early examples
1.2 Modern era
1.2.1 United Kingdom
1.2.2 United States
2 Common principles
Taxpayers and rates
2.2 Residents and nonresidents
2.3 Defining income
2.4 Deductions allowed
2.5 Business profits
2.7 Alternative taxes
2.9 State, provincial, and local
2.10 Wage based taxes
3 Economic and policy aspects
4 Around the world
5 Transparency and public disclosure
6 See also
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 Roman Republic, public taxes consisted of modest
assessments on owned wealth and property. The tax rate under normal
circumstances was 1% and sometimes would climb as high as 3% in
situations such as war. These modest taxes were levied against land,
homes and other real estate, slaves, animals, personal items and
monetary wealth. The more a person had in property, the more tax they
paid. Taxes were collected from individuals.
In the year 10 AD, Emperor
Wang Mang 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
William Pitt the Younger
William Pitt the Younger introduced a progressive income tax in 1798.
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
William Pitt the Younger
William Pitt the Younger in his budget of December 1798, to
pay for weapons and equipment for the French Revolutionary War. Pitt's
new graduated (progressive) income tax began at a levy of 2 old pence
in the pound (1/120) on incomes over £60 (equivalent to £5,800 in
2016), and increased up to a maximum of 2 shillings in the pound
(10%) on incomes of over £200. Pitt hoped that the new income tax
would raise £10 million a year, but actual receipts for 1799 totalled
only a little over £6 million.
Pitt's income tax was levied from 1799 to 1802, when it was abolished
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
France recommenced, but it was again abolished
in 1816, one year after the Battle of Waterloo. Opponents of the tax,
who thought it should only be used to finance wars, wanted all records
of the tax destroyed along with its repeal. Records were publicly
burned by the Chancellor of the Exchequer, but copies were retained in
the basement of the tax court.
Punch cartoon (1907); illustrates the unpopularity amongst Punch
readers of a proposed 1907 income tax by the Labour Party in the
In the United
Kingdom of Great Britain
Kingdom of Great Britain and Ireland, income tax was
reintroduced by Sir
Robert Peel by the Income
Tax Act 1842. Peel, as a
Conservative, had opposed income tax in the 1841 general election, but
a growing budget deficit required a new source of funds. The new
income tax, based on Addington's model, was imposed on incomes above
£150 (equivalent to £12,959 in 2016),. Although this measure was
initially intended to be temporary, it soon became a fixture of the
British taxation system.
A committee was formed in 1851 under
Joseph Hume to investigate the
matter, but failed to reach a clear recommendation. Despite the
vociferous objection, William Gladstone, Chancellor of the Exchequer
from 1852, kept the progressive income tax, and extended it to cover
the costs of the Crimean War. By the 1860s, the progressive tax had
become a grudgingly accepted element of the English fiscal system.
Main article: Taxation history of the United States
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 $21,800 in
2017).[verification needed] This tax was repealed and replaced by
another income tax in 1862.[verification needed] 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 $113,000 in 2017), which meant fewer than 10% of households would
pay any. The purpose of the income tax was to make up for revenue that
would be lost by tariff reductions. The US Supreme Court ruled the
income tax unconstitutional, the 10th amendment forbidding any powers
not expressed in the US Constitution, and there being no power to
impose any other than a direct tax by apportionment.
In 1913, the Sixteenth Amendment to the United States Constitution
made the income tax a permanent fixture in the U.S. tax system. In
fiscal year 1918, annual internal revenue collections for the first
time passed the billion-dollar mark, rising to $5.4 billion by
1920. The amount of income collected via income tax has varied
dramatically, from 1% in the early days of US income tax to taxation
rates of over 90% during WW2.
While tax rules vary widely, there are certain basic principles common
to most income tax systems.
Tax systems in Canada, China, Germany,
Singapore, the United Kingdom, and the United States, among others,
follow most of the principles outlined below. Some tax systems, such
as India, may have significant differences from the principles
outlined below. Most references below are examples; see specific
articles by jurisdiction (e.g.,
Income tax in Australia).
Taxpayers and rates
Individuals are often taxed at different rates than corporations.
Individuals include only human beings.
Tax systems in countries other
than the USA treat an entity as a corporation only if it is legally
organized as a corporation. Estates and trusts are usually subject to
special tax provisions. Other taxable entities are generally treated
as partnerships. In the USA, many kinds of entities may elect to be
treated as a corporation or a partnership. Partners of partnerships
are treated as having income, deductions, and credits equal to their
shares of such partnership items.
Separate taxes are assessed against each taxpayer meeting certain
minimum criteria. Many systems allow married individuals to request
joint assessment. Many systems allow controlled groups of locally
organized corporations to be jointly assessed.
Tax rates vary widely. Some systems impose higher rates on higher
amounts of income. Example: Elbonia taxes income below E.10,000 at 20%
and other income at 30%. Joe has E.15,000 of income. His tax is
Tax rates schedules may vary for individuals based on marital
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.[notes 1] A
very few countries (notably
Singapore and Hong Kong) tax residents
only on income earned in or remitted to the country.
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
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
Only net income from business activities, whether conducted by
individuals or entities is taxable, with few exceptions. Many
countries require business enterprises to prepare financial
statements which must be audited.
Tax systems in those countries
often define taxable income as income per those financial statements
with few, if any, adjustments. A few jurisdictions compute net income
as a fixed percentage of gross revenues for some types of businesses,
particularly branches of nonresidents.
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.
Income tax is generally collected in one of two ways: through
withholding of tax at source and/or through payments directly by
taxpayers. Nearly all jurisdictions require those paying employees or
nonresidents to withhold income tax from such payments. The amount to
be withheld is a fixed percentage where the tax itself is at a fixed
rate. Alternatively, the amount to be withheld may be determined by
the tax administration of the country or by the payer using formulas
provided by the tax administration. Payees are generally required to
provide to the payer or the government the information needed to make
the determinations. Withholding for employees is often referred to as
"pay as you earn" (PAYE) or "pay as you go."
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
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
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
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
Tax § Economic effects
This section needs expansion. You can help by adding to it. (August
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
Tax avoidance strategies and loopholes tend to emerge within income
tax codes. They get created when taxpayers find legal methods to avoid
Lawmakers then attempt to close the loopholes with
additional legislation. That leads to a vicious cycle of ever more
complex avoidance strategies and legislation. The vicious cycle
tends to benefit large corporations and wealthy individuals that can
afford the professional fees that come with ever more sophisticated
tax planning, thus challenging the notion that even a marginal
income tax system can be properly called progressive.
The higher costs to labour and capital imposed by income tax causes
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
Around the world
Tax rates around the world and International taxation
Systems of taxation on personal income
No income tax on individuals
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.
Tax laws in most countries are extremely complex, and tax burden falls
differently on different groups in each country and sub-national unit.
Of course, services provided by governments in return for taxation
also vary, making comparisons all the more difficult.
Countries that tax income generally use one of two systems:
territorial or residential. In the territorial system, only local
income – income from a source inside the country – is taxed. In
the residential system, residents of the country are taxed on their
worldwide (local and foreign) income, while nonresidents are taxed
only on their local income. In addition, a very small number of
countries, notably the United States, 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,
France uses a residential
system for individuals but a territorial system for corporations,
Singapore does the opposite, and
Brunei taxes corporate but
not personal income.
Transparency and public disclosure
Public disclosure of personal income tax filings occurs in Finland,
Sweden (as of the late-2000s and early 2010s).
^ 2 Breasted, Ancient Records, Volume 2, paragraph 719-742
^ Roman Taxes. Unrv.com. Retrieved on 2014-04-12.
^ "Saladin Tithe".
^ Peter Harris (2006).
Income tax in common law jurisdictions: from
the origins to 1820, Volume 1. p. 34.
^ Peter Harris (2006).
Income tax in common law jurisdictions: from
the origins to 1820, Volume 1. p. 1.
^ The Gentleman's magazine, Vol 161. 1837. pp. 546–7.
^ a b UK
Retail Price Index
Retail Price Index inflation figures are based on data from
Clark, Gregory (2017). "The Annual RPI and Average Earnings for
Britain, 1209 to Present (New Series)". MeasuringWorth. Retrieved
November 6, 2017.
^ "A tax to beat Napoleon". HM Revenue & Customs. Archived from
the original on July 24, 2010. Retrieved 2007-01-24.
^ Adams, Charles 1998. Those Dirty Rotten TAXES, The Free Press, New
^ Steven A. Bank (2011). Anglo-American Corporate Taxation: Tracing
the Common Roots of Divergent Approaches. Cambridge University Press.
^ Revenue Act of 1861, sec. 49, ch. 45, 12 Stat. 292, 309 (Aug. 5,
^ Sections 49, 51, and part of 50 repealed by Revenue Act of 1862,
sec. 89, ch. 119, 12 Stat. 432, 473 (July 1, 1862); income taxes
imposed under Revenue Act of 1862, section 86 (pertaining to salaries
of officers, or payments to "persons in the civil, military, naval, or
other employment or service of the United States ...") and section 90
(pertaining to "the annual gains, profits, or income of every person
residing in the United States, whether derived from any kind of
property, rents, interest, dividends, salaries, or from any
profession, trade, employment or vocation carried on in the United
States or elsewhere, or from any other source whatever....").
^ Charles F. Dunbar, "The New Income Tax," Quarterly Journal of
Economics, Vol. 9, No. 1 (Oct., 1894), pp. 26–46 in JSTOR.
^ Young, Adam (2004-09-07). "The Origin of the Income Tax". Ludwig von
Mises Institute. Retrieved 2007-01-24.
^ See, e.g., rates under the Germany and United States systems.
^ See, e.g., gross income in the United States.
^ See, e.g., UK requirements
^ See, e.g., references in Tax#Economic effects,
Economics#Macroeconomics, Fiscal policy
Retrieved 19 August 2013
Retrieved 19 August 2013
Retrieved 19 August 2013.
^ International tax -
France Highlights 2012 Archived October 25,
2012, at the Wayback Machine., Deloitte.
^ International tax -
Singapore Highlights 2012 Archived June 3, 2013,
at the Wayback Machine., Deloitte.
^ International tax -
Brunei Darussalam Archived October 25, 2012, at
the Wayback Machine. 2012, Deloitte.
^ Bernasek, Anna (February 13, 2010). "Should
Tax Bills Be Public
Information?". The New York Times. Retrieved 2010-03-07.
^ How much do you make? It'd be no secret in Scandinavia, USA Today,
June 18, 2008.
^ The Germany system is typical in this regard.
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