Tax

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
collectively fund government spending,
public expenditures, or as a way to
regulate and reduce negative
externalities.[1] 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 relief.[2] The first
known taxation took place in Ancient
Egypt around 3000–2800 BC.[3] Taxes
consist of direct or indirect taxes and may
be paid in money or as its labor
equivalent.

All 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 countries
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 as
well as on corporate income. Countries or
subunits often also impose wealth taxes,
inheritance taxes, estate taxes, gift taxes,
property taxes, sales taxes, use taxes,
environmental taxes, payroll taxes, duties
and/or tariffs. It is also possible to levy a
tax on tax, as with a gross receipts tax.

In economic terms (circular flow of

income), taxation transfers wealth from
households or businesses to the
government. This has effects on economic
growth and economic welfare that can be
both increased (known as fiscal multiplier)
or decreased (known as excess burden of
taxation). Consequently, taxation is a
highly debated topic by some, as although
taxation is deemed necessary by general
consensus in order for society to function
and grow in an orderly and equitable
manner through the government
provision of public goods and public
services,[4][5][6][7] others such as
libertarians and anarcho-capitalists are
anti-taxation and denounce taxation
broadly or in its entirety, classifying
taxation as theft or extortion through
coercion along with the use of force.
Within market economies, taxation is
considered as the most viable option to
operate the government (instead of
widespread state ownership of the means
of production), as taxation enables the
government to generate revenue without
heavily interfering with the market and
private businesses; taxation preserves the
efficiency and productivity of the private
sector by allowing individuals and
businesses to make their own economic
decisions, engage in flexible production,
competition and innovation as a result of
market forces.

Certain countries function as tax havens

by imposing minimal taxes on the
personal income of individuals and on
corporate income. These tax havens
attract capital from abroad whilst resulting
in loss of tax revenues within other non-
haven countries (through base erosion
and profit shifting).

Overview

Total revenue from direct and indirect taxes given as share of GDP in
2017[8]

Legal and economic definitions of taxes

differ, such that many transfers to
governments are not considered taxes by
economists. 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
proceeds. From the view of economists, a
tax is a non-penal, yet compulsory
transfer of resources from the private to
the public sector, 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 and
corvée taxation are characteristic of
traditional or pre-capitalist states and
their functional equivalents. The method
of taxation and the government
expenditure of taxes raised is often highly
debated in politics and economics. Tax
collection is performed by a government
agency such as the Internal Revenue
Service (IRS) in the United States, His
Majesty's Revenue and Customs (HMRC) in
the United Kingdom, the Canada Revenue
Agency or the Australian Taxation Office.
When taxes are not fully paid, the state
may impose civil penalties (such as fines
or forfeiture) or criminal penalties (such as
incarceration) on the non-paying entity or
individual.[9]

Purposes and effects

The levying of taxes aims to raise revenue

to fund governing, to alter prices in order
to affect demand, or to regulate some
form of cost or benefit. 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 (roads, public
transportation, sanitation, legal systems,
public security, public education, public
health systems), military, scientific
research & development, culture and the
arts, public works, distribution, data
collection and dissemination, public
insurance, and the operation of
government itself. A government's ability
to raise taxes is called its fiscal capacity.

When expenditures exceed tax revenue, a

government accumulates government
debt. A portion of taxes may be used to
service past debts. Governments also use
taxes to fund welfare and public services.
These services can include education
systems, pensions for the elderly,
unemployment benefits, transfer
payments, subsidies and public
transportation. Energy, water and waste
management systems are also common
public utilities.

According to the proponents of the

chartalist theory of money creation, taxes
are not needed for government revenue,
as long as the government in question is
able to issue fiat money. 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.[10]

Types

The Organisation for Economic Co-

operation and Development (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,[11] generally followed below. In
addition, many countries impose taxes
(tariffs) on the import of goods.

Income

Income tax

Many jurisdictions tax the income of

individuals and of business entities,
including corporations. Generally, the
authorities impose a tax on net profits
from a business, 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 on a pay-as-you-earn
basis, with corrections made after the end
of the tax year. These corrections take one
of two forms:
 payments to the government, from
taxpayers who have not paid enough
during the tax year
tax refunds 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 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 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.
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

General government revenue, in % of

GDP, from social contributions. For
this data, 20% of the variance of GDP
per capita – adjusted for purchasing
power parity (PPP) – is explained by
revenue from social security and the
like.
Many countries provide publicly funded
retirement or healthcare systems.[12] In
connection with these systems, the
country typically requires employers
and/or employees to make compulsory
payments.[13] 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.[14] 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.[15]

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, and personal trusts.[16]
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.[17] Many jurisdictions
impose estate tax, gift tax or other
inheritance taxes 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 human-made things, e.g.
buildings), and personal property
(movable things). Real estate 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, 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, with the result that
one can still see listed buildings 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, charged upon change of
ownership, and inheritance tax, 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 losses the way other taxes
do.[18]
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 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.[19] Any otherwise non-exempt
object can lose its exemption if regularly
kept outside the household.[19] 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.[19] 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.[19]

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, 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 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.[20]

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
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)

Some countries' governments will require

a declaration of the taxpayers' 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."

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 and auditability, 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,[21] 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 (htt
p://www.taxadmin.org/) website.

In the United States, there is a growing

movement[22] 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 GST—Harmonized 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

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 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, 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).[23]

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 consumption, 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 use disorder.
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

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 the
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

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. One of the
earliest taxes mentioned in the Bible 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.[24] 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 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

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

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 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, greenhouse gas tax
(Carbon tax), "sulfuric tax", and others.
The stated purpose is to reduce the
environmental impact by repricing.
Economists describe environmental
impacts as negative externalities. As early
as 1920, Arthur Pigou 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 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 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.[25][26][27]

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."[28]
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.[29] 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 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.[30] 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[31]
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.[32]

History

Egyptian peasants seized for non-

payment of taxes. (Pyramid Age)
The first known system of taxation was in
Ancient Egypt around 3000–2800 BC, in
the First Dynasty of the Old Kingdom of
Egypt.[3] The earliest and most widespread
forms of taxation were the corvée and the
tithe. The corvée was forced labor
provided to the state by peasants too poor
to pay other forms of taxation (labor in
ancient Egyptian is a synonym for
taxes).[33] 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.[34] Early taxation is
also described in the Bible. In Genesis
(chapter 47, verse 24 – the New
International Version), it states "But when
the crop comes in, give a fifth of it to
Pharaoh. 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.[35] In Hattusa, the capital of
the Hittite Empire, grains were collected as
a tax from the surrounding lands, and
stored in silos as a display of the king's
wealth.[36]

In the Persian Empire, a regulated and

sustainable tax system was introduced by
Darius I the Great in 500 BC;[37] the
Persian system of taxation was tailored to
each Satrapy (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
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, 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) and was
required to provide 120,000 measures of
grain in addition to 700 talents of silver.[38]
This tax was exclusively levied on
Satrapies based on their lands, productive
capacity and tribute levels.[39]
The Rosetta Stone, a tax concession issued
by Ptolemy V in 196 BC and written in
three languages "led to the most famous
decipherment in history—the cracking of
hieroglyphics".[40]

In the Roman Republic, 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 publicani) 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; 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.[41]

Islamic rulers imposed Zakat (a tax on

Muslims) and Jizya (a poll tax 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 numbers are not as readily
available. Government expenditures and
revenue in France during the 17th century
went from about 24.30 million livres in
1600–10 to about 126.86 million livres in
1650–59 to about 117.99 million livres in
1700–10 when government debt had
reached 1.6 billion livres. In 1780–89, it
reached 421.50 million livres.[42] Taxation
as a percentage of production of final
goods may have reached 15–20% during
the 17th century in places such as France,
the Netherlands, and Scandinavia. 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 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 in the years before the French
Revolution, 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.[43]

Taxation as a percentage of GDP 2016 was

45.9% in Denmark, 45.3% in France,
33.2% in the United Kingdom, 26% in the
United States, and among all OECD
members an average of 34.3%.[44][45]

Forms

In monetary economies prior to fiat

banking, a critical form of taxation was
seigniorage, the tax on the creation of
money.

Other obsolete forms of taxation include:

Scutage, 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, a tax on feudal dependents.
Tithe, 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, 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, the principle of assigning
the responsibility for tax revenue
collection to private citizens or groups.
Socage, a feudal tax system based on
land rent.
 Burgage, 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 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 €3.7 billion to
collect the income tax. In the United
States, the IRS has about 1,177 forms and
instructions,[46] 28.4111 megabytes of
Internal Revenue Code[47] which contained
3.8 million words as of 1 February
2010,[48] numerous tax regulations in the
Code of Federal Regulations,[49] and
supplementary material in the Internal
Revenue Bulletin.[50] 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

Public finance revenue from taxes

in % of GDP. For this data, 32% of the
variance of GDP per capita – adjusted
for purchasing power parity (PPP) – is
explained by revenue from social
security and the like.

In economic terms, taxation transfers

wealth 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."[51]

The side-effects of taxation (such as

economic distortions) and theories about
how best to tax are an important subject
in microeconomics. Taxation is almost
never a simple transfer of wealth.
Economic theories of taxation approach
the question of how to maximize
economic welfare 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.[52] Tax cuts for the
wealthiest top 10% had a small impact.[52]

Incidence

Law establishes from whom a tax is

collected. In many countries, taxes are
imposed on businesses (such as corporate
taxes or portions of payroll taxes).
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 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).[53]

Increased economic welfare

Government spending

The purpose of taxation is to provide for

government spending without inflation.
The provision of public goods such as
roads and other infrastructure, schools, a
social safety net, public health systems,
national defense, law enforcement, and a
courts system increases the economic
welfare 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 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 are
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,

after economist Arthur Pigou who wrote
about it in his 1920 book "The Economics
of Welfare".[54]

Pigovian taxes might target the

undesirable production of greenhouse
gases which cause climate change (namely
a carbon tax), polluting fuels (such as
petrol), water or air pollution (namely an
ecotax), goods which incur public
healthcare costs (such as alcohol or
tobacco), 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 so the free market
incorporates all costs 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, even when the tax
revenue is not redistributed from higher-
income individuals to lower-income
individuals.[55][56] However, in a highly
specific condition, progressive taxation
increases economic inequality when
lower-income individuals consume goods
and services produced by higher-income
individuals, who in turn consume only
from other higher-income individuals
(trickle-up effect).[57]

Reduced economic welfare

Most taxes (see below) have side effects
that reduce economic welfare, either by
mandating unproductive labor
(compliance costs) or by creating
distortions to economic incentives
(deadweight loss and perverse incentives).

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 proposals).

Deadweight costs

Diagram illustrating deadweight costs of taxes

In the absence of negative externalities,

the introduction of taxes into a market
reduces economic efficiency by causing
deadweight loss. In a competitive market,
the price of a particular economic good
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 individuals or
businesses involved are less well off than
before the tax. The tax burden and the
amount of deadweight cost is dependent
on the elasticity of supply and demand for
the good taxed.
Most taxes—including income tax and
sales tax—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 incentives. Such taxes
include the land value tax,[58] 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
such as a poll tax (head tax) which is paid
by all adults regardless of their choices.
Arguably a windfall profits tax 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.[59]

Perverse incentives

Complexity of the tax code in developed

economies offers perverse tax incentives.
The more details of tax policy there are,
the more opportunities for legal tax
avoidance and illegal tax evasion. 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
incentives also occur because of non-
taxable 'hidden' transactions; for instance,
a sale from one company to another
might be liable for sales tax, 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 which disregards
intermediate transactions.

In developing countries

Following Nicolas Kaldor's research, public

finance in developing countries is strongly
tied to state capacity and financial
development. As state capacity develops,
states not only increase the level of
taxation but also the pattern of taxation.
With larger tax bases and the diminishing
importance of trading tax, income tax
gains more importance.[60] 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.[61] Taxation is constrained by the
fiscal and legal capacities of a country.[61]
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.[62]

Researchers for EPS PEAKS[63] 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
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.

They state that taxes and tax relief have

also been used as a tool for behavioral
change, to influence investment decisions,
labor supply, 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,[64] 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[63] found tax revenue as a

percentage of GDP varying greatly around
a global average of 19%.[65] 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 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.[66]

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) or
relatively efficient tax administration (e.g.
Kenya, Brazil) whereas some middle-
income countries have lower tax-to-GDP
ratios (e.g. Malaysia) 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 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.[67]

One indicator of the taxpaying experience

was captured in the "Doing Business"
survey,[68] 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 ranking first, followed by
Qatar and Saudi Arabia, most likely
reflecting low tax regimes in those
countries. Countries in Sub-Saharan Africa
are among the "hardest" to pay with the
Central African Republic, Republic of
Congo, Guinea and Chad 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:[63]
Trade liberalization has led to a decline
in trade taxes as a share of total
revenues and GDP.[63][69]
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.[69] By strengthening revenue
management, there are huge
opportunities for investment for
development and growth.[63][70]
Developing countries have an informal
sector representing an average of
around 40%, perhaps up to 60% in
some.[71] 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.[63][72]
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.[63][72]
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.[63][73]
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).[63] For example, even
though the Government of Armenia
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.[74] Support
towards the IT industry and tax
incentives were established in the 2000s
in Armenia, and this example showcases
that such policies are not the guarantee
of rapid economic growth.[75]
In low-income countries, compliance
costs are high, they are lengthy
processes, frequent tax payments,
bribes and corruption.[63][72][76]
Administrations are often under-
resourced, resources are not 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).[63]
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.[63]
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.[63][77]
Fragile states are less able to expand tax
revenue as a percentage of GDP and
any gains are more difficult to
sustain.[78] Tax administration tends to
collapse if conflict reduces state-
controlled territory or reduces
productivity.[79] As economies are
rebuilt after conflicts, there can be good
progress in developing effective tax
systems. Liberia expanded from 10.6%
of GDP in 2003 to 21.3% in 2011.
Mozambique increased from 10.5% of
 GDP in 1994 to around 17.7% in
2011.[63][80]

Summary

Aid interventions in revenue can support

revenue mobilization for growth, improve
tax system design and administrative
effectiveness, and strengthen governance
and compliance.[63] 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.[63]

Views

Support
According to most political
Every tax,
philosophies, taxes are however,
justified as they fund is, to the
activities that are necessary person
and beneficial to society. who pays

Additionally, progressive it, a

badge,
taxation can be used to
not of
reduce economic inequality
slavery,
in a society. According to this but of
view, taxation in modern liberty. –
nation-states benefit the Adam
majority of the population Smith
and social development.[82] A (1776),
Wealth of
common presentation of this
Nations[81]
view, paraphrasing various
statements by Oliver
Wendell Holmes Jr. is "Taxes are the price
of civilization".[83]

It can also be argued that in a democracy,

because the government is the party
performing the act of imposing taxes,
society as a whole decides how the tax
system should be organized.[84] The
American Revolution's "No taxation
without representation" slogan implied
this view. For traditional conservatives, 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 of public finance, "An old tax is a
good tax".[85] 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'."[86]
Social democrats generally favor higher
levels of taxation to fund public provision
of a wide range of services such as
universal health care and education, as
well as the provision of a range of welfare
benefits.[87] As argued by Anthony
Crosland and others, the capacity to tax
income from capital is a central element
of the social democratic case for a mixed
economy as against Marxist arguments for
comprehensive public ownership of
capital.[88] American libertarians
recommend a minimal level of taxation in
order to maximize the protection of
liberty.

Compulsory taxation of individuals, such

as income tax, is often justified on
grounds including territorial sovereignty,
and the social contract. 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 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.[89] Georgist
economists argue that all of the economic
rent 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, some
political philosophies view taxation as
theft, extortion, slavery, as a violation of
property rights, or tyranny, accusing the
government of levying taxes via force and
coercive means.[90] Objectivists, anarcho-
capitalists, and right-wing libertarians see
taxation as government aggression
through the lens of the non-aggression
principle. 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, "society as
a whole" should not make such decisions,
due to methodological individualism.[91]
Libertarian opponents of taxation claim
that governmental protection, such as
police and defense forces might be
replaced by market alternatives such as
private defense agencies, arbitration
agencies or voluntary contributions.[92]

Murray Rothbard 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."[93][94]

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.[95]

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.[96][97] 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.[98] While the morality
of taxation is sometimes questioned, most
arguments about taxation revolve around
the degree and method of taxation and
associated government spending, 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 decisions would
integrate their partial knowledge.[99] 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 demonstrate their preferences would
help ensure that the government succeeds
at efficiently producing the public goods
that taxpayers truly value.[100] 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 particular the value of
land, for both reasons of economic
efficiency as well as morality. The
efficiency of using economic rent for
taxation is (as economists
agree[101][102][103]) 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.[104] Its morality is based on the
Geoist premise that private property is
justified for products of labor but not for
land and natural resources.[105]

Economist and social reformer Henry

George opposed sales taxes and
protective tariffs for their negative impact
on trade.[106] He also believed in the right
of each person to the fruits of their own
labor and productive investment.
Therefore, income from paid labor and
proper 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 even theft. George stated there
should be one single tax: the Land Value
Tax, which is considered both efficient and
moral.[105] Demand for specific land is
dependent on nature, but even more so
on the presence of communities, trade,
and government infrastructure,
particularly in urban environments.
Therefore, the economic rent 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.[105] Joseph Stiglitz's
Henry George Theorem predicts its
sufficiency for financing public goods
because those raise land value.[107]

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 proviso that
there must be enough other natural
resources of the same quality available to
others.[108] 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.[109] 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 but rather a
'predistribution' or simply a correct
distribution of the commons.[110]

Modern geoists note that 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 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.[111][112]

Theories

Laffer curve

In economics, 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%.[113]

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.
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.[114]

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
marginal rate and the 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 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

Black market
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
Shadow economy
Tax competition
Tax exporting
Tax haven
Tax resistance
Tax revenue
Tax shelter
Taxpayer receipt

By country or region

List of countries by tax rates

 List of countries by tax revenue as
percentage of GDP
Revenue service
Category:Taxation by country

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Further reading
My taxes go where? How countries
spend your money (https://www.bbc.co
m/capital/story/20150216-my-taxes-go-
where?ocid=global_bbccom_email_1902
2015_capital) (17 February 2015), The
BBC
Minarik, Joseph J. (2008). "Taxation" (htt
p://www.econlib.org/library/Enc/Taxatio
n.html) . In David R. Henderson (ed.).
Concise Encyclopedia of Economics
(2nd ed.). Library of Economics and
Liberty. ISBN 978-0865976658.
OCLC 237794267 (https://www.worldca
t.org/oclc/237794267) .
 Genschel, Philipp; Seelkopf, Laura, eds.
(2022). Global Taxation: How Modern
Taxes Conquered the World (https://oxf
ord.universitypressscholarship.com/vie
w/10.1093/oso/9780192897572.001.00
01/oso-9780192897572?) . Oxford
University Press.
Seelkopf, L., Bubek, M., Eihmanis, E. et
al. The rise of modern taxation: A new
comprehensive dataset of tax
introductions worldwide. Rev Int Organ
(2019).

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