A tax (from the Latin taxo; "rate") is a financial charge or other levy imposed

upon a taxpayer (an individual or legal entity) by a state or the functional

equivalent of a state to fund various public expenditures.[1] A failure to pay, or
evasion of or resistance to taxation, is usually punishable by law. Taxes are also
imposed by many administrative divisions. Taxes consist of direct or indirect
taxes and may be paid in money or as its labour equivalent. Few countries
impose no taxation at all, such as the United Arab Emirates

Purposes and effects[edit]

Money provided by taxation has been used by states and their functional
equivalents throughout history to carry out many functions. Some of these
include expenditures on war, the enforcement of law and public order, protection
of property, economic infrastructure (roads, legal tender, enforcement of
contracts, etc.),public works, social engineering, subsidies, and the operation of
government itself. A portion of taxes also go to pay off the state's debt and the
interest this debt accumulates. Governments also use taxes to
fund welfare and public services. These services can include education
systems, health care systems, pensions for the elderly, unemployment benefits,
and public transportation. Energy, water and waste management systems are
also common public utilities. Colonial and modernizing states have also used
cash taxes to draw or force reluctant subsistence producers into cash
economies.
Most economists, especially neoclassical economists, argue that all taxation
creates market distortion and results in economic inefficiency. They have
therefore sought to identify the kind of tax system that would minimize this
distortion.[4] Recent scholarship suggests that in the United States, 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.[4]

Governments use different kinds of taxes and vary the tax rates. This is done to
distribute the tax burden among individuals or classes of the population involved
in taxable activities, such as business, or to redistribute resources between
individuals or classes in the population. Historically, the nobility were supported
by taxes on the poor; modern social security systems are intended to support the
poor, the disabled, or the retired by taxes on those who are still working. In
addition, taxes are applied to fund foreign aid and military ventures, to influence
the macroeconomic performance of the economy (the government's strategy for
doing this is called itsfiscal policy; see also tax exemption), or to modify patterns
of consumption or employment within an economy, by making some classes of
transaction more or less attractive.
A nation's tax system is often a reflection of its communal values and the values
of those in current political power. To create a system of taxation, a nation must
make choices regarding the distribution of the tax burdenwho will pay taxes
and how much they will payand how the taxes collected will be spent. In
democratic nations where the public elects those in charge of establishing the tax
system, these choices reflect the type of community that the public wishes to
create. In countries where the public does not have a significant amount of
influence over the system of taxation, that system may be more of a reflection on
the values of those in power.
All large businesses incur administrative costs in the process of delivering
revenue collected from customers to the suppliers of the goods or services being
purchased. Taxation is no different; the resource collected from the public
through taxation is always greater than the amount which can be used by the
government. The difference is called the compliance cost and includes for
example the labour cost and other expenses incurred in complying with tax laws
and rules. The collection of a tax in order to spend it on a specified purpose, for
example collecting a tax on alcohol to pay directly for alcoholism rehabilitation
centres, is called hypothecation. This practice is often disliked by finance
ministers, since it reduces their freedom of action. Some economic theorists

consider the concept to be intellectually dishonest since, in reality, money

is fungible. Furthermore, it often happens that taxes or excises initially levied to
fund some specific government programs are then later diverted to the
government general fund. In some cases, such taxes are collected in
fundamentally inefficient ways, for example highway tolls.
Since governments also resolve commercial disputes, especially in countries
with common law, similar arguments are sometimes used to justify a sales
tax or value added tax. Others (e.g., libertarians) argue that most or all forms of
taxes are immoral due to their involuntary (and therefore
eventually coercive/violent) nature. The most extreme anti-tax view is anarchocapitalism, in which the provision of all social services should be voluntarily
bought by the person(s) using them.

Kinds of taxes[edit]
The Organisation for Economic Co-operation and Development (OECD)
publishes an analysis of tax systems of member countries. As part of such
analysis, OECD developed a definition and system of classification of internal
taxes,[5] generally followed below. In addition, many countries impose taxes
(tariffs) on the import of goods.

Taxes on income[edit]
Income tax[edit]
Main article: Income tax
Many jurisdictions tax the income of individuals and business entities, including
corporations. Generally the tax is imposed on net profits from business, net
gains, and other income. Computation of income subject to tax may be
determined under accounting principles used in the jurisdiction, which may be
modified or replaced by tax law principles in the jurisdiction. The incidence of
taxation varies by system, and some systems may be viewed
as progressive or regressive. Rates of tax may vary or be constant (flat) by
income level. Many systems allow individuals certain personal allowances and

other nonbusiness reductions to taxable income, although business deductions

tend to be favored over personal deductions.[4]
Personal income tax is often collected on a pay-as-you-earn basis, with small
corrections made soon after the end of the tax year. These corrections take one
of two forms: payments to the government, for taxpayers who have not paid
enough during the tax year; and tax refunds from the government for those who
have overpaid. Income tax systems will often have deductions available that
lessen the total tax liability by reducing total taxable income. They may allow
losses from one type of income to be counted against another. For example, a
loss on the stock market may be deducted against taxes paid on wages. Other
tax systems may isolate the loss, such that business losses can only be
deducted against business tax by carrying forward the loss to later tax years.
Negative income tax[edit]
Main article: Negative income tax
In economics, a negative income tax (abbreviated NIT) is a progressive income
tax system where people earning below a certain amount receive supplemental
pay from the government instead of paying taxes to the government.
Capital gains tax[edit]
Main article: Capital gains tax
Most jurisdictions imposing an income tax treat capital gains 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. Some tax scholars have argued that

differences in the ways different kinds of capital and investment are taxed
contribute to economic distortions.[4]
Corporate tax[edit]
Main article: Corporate tax
Corporate tax refers to income, capital, net worth, or other taxes imposed on
corporations. Rates of tax and the taxable base for corporations may differ from
those for individuals or other taxable persons.

Social security contributions[edit]

Many countries provide publicly funded retirement or health care systems.[6] In
connection with these systems, the country typically requires employers and/or
employees to make compulsory payments.[7] 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.[8] Some systems provide an upper limit on earnings subject to the tax.
A few systems provide that the tax is payable only on wages above a particular
amount. Such upper or lower limits may apply for retirement but not health care
components of the tax. 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 suggest that such programs are really tax and spending programs.[4] Some
tax scholars argue that supporting social security programs exclusively through
taxes on wages, rather than through broader taxes that include capital, creates
distortions and underinvestment in human capital, since the returns to such
investments will be taxes as wages.[4]

Taxes on payroll or workforce[edit]

Main article: Payroll tax

Unemployment and similar taxes are often imposed on employers based on total
payroll. These taxes may be imposed in both the country and sub-country levels.
[9]

Taxes on property[edit]
Recurrent property taxes may be imposed on immovable property (real property)
and some classes of movable property. In addition, recurrent taxes may be
imposed on net wealth of individuals or corporations.[10] Many jurisdictions
impose estate tax, gift tax or other inheritance taxes on property at death or gift
transfer. Some jurisdictions impose taxes on financial or capital transactions.
Property tax[edit]
Main articles: Property tax and Land value tax
A property tax (or millage tax) is an ad valorem tax levy on the value of property
that the owner of the property is required to pay to a government in which the
property is situated. Multiple jurisdictions may tax the same property. There are
three general varieties of property: land, improvements to land (immovable manmade things, e.g. buildings) and personal property (movable things). Real estate
or realty is the combination of land and improvements to land.
Property taxes are usually charged on a recurrent basis (e.g., yearly). A common
type of property tax is an annual charge on the ownership of real estate, where
the tax base is the estimated value of the property. For a period of over 150
years from 1695 a window tax was levied in England, with the result that one can
still see listed buildings with windows bricked up in order to save their owners
money. A similar tax on hearths existed in France and elsewhere, with similar
results. The two most common type of event driven property taxes are stamp
duty, charged upon change of ownership, and inheritance tax, which is imposed
in many countries on the estates of the deceased.
In contrast with a tax on real estate (land and buildings), a Land Value Tax (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 land value tax argue that it is economically justified, as it
will not deter production, distort market mechanisms or otherwise
create deadweight lossesthe way other taxes do.[11]
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
apayment in lieu of taxes 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 (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.[12] Any otherwise non-exempt object can lose its exemption if
regularly kept outside the household.[12] 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.[12] 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.[12]
Inheritance tax[edit]
Main article: Inheritance tax
Inheritance tax, estate tax, and death tax or duty are the names given to various
taxes which arise on the death of an individual. In United States tax law, there is
a distinction between an estate tax and an inheritance tax: the former taxes the
personal representatives of the deceased, while the latter taxes the beneficiaries
of the estate. However, this distinction does not apply in other jurisdictions; for
example, if using this terminology UK inheritance tax would be an estate tax.
Expatriation tax[edit]

Main article: Expatriation tax

An expatriation tax is a tax on individuals who renounce their citizenship or
residence. The tax is often imposed based on a deemed disposition of all the
individual's property. One example is the United States under the American Jobs
Creation Act, where any individual who has a net worth of $2 million or an
average income-tax liability of $127,000 who renounces his or her citizenship
and leaves the country is automatically assumed to have done so for tax
avoidance reasons and is subject to a higher tax rate.[13]
Transfer tax[edit]
Main article: Transfer tax
Historically, in many countries, a contract needed to have a stamp affixed to
make it valid. The charge for the stamp was either a fixed amount or a
percentage of the value of the transaction. In most countries the stamp has been
abolished but stamp duty remains. Stamp duty is levied in the UK on the
purchase of shares and securities, the issue of bearer instruments, and certain
partnership transactions. Its modern derivatives, stamp duty reserve
tax and stamp duty land tax, are respectively charged on transactions involving
securities and land. Stamp duty has the effect of discouraging speculative
purchases of assets by decreasing liquidity. In the United States, transfer tax is
often charged by the state or local government and (in the case of real property
transfers) can be tied to the recording of the deed or other transfer documents.
Wealth (net worth) tax[edit]
Main article: Wealth tax
Some countries' governments will require declaration of the tax payers' balance
sheet (assets and liabilities), and from that exact a tax on net worth (assets
minus liabilities), as a percentage of the net worth, or a percentage of the net
worth exceeding a certain level. The tax may be levied on "natural" or legal
"persons". An example is France's ISF.

Taxes on goods and services[edit]

Value added tax (Goods and Services Tax)[edit]

Main article: Value added tax
A value added tax (VAT), also known as Goods and Services Tax (G.S.T), Single
Business Tax, or Turnover Tax in some countries, applies the equivalent of a
sales tax to every operation that creates value. To give an example, sheet steel is
imported by a machine manufacturer. That manufacturer will pay the VAT on the
purchase price, remitting that amount to the government. The manufacturer will
then transform the steel into a machine, selling the machine for a higher price to
a wholesale distributor. The manufacturer will collect the VAT on the higher price,
but will remit to the government only the excess related to the "value added" (the
price over the cost of the sheet steel). The wholesale distributor will then
continue the process, charging the retail distributor the VAT on the entire price to
the retailer, but remitting only the amount related to the distribution mark-up to
the government. The last VAT amount is paid by the eventual retail customer who
cannot recover any of the previously paid VAT. For a VAT and sales tax of
identical rates, the total tax paid is the same, but it is paid at differing points in the
process.
VAT is usually administrated by requiring the company to complete a VAT return,
giving details of VAT it has been charged (referred to as input tax) and VAT it has
charged to others (referred to as output tax). The difference between output tax
and input tax is payable to the Local Tax Authority. If input tax is greater than
output tax the company can claim back money from the Local Tax Authority.
Sales taxes[edit]
Main article: Sales tax
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 flatrate sales tax will tend to be regressive. It is therefore common to exempt food,

utilities and other necessities from sales taxes, since poor people spend a higher
proportion of their incomes on these commodities, so such exemptions make the
tax more progressive. This is the classic "You pay for what you spend" tax, as
only those who spend money on non-exempt (i.e. luxury) items pay the tax.
A small number of U.S. states rely entirely on sales taxes for state revenue, as
those states do not levy a state income tax. Such states tend to have a moderate
to large amount of tourism or inter-state travel that occurs within their borders,
allowing the state to benefit from taxes from people the state would otherwise not
tax. In this way, the state is able to reduce the tax burden on its citizens. The U.S.
states that do not levy a state income tax are Alaska, Tennessee, Florida,
Nevada, South Dakota, Texas,[14] Washington state, and Wyoming. Additionally,
New Hampshire and Tennessee levy state income taxes only on dividends and
interest income. Of the above states, only Alaska and New Hampshire do not
levy a state sales tax. Additional information can be obtained at the Federation of
Tax Administrators website.
In the United States, there is a growing movement[15] for the replacement of all
federal payroll and income taxes (both corporate and personal) with a national
retail sales tax and monthly tax rebate to households of citizens and legal
resident aliens. The tax proposal is named FairTax. In Canada, the federal sales
tax is called the Goods and Services tax (GST) and now stands at 5%. The
provinces of British Columbia, Saskatchewan, Manitoba, and Prince Edward
Island also have a provincial sales tax [PST]. The provinces of Nova Scotia, New
Brunswick, Newfoundland & Labrador, and Ontario have harmonized their
provincial sales taxes with the GSTHarmonized Sales Tax [HST], and thus is a
full VAT. The province of Quebec collects the Quebec Sales Tax [QST] which is
based on the GST with certain differences. Most businesses can claim back the
GST, HST and QST they pay, and so effectively it is the final consumer who pays
the tax.
Excises[edit]
Main article: Excise

An excise duty is an indirect tax 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 and approved by the Long Parliament. These duties
consisted of charges on beer, ale, cider, cherry wine and tobacco, to which list
were afterwards 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, 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).[16]
Excises (or exemptions from them) are also used to modify consumption patterns
(social engineering). For example, a high excise is used to
discourage alcoholconsumption, relative to other goods. This may be combined
with hypothecation if the proceeds are then used to pay for the costs of treating
illness caused by alcohol abuse. Similar taxes may exist
on tobacco, pornography, etc., and they may be collectively referred to as "sin
taxes". A carbon tax is a tax on the consumption of carbon-based non-renewable
fuels, such as petrol, diesel-fuel, jet fuels, and natural gas. The object is to
reduce the release of carbon into the atmosphere. In the United Kingdom, vehicle
excise duty is an annual tax on vehicle ownership.

Tariff[edit]
Main article: Tariff
An import or export tariff (also called customs duty or impost) is a charge for the
movement of goods through a political border. Tariffs discourage trade, and they
may be used by governments to protect domestic industries. A proportion of tariff
revenues is often hypothecated to pay government to maintain a navy or border

police. The classic ways of cheating a tariff are smuggling or declaring a false
value of goods. Tax, tariff and trade rules in modern times are usually set
together because of their common impact on industrial policy, investment policy,
and agricultural policy. A trade bloc is a group of allied countries agreeing to
minimize or eliminate tariffs against trade with each other, and possibly to impose
protective tariffs on imports from outside the bloc. A customs union has
a common external tariff, and the participating countries share the revenues from
tariffs on goods entering the customs union.
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.

Other taxes[edit]
License fees[edit]
Occupational taxes or license fees may be imposed on businesses or individuals
engaged in certain businesses. Many jurisdictions impose a tax on vehicles.
Poll tax[edit]
Main article: Poll tax
A poll tax, also called a per capita tax, or capitation tax, is a tax that levies a set
amount per individual. It is an example of the concept of fixed tax. One of the
earliest taxes mentioned in the Bible of a half-shekel per annum from each adult
Jew (Ex. 30:1116) was a form of poll tax. Poll taxes are administratively cheap
because they are easy to compute and collect and difficult to cheat. Economists
have considered poll taxes economically efficient because people are presumed
to be in fixed supply 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.[4] 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.[17][not in citation given] The introduction of a poll tax in medieval

England was the primary cause of the 1381 Peasants' Revolt. Scotland was the
first to be used to test the new poll tax in 1989 with England and Wales in 1990.
The change from a progressive local taxation based on property values to a
single-rate form of taxation regardless of ability to pay (the Community Charge,
but more popularly referred to as the Poll Tax), led to widespread refusal to pay
and to incidents of civil unrest, known colloquially as the 'Poll Tax Riots'.
Other[edit]
Some types of taxes have been proposed but not actually adopted in any major
jurisdiction. These include:

Bank tax

Financial transaction taxes including currency transaction taxes

Descriptive labels given some taxes[edit]

Ad valorem and per unit[edit]
Main articles: Ad valorem tax and Per unit tax
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 is an example.
Consumption tax[edit]
Main article: Consumption tax
Consumption tax refers to any tax on non-investment spending, and can be
implemented by means of a sales tax, consumer value added tax, or by

modifying an income tax to allow for unlimited deductions for investment or

savings.
Environmental tax[edit]
See also: Ecotax, Gas Guzzler Tax and Polluter pays principle
This includes natural resources consumption tax, greenhouse gas tax (Carbon
tax), "sulfuric tax", and others. The stated purpose is to reduce the environmental
impact by repricing.
Proportional, progressive, regressive, and lump-sum[edit]
An important feature of tax systems is the percentage of the tax burden as it
relates to income or consumption. The terms progressive, regressive, and
proportional are used to describe the way the rate progresses from low to high,
from high to low, or proportionally. The terms describe a distribution effect, which
can be applied to any type of tax system (income or consumption) that meets the
definition.

A progressive tax is a tax imposed so that the effective tax rate increases
as the amount to which the rate is applied increases.

The opposite of a progressive tax is a regressive tax, where the effective

tax rate decreases as the amount to which the rate is applied increases. This
effect is commonly produced where means testing is used to withdraw tax
allowances or state benefits.

In between is a proportional tax, where the effective tax rate is fixed, while
the amount to which the rate is applied increases.

A lump-sum tax is a tax that is a fixed amount, no matter the change in

circumstance of the taxed entity. This in actuality is a regressive tax as those
with lower income must use higher percentage of their income than those with
higher income and therefore the effect of the tax reduces as a function of
income.

The terms can also be used to apply meaning to the taxation of select
consumption, such as a tax on luxury goods and the exemption of basic
necessities may be described as having progressive effects as it increases a tax
burden on high end consumption and decreases a tax burden on low end
consumption.[18][19][20]
Direct and indirect[edit]
Main articles: Direct tax and Indirect tax
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."[21] According to this definition, for example, income tax is "direct", and
sales tax is "indirect". In law, the terms may have different meanings. In U.S.
constitutional law, for instance, direct taxes refer to poll taxes and property taxes,
which are based on simple existence or ownership. Indirect taxes are imposed
on events, rights, privileges, and activities.[22] Thus, a tax on the sale of property
would be considered an indirect tax, whereas the tax on simply owning the
property itself would be a direct tax.

Fees and effective taxes[edit]

Governments may charge user fees, tolls, or other types of assessments in
exchange of particular goods, services, or use of property. These are generally
not considered taxes, as long as they are levied as payment for a direct benefit to
the individual paying.[23] Such fees include:

Tolls: a fee charged to travel via a road, bridge, tunnel, canal, waterway or
other transportation facilities. Historically tolls have been used to pay for
public bridge, road and tunnel projects. They have also been used in privately
constructed transport links. The toll is likely to be a fixed charge, possibly
graduated for vehicle type, or for distance on long routes.

User fees, such as those charged for use of parks or other government
owned facilities.

Ruling fees charged by governmental agencies to make determinations in

particular situations.

Some scholars refer to certain economic effects as taxes, though they are not
levies imposed by governments. These include:

Inflation tax: the economic disadvantage suffered by holders of cash and

cash equivalents in one denomination of currency due to the effects
of expansionary monetary policy[24]

Financial repression: 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.[25]