A tax (from the
Latin taxo) is a mandatory financial charge or some
other type of levy imposed upon a taxpayer (an individual or other
legal entity) by a governmental organization in order to fund various
public expenditures. A failure to pay, or evasion of or resistance
to taxation, is punishable by law. Taxes consist of direct or indirect
taxes and may be paid in money or as its labour equivalent. Most
countries have a tax system in place to pay for public/common/agreed
national needs and government functions: some levy a flat percentage
rate of taxation on personal annual income, some on a scale based on
annual income amounts, and some countries impose almost no taxation at
all, or a very low tax rate for a certain area of taxation. Some
countries charge a tax both on corporate income and dividends; this is
often referred to as double taxation as the individual shareholder(s)
receiving this payment from the company will also be levied some tax
on that personal income.
2 Purposes and effects
3.1.1 Income tax
3.1.2 Negative income
3.1.3 Capital gains
Social security contributions
3.3 Payroll or workforce
Wealth (net worth)
3.5 Goods and services
3.5.1 Value added
3.7.1 License fees
3.8 Descriptive labels
3.8.1 Ad valorem and per unit
3.8.4 Proportional, progressive, regressive, and lump-sum
3.8.5 Direct and indirect
3.9 Fees and effective
5 Economic effects
5.2 Increased economic welfare
5.2.3 Reduced inequality
5.3 Reduced economic welfare
5.3.1 Cost of compliance
5.3.2 Deadweight costs
5.3.3 Perverse incentives
5.3.4 Reduced production
6 In developing countries
6.1 Key facts
Tax administration in developing countries
7.3 Socialist view
8.1 Laffer curve
9 See also
9.1 By country or region
11 Further reading
12 External links
Pieter Brueghel the Younger, The tax collector's office, 1640
The legal definition and the economical definition of taxes differ in
that economists do not regard many transfers to governments as taxes.
For example, some transfers to the public sector are comparable to
prices. Examples include tuition at public universities and fees for
utilities provided by local governments. Governments also obtain
resources by "creating" money and coins (for example, by printing
bills and by minting coins), through voluntary gifts (for example,
contributions to public universities and museums), by imposing
penalties (such as traffic fines), by borrowing, and by confiscating
wealth. 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 benefit 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 Canada Revenue Agency, the Internal
Revenue Service (IRS) in the United States, Her Majesty's Revenue and
Customs (HMRC) in the
United Kingdom or Federal
Tax Service in Russia.
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.
Purposes and effects
The levying of taxes aims to raise revenue to fund governing and/or to
alter prices in order to affect demand. States and their functional
equivalents throughout history have used money provided by taxation to
carry out many functions. Some of these include expenditures on
economic infrastructure (roads, public transportation, sanitation,
legal systems, public safety, education, health-care systems),
military, scientific research, 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 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, 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.
A tax effectively changes relative prices of products. Therefore,
most[quantify] economists, especially neoclassical economists, argue
that taxation creates market distortion and results in economic
inefficiency unless there are (positive or negative) externalities
associated with the activities that are taxed that need to be
internalized to reach an efficient market outcome. They have
therefore sought to identify the kind of tax system that would
minimize this distortion. Recent[when?] scholarship suggests that
United States of America, 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.
Governments use different kinds of taxes and vary the tax rates. They
do this in order to distribute the tax burden among individuals or
classes of the population involved in taxable activities, such as the
business sector, or to redistribute resources between individuals or
classes in the population. Historically,[when?] taxes on the poor
supported the nobility; modern social-security systems aim to support
the poor, the disabled, or the retired by taxes on those who are still
working. In addition, taxes are applied to fund foreign aid and
military ventures, to influence the macroeconomic performance of the
economy (a government's strategy for doing this is called its fiscal
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 state's tax system often[quantify] reflects its communal values and
the values of those in current political power. To create a system of
taxation, a state must make choices regarding the distribution of the
tax burden—who will pay taxes and how much they will pay—and how
the taxes collected will be spent. In democratic nations where the
public elects those in charge of establishing or administering the tax
system, these choices reflect the type of community that the public
wishes to create. In countries where the public does not have a
significant amount of influence over the system of taxation, that
system may reflect more closely the values of those in power.
All large 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. Finance ministers often dislike this practice, since it
reduces their freedom of action. Some economic theorists regard
hypothecation as intellectually dishonest since, in reality, money is
fungible. 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,
though 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. Some (libertarians, for
example) portray most or all forms of taxes as immoral due to their
involuntary (and therefore eventually coercive/violent) nature. The
most extreme anti-tax view, anarcho-capitalism, holds that all social
services should be voluntarily bought by the person(s) using them.
Organisation for Economic Co-operation and Development
Organisation for Economic Co-operation and Development (OECD)
publishes an analysis of tax systems of member countries. As part of
OECD developed a definition and system of
classification of internal taxes, generally followed below. In
addition, many countries impose taxes (tariffs) on the import of
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.
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
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
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
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
Social security contributions
Many countries provide publicly funded retirement or health care
systems. In connection with these systems, the country typically
requires employers and/or employees to make compulsory payments.
These payments are often computed by reference to wages or earnings
Tax rates are generally fixed, but a different
rate may be imposed on employers than on employees. Some systems
provide an upper limit on earnings subject to the tax. A few systems
provide that the tax is payable only on wages above a particular
amount. Such upper or lower limits may apply for retirement but not
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.
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
Payroll or workforce
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
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.
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 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 man-made 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 losses the way other taxes do.
When real estate is held by a higher government unit or some other
entity not subject to taxation by the local government, the taxing
authority may receive a payment in lieu of taxes 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. Any otherwise non-exempt object can lose its
exemption if regularly kept outside the household. Thus, tax
collectors often monitor newspaper articles for stories about wealthy
people who have lent art to museums for public display, because the
artworks have then become subject to personal property tax. If an
artwork had to be sent to another state for some touch-ups, it may
have become subject to personal property tax in that state as
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
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.
Main article: Transfer tax
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
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 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".
Goods and services
Main article: Value added tax
A value added tax (VAT), also known as Goods and Services
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
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.[citation
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 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 large amount of tourism or inter-state
travel that occurs within their borders, allowing the state to benefit
from taxes from people the state would otherwise not tax. In this way,
the state is able to reduce the tax burden on its citizens. The U.S.
states that do not levy a state income tax are Alaska, Tennessee,
Florida, Nevada, South Dakota, Texas, Washington state, and
Wyoming. Additionally, New Hampshire and Tennessee levy state income
taxes only on dividends 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
In the United States, there is a growing movement for the
replacement of all federal payroll and income taxes (both corporate
and personal) with a national retail sales tax and monthly tax rebate
to households of citizens and legal resident aliens. The tax proposal
is named FairTax. In Canada, the federal sales tax is called the Goods
and Services tax (GST) and now stands at 5%. The provinces of British
Columbia, Saskatchewan, Manitoba, and Prince Edward Island also have a
provincial sales tax [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
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.
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).
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
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.
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
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.
Occupational taxes or license fees may be imposed on businesses or
individuals engaged in certain businesses. Many jurisdictions impose a
tax on vehicles.
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. 30:11–16) 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. 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.[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
Some types of taxes have been proposed but not actually adopted in any
major jurisdiction. These include:
Financial transaction taxes including currency transaction taxes
Ad valorem and per unit
Ad valorem tax
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.
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.
See also: Ecotax, Gas Guzzler Tax, Polluter pays principle, and
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
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 higher percentage of their
income than those with higher income and therefore the effect of the
tax reduces as a function of income.
The terms can also be used to apply meaning to the taxation of select
consumption, such as a tax on luxury goods and the exemption of basic
necessities may be described as having progressive effects as it
increases a tax burden on high end consumption and decreases a tax
burden on low end consumption.
Direct and indirect
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." 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. 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
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. Such fees
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
Ruling fees charged by governmental agencies to make determinations in
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
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.
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 Egypt
First Dynasty of Egypt of the
Old Kingdom of
Egypt. The earliest and most widespread form of taxation was the
corvée and tithe. The corvée was forced labour provided to the state
by peasants too poor to pay other forms of taxation (labour in ancient
Egyptian is a synonym for taxes). Records from the time document
Pharaoh would conduct a biennial tour of the kingdom,
collecting tithes from the people. Other records are granary receipts
on limestone flakes and papyrus. Early taxation is also described
in the Bible. 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". Joseph was telling the people of
Egypt how to divide their
crop, providing a portion to the Pharaoh. A share (20%) of the crop
was the tax (in this case, a special rather than an ordinary tax, as
it was gathered against an expected famine).
In the Persian Empire, a regulated and sustainable tax system was
Darius I the Great
Darius I the Great in 500 BC; 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.
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. This tax was exclusively levied
on Satrapies based on their lands, productive capacity and tribute
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".
Islamic rulers imposed jizya (a poll tax on conquered non-Muslims). In
India this practice began in the 11th century.
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
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
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 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.
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
OECD members an average of 34.3%..
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, 28.4111 megabytes of Internal
Revenue Code which contained 3.8 million words as of 1 February
2010, numerous tax regulations in the Code of Federal
Regulations, and suppmentary material in the Internal Revenue
Bulletin. Today, governments in more advanced economies (i.e.
Europe and North America) tend to rely more on direct taxes, while
developing economies (i.e.
India and several African countries) rely
more on indirect taxes.
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." Smith, Adam (2015). The
Wealth of Nations: A
Translation into Modern English. Industrial Systems Research.
p. 429. ISBN 978-0-906321-70-6. </ref>
The side-effects of taxation (such as economic distortions) and
theories about how best to tax are an important subject in
Taxation is almost never a simple transfer of
wealth. Economic theories of taxation approach the question of how to
maximize economic welfare through taxation.
See also: Effect of taxes and subsidies on price
Law establishes from whom a tax is collected. In many countries, taxes
are imposed on business (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 on 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 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 for a small increase in price. Therefore, in order
to stabilize sales, the seller absorbs more of the additional tax
burden. For example, the seller might drop the price of the product to
$0.70 so that, after adding in the tax, the buyer pays a total of
$1.20, or $0.20 more than he did before the $0.50 tax was imposed. In
this example, the buyer has paid $0.20 of the $0.50 tax (in the form
of a post-tax price) and the seller has paid the remaining $0.30 (in
the form of a lower pre-tax price).
Increased economic welfare
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, health care, national
defense, law enforcement, and a courts system increases the economic
welfare of society if the benefit outweighs the costs involved.
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 increase overall welfare as well as raising revenue.
This type of tax is called a Pigovian tax, after economist Arthur
Possible Pigovian taxes include those on polluting fuels (like
petrol), taxes on goods which incur public healthcare costs (such as
alcohol or tobacco), and charges for existing 'free' public goods
(like congestion charging) are another possibility.
Progressive taxation may reduce economic inequality. This effect
occurs even when the tax revenue isn't redistributed.
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
FairTax or OneTax, and some flat tax proposals).
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, where
the tax is on a good in completely inelastic supply, 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.
Complexity of the tax code in developed economies offer 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 which avoid providing loopholes. Sales tax,
for instance, can be replaced with a value added tax which disregards
If a tax is paid on outsourced services that is not also charged on
services performed for oneself, then it may be cheaper to perform the
services oneself than to pay someone else—even considering losses in
For example, suppose jobs A and B are both valued at $1 on the market.
And suppose that because of your unique abilities, you can do job A
twice over (100% extra output) in the same effort as it would take you
to do job B. But job B is the one that you need done right now. Under
perfect division of labor, you would do job A and somebody else would
do job B. Your unique abilities would always be rewarded.
Income taxation has the worst effect on division of labor in the form
of barter. Suppose that the person doing job B is actually interested
in having job A done for him. Now suppose you could amazingly do job A
four times over, selling half your work on the market for cash just to
pay your tax bill. The other half of the work you do for somebody who
does job B twice over but he has to sell off half to pay his tax bill.
You're left with one unit of job B, but only if you were 400% as
productive doing job A! In this case of 50% tax on barter income,
anything less than 400% productivity will cause the division of labor
In summary, depending on the situation a 50% tax rate can cause the
division of labor to fail even where productivity gains of up to 300%
would have resulted. Even a mere 30% tax rate can negate the advantage
of a 100% productivity gain.
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 the increase
of larger tax bases and the diminish of the importance of trading tax,
while income tax gains more importance. According to Tilly's
argument, state capacity evolves as response to the emergence of war.
War is an incentive for states to raise tax and strengthen states
capacity. Historically, many taxation breakthroughs took place during
the wartime. The introduction of income tax in Britain was due to the
Napoleonic War in 1798. US first introduce income tax during Civil
Taxation is constrained by the fiscal and legal capacities of
a country. Fiscal and legal capacities also complement each other.
A well-designed tax system can minimize efficiency loss and boost
economic growth. With better compliance and better support to
financial institutions and individual property, the government will be
able to collect more tax. Although wealthier countries have higher tax
revenue, economic growth does not always translate to higher tax
revenue. For example, in India, increases in exemptions leads to the
stagnation of income tax revenue at around 0.5% of GDP since 1986.
Researchers for EPS PEAKS  stated that the core purpose of
taxation is revenue mobilisation, providing resources for National
Budgets, and forming an important part of macroeconomic management.
They said economic theory has focused on the need to 'optimise' 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 reliefs have also been used as a tool
for behavioural change, to influence investment decisions, labour
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, with these more likely to
be non-resource-rich countries. This suggests countries making most
progress replacing aid with tax revenue tend to be those benefiting
disproportionately from rising prices of energy and commodities.
The author  found tax revenue as a percentage of GDP varying
greatly around a global average of 19%. This data also indicates
countries with higher GDP tend to have higher tax to GDP ratios,
demonstrating that higher income is associated with more than
proportionately higher tax revenue. On average, high-income countries
have tax revenue as a percentage of GDP of around 22%, compared to 18%
in middle-income countries and 14% in low-income countries.
In high-income countries, the highest tax-to-GDP ratio is in Denmark
at 47% and the lowest is in Kuwait at 0.8%, reflecting low taxes from
strong oil revenues. Long-term average performance of tax revenue as a
share of GDP in low-income countries has been largely stagnant,
although most have shown some improvement in more recent years. On
average, resource-rich countries have made the most progress, rising
from 10% in the mid-1990s to around 17% in 2008. Non resource rich
countries made some progress, with average tax revenues increasing
from 10% to 15% over the same period.
Many low-income countries have a tax-to-GDP ratio of less than 15%
which could be due to low tax potential, 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.
One indicator of the taxpaying experience was captured in the 'Doing
Business' survey, which compares the total tax rate, time spent
complying with tax procedures and the number of payments required
through the year, across 176 countries. The 'easiest' countries in
which to pay taxes are located in the Middle East with the
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
Chad in the bottom 5, reflecting higher total tax
rates and a greater administrative burden to comply.
The below facts were compiled by EPS PEAKS researchers:
Trade liberalisation has led to a decline in trade taxes as a share of
total revenues and GDP.
Resource-rich countries tend to collect more revenue as a share of
GDP, but this is more volatile. Sub-Saharan African countries that are
resource rich have performed better tax collecting than
non-resource-rich countries, but revenues are more volatile from year
to year. By strengthening revenue management, there are huge
opportunities for investment for development and growth.
Developing countries have an informal sector representing an average
of around 40%, perhaps up to 60% in some. Informal sectors feature
many small informal traders who may not be efficient in bringing into
the tax net, since the cost of collection is high and revenue
potential limited (although there are broader governance benefits).
There is also an issue of non-compliant companies who are 'hard to
tax', evading taxes and should be brought into the tax net.
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 minimising their tax liability, in some cases abusing a
lack of capacity in revenue authorities, sometimes through transfer
pricing abuse.[further explanation needed]
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
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
In low-income countries, compliance costs are high, they are lengthy
processes, frequent tax payments, bribes and corruption.
Administrations are often under-resourced, resources aren't
effectively targeted on areas of greatest impact, and mid-level
management is weak. Coordination between domestic and customs is weak,
which is especially important for VAT. Weak administration, governance
and corruption tend to be associated with low revenue collections
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
Of all regions, Africa has the highest total tax rates borne by
business at 57.4% of profit on average, but has reduced the most since
2004, from 70%, partly due to introducing VAT and this is likely to
have a beneficial effect on attracting investment.
Fragile states are less able to expand tax revenue as a percentage of
GDP and any gains are more difficult to sustain. Tax
administration tends to collapse if conflict reduces state controlled
territory or reduces productivity. As economies are rebuilt after
conflicts, there can be good progress in developing effective tax
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
Tax administration in developing countries
Many developing countries have attempted to improve their tax
collection capacity by streamlining business processes and introducing
information and communication technologies.
Aid interventions in revenue can support revenue mobilisation for
growth, improve tax system design and administrative effectiveness,
and strengthen governance and compliance. The author of the
Economics Topic Guide found that the best aid modalities for revenue
depend on country circumstances, but should aim to align with
government interests and facilitate effective planning and
implementation of activities under an 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
Main article: Social contract
Every tax, however, is, to the person who pays it, a badge, not of
slavery, but of liberty. –
Adam Smith (1776),
Wealth of Nations
According to most political philosophies, taxes are justified as they
fund activities that are necessary and beneficial to society.
Additionally, progressive taxation can be used to reduce economic
inequality in a society. According to this view, taxation in modern
nation-states benefit the majority of the population and social
development. A common presentation of this view, paraphrasing
various statements by
Oliver Wendell Holmes, Jr.
Oliver Wendell Holmes, Jr. is "Taxes are the
price of civilization".
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. 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".
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
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. As argued by Tony
Crosland and others, the capacity to tax income from capital is a
central element of the social democratic case for a mixed economy as
Marxist arguments for comprehensive public ownership of
capital. Many 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 use of publicly established
and maintained economic infrastructure, and that businesses are in
effect charged for this use.
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.
Tax noncompliance and
Taxation as theft
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, (or as slavery, or as a violation
of property rights), or tyranny, accusing the government of levying
taxes via force and coercive means. Voluntaryists, individualist
anarchists, Objectivists, anarcho-capitalists, and libertarians see
taxation as government aggression (see 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. 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. Walter
E. Williams, professor of economics at George Mason University, stated
Government income redistribution programs produce the same result as
theft. In fact, that's what a thief does; he redistributes income. The
difference between government and thievery is mostly a matter of
Karl Marx assumed that taxation would be unnecessary after the advent
of communism and looked forward to the "withering away of the state".
In socialist economies such as that of China, taxation played a minor
role, since most government income was derived from the ownership of
enterprises, and it was argued by some that monetary taxation was not
necessary. While the morality of taxation is sometimes questioned,
most arguments about taxation revolve around the degree and method of
taxation and associated government spending, not taxation itself.
This section may lend undue weight to certain ideas, incidents, or
controversies. Please help to create a more neutral presentation, with
details put in their proper context. Discuss and resolve this issue
before removing this message. (November 2012)
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. 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. 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
Main articles: Georgism, Geolibertarianism, and
Land value tax
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) due to the fact that such taxation cannot be passed
on and does not create any dead-weight loss, and that it removes the
incentive to speculate on land. Its morality is based on the
Geoist premise that private property is justified for products of
labour but not for land and natural resources.
Economist and social reformer
Henry George opposed sales taxes and
protective tariffs for their negative impact on trade. He also
believed in the right of each person to the fruits of their own labour
and productive investment. Therefore, income from labour 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.
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. Joseph Stiglitz's
Henry George Theorem predicts
its sufficiency for financing public goods because those raise land
John Locke stated that whenever labour 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.
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. This means that
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.
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
Main article: Theory of taxation
Main article: 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 which 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
Main article: Optimal tax
Most governments take revenue which exceeds that which can be provided
by non-distortionary taxes or through taxes which 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 is 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.
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
(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%.
Advance tax ruling
Excess burden of taxation
Government budget balance
List of taxes
By country or region
List of countries by tax rates
List of countries by tax revenue as percentage of GDP
Taxation by country
^ Charles E. McLure, Jr. "Taxation". Britannica. Retrieved 3 March
^ See for example 26 U.S.C. § 7203 in the case of U.S.
^ a b Simkovic, Michael (2015). "The Knowledge Tax". University of
Chicago Law Review. SSRN 2551567 .
^ Beardsley, Ruml. "Taxes for Revenue are Obsolete" (PDF). American
Affairs. VIII (1). Archived from the original (PDF) on
^ a b c d e f g h i Simkovic, Michael. "The Knowledge Tax". University
of Chicago Law Review. SSRN 2551567 .
^ "Definition of Taxes (Note by the Chairman), 1996" (PDF). Retrieved
22 January 2013.
^ "Social Security Programs Throughout the World on the U.S. Social
Security website for links to individual country program
descriptions". Ssa.gov. Retrieved 22 January 2013.
^ By contrast, some countries, such as New Zealand, finance the
programs through other taxes.
^ See, e.g.,
India Social Security overview Archived 23 June 2011 at
the Wayback Machine.
^ See, e.g.,
United States Federal
^ Taxes on the net wealth of corporations are often referred to as
^ McCluskey, William J.; Franzsen, Riël C. D. (2005). Land Value
Taxation: An Applied Analysis. Ashgate Publishing, Ltd. p. 4.
^ a b c d "TPC
Tax Topics Federal Budget". Taxpolicycenter.org.
Retrieved 27 March 2009.
^ "26 USC 877". Law.cornell.edu. Retrieved 22 January 2013.
^ Although Texas has no individual income tax, the state does impose a
franchise tax—soon to be replaced by a margin tax—on business
activity that, while not denominated as an income tax, is in substance
a kind of income tax.
^ "Economist.com". Economist.com. 12 February 2009. Retrieved 27 March
^ Quick, John; Garran, Robert (1 January 1901). The Annotated
Constitution of the Australian Commonwealth. Australia: Angus &
Robertson. p. 837.
Tax Facts Listing". Taxpolicycenter.org. Retrieved 27
^ "Internal Revenue Service". webcache.googleusercontent.com. Archived
from the original on 16 August 2007. Retrieved 27 March 2009.
^ "luxury tax —
Britannica Online Encyclopedia".
Concise.britannica.com. Retrieved 27 March 2009.
^ Schaefer, Jeffrey M. (1 January 1969). "Clothing Exemptions and
Tax Regressivity". The American Economic Review. 59 (4):
596–99. JSTOR 1813222.
^ Atkinson, A. B. (1977). "Optimal
Taxation and the Direct Versus
Tax Controversy". Can. J. Econ. 590: 592.
^ "What is Difference Between Direct and Indirect Tax?". Investor
Guide. Retrieved 28 October 2011.
^ "Taxes versus fees". Ncsu.edu. 2 May 2007. Archived from the
original on 8 October 2012. Retrieved 22 January 2013.
^ Some economists[who?] hold that the inflation tax affects the lower
and middle classes more than the rich, as they hold a larger fraction
of their income in cash, they are much less likely to receive the
newly created monies before the market has adjusted with inflated
prices, and more often have fixed incomes, wages or pensions. Some
argue that inflation is a regressive consumption tax. Also see Andrés
Erosa and Gustavo Ventura, "On inflation as a regressive consumption
tax Archived 10 September 2008 at the Wayback Machine.". Some[who?]
claim there are systemic effects of an expansionary monetary policy,
which are also definitively taxing, imposing a financial charge on
some as a result of the policy. Because the effects of monetary
expansion or counterfeiting are never uniform over an entire economy,
the policy influences capital transfers in the market, creating
economic bubbles where the new monies are first introduced. Economic
bubbles increase market instability, and therefore increase investment
risk, creating the conditions common to a recession. This particular
tax can be understood to be levied on future generations that would
have benefited from economic growth, and it has a 100% transfer cost
(so long as people are not acting against their interests, increased
uncertainty benefits no-one). One example of a strong supporter of
this tax was the former
Federal Reserve chair Beardsley Ruml.
^ See, e.g., Reinhart, Carmen M. and Rogoff, Kenneth S., This Time is
Different. Princeton and Oxford: Princeton University Press, 2008 (p.
143), The Liquidation of
Government Debt, Reinhart, Carmen M. &
Sbrancia, M. Belen, p. 19, Giovannini, Alberto; de Melo, Martha
Government Revenue from Financial Repression". The American
Economic Review. 83 (4): 953–63.
^ Taxes in the Ancient World, University of Pennsylvania Almanac, Vol.
48, No. 28, 2 April 2002
^ David F. Burg (2004). A World History of
Tax Rebellions. Taylor
& Francis. pp. vi–viii. ISBN 9780415924986.
^ Olmert, Michael (1996). Milton's Teeth and Ovid's Umbrella:
Curiouser & Curiouser Adventures in History, p. 41. Simon &
Schuster, New York. ISBN 0-684-80164-7.
^ "The Bible".
^ "Darius I (Darius the Great), King of
Persia (from 521 BC)".
1902encyclopedia.com. Retrieved 22 January 2013.
^ "History Of Iran (Persia)". Historyworld.net. Retrieved 22 January
^ The Theocratic Ideology of the Chronicler – by Jonathan E. Dyck
– p. 96 – Brill, 1998
^ British Museum. "History of the World in 100 Objects:Rosetta Stone".
^ Hoffman, Phillipe and Kathryn Norberg (1994), Fiscal Crises,
Liberty, and Representative Government, 1450–1789, p. 238.
^ Hoffman, Phillipe and Kathryn Norberg (1994), Fiscal Crises,
Liberty, and Representative Government, 1450–1789, p. 300 .
OECD Revenue Statistics: 1965-2016".
^ Tax/Spending Burden, Forbes magazine, 05-24-04
^ "IRS pick list". IRS. Retrieved 21 January 2013.
^ "title 26 US Code". US House of Reperesentitives. Retrieved 21
^ Caron, Paul L. (28 October 2011). "How Many Words Are in the
Internal Revenue Code?". Retrieved 21 January 2013.
^ "26 CFR – Table Of Contents". Gpo.gov. 1 April 2012. Retrieved 22
^ "Internal Revenue Bulletin: 2012–23". Internal Revenue Service. 4
June 2012. Retrieved 7 June 2012.
^ Parkin, Michael (2006), Principles of Microeconomics, p. 134.
^ William J. McCluskey; Riël C. D. Franzsen (2005). Land Value
Taxation: An Applied Analysis. Ashgate. p. 73.
^ Avi-Yonah, Reuven S.; Slemrod, Joel B. (April 2002). "Why
Rich? Efficiency, Equity, and Progressive Taxation". The Yale Law
Journal. 111 (6): 1391–416. doi:10.2307/797614.
^ Johnsson, Richard. "
Taxation and Domestic Free Trade".
Ideas.repec.org. Retrieved 27 March 2009.
^ Corsi, Jerome, 2007. "The VAT: Menace to Free Trade", WorldNetDaily
Exclusive Commentary, WorldNetDaily, 3 February 2007
^ Johnsson, Richard, 2004. "
Taxation and Domestic Free Trade," Ratio
Working Papers 40, The Ratio Institute, revised 7 June 2004.
^ Stern, Nicolas; Burgess, Robin. "
Taxation and Development". Journal
of Economic Literature.
^ Besley, Timothy; Persson, Torsten. "The Origins of State Capacity:
Property Rights, Taxation, and Politics".
^ Besley, Timothy; Persson, Trosten. "The Origins of State Capacity:
Property Rights, Taxation, and Politics".
^ Piketty, Thomas; Qian, Nancy. "Income Inequality and Progressive
Taxation in China
Taxation in China and India, 1986–2015".
^ a b c d e f g h i j k l m n o p Hazel Granger (2013). "Economics
Taxation and Revenue". EPS PEAKS.
^ Africa Economic Outlook 2010, Part 2: Public Resource Mobilisation
and Aid in Africa, AfDB/
^ According to IMF data for 2010, from Revenue Data for IMF Member
Countries, as of 2011, (unpublished)
^ IMF FAD (2011), Revenue Mobilization in Developing Countries
^ IMF WP/05/112,
Tax Revenue and (or?)
Trade Liberalization, Thomas
Baunsgaard and Michael Keen
Business 2013', World Bank/IFC (2013)
^ a b Keen; Mansour (2010). "Revenue Mobilisation in Sub-Saharan
Africa: Challenges from Globalisation I –
Trade Reform". Development
Policy Review. 28 (5): 553–71.
^ See for example Paul Collier (2010), The Political Economy of
Natural Resources, social research Vol 77 : No 4 : Winter
^ Schneider, Buehn, and Montenegro (2010), Shadow Economies all over
the World: New Estimates for 162 Countries from 1999 to 2007.
^ a b c IMF, 2011, Revenue Mobilization in Developing Countries,
Fiscal Affairs Department
^ See Section 3 'International Taxation' e.g. Torvik, 2009 in
Commission on Capital Flight from Developing Countries, 2009: Tax
Havens and Development
Business 2013', World Bank/IFC 2013
^ Paying Taxes 2013: Total tax rate is a composite measure including
corporate income tax, employment taxes, social contributions, indirect
taxes, property taxes and smaller taxes e.g. environmental tax.
^ IMF Working Paper 108/12 (2012), Mobilizing Revenue in Sub-Saharan
Africa: Empirical Norms and Key Determinants
^ African Economic Outlook (2010)
^ IMF Revenue Data, 2011: Total
Tax Revenue as a percentage of GDP
^ Barreto, Ruben; Sinha, Rajib (2014-12-22). "Implementing a Tax
Administration System in the Kyrgyz Republic". Rochester, NY.
^ Smith, Adam (1776),
Wealth of Nations, Penn State Electronic
Classics edition, republished 2005, p. 704
^ Population and Social Integration Section (PSIS), United Nations
Social and Economic Commission for Asia and the Pacific
^ Eugene C. Gerhart (1998). Quote it Completely!: World Reference
Guide to More Than 5,500 Memorable Quotations from Law and Literature.
W.S. Hein. p. 1045. ISBN 978-1-57588-400-4.
^ Logue, Danielle (2009). "Moving policy forward: 'brain drain' as a
wicked problem". Globalisation, Societies & Education. 7 (1):
Tax History Project: The Depression and Reform: FDR's Search for
Tax Revision in N.Y. (Copyright, 2003,
Conservatives Have a Conservative
Tax Agenda?". Heritage.org.
Archived from the original on 22 May 2009. Retrieved 22 January
^ Ruiz del Portal, X. 2009. "A general principal–agent setting with
non-differentiable mechanisms: Some examples." Mathematical Social
Sciences 57, no. 2: 262–78. Academic Search Premier, EBSCOhost.
^ Chaturvedi, Skand (2009). Financial Management: Entailing Planning
for the Future. Global
India Publications. p. 77.
^ Van Der Graaf, Rieke, and Johannes J. M. Van Delden. 2009.
Clarifying appeals to dignity in medical ethics from an historical
perspective. Bioethics 23, no. 3: 151–60. Academic Search Premier,
^ For an overview of the classical liberal perspective on taxation see
Human Action Chapter II. Sec. 4. The Principle of Methodological
Individualism by Ludwig von Mises
^ Spencer Heath MacCallum (12 September 2007). "The Rule of Law
Without the State,". Ludwig Von Mises Institute. Retrieved 16 August
^ Williams, Walter E. (6 August 2008). "
American-style". WorldNetDaily. Retrieved 11 September 2008.
^ Li, Jinyan (1991).
Taxation in the People's Republic of China. New
York: Praeger. ISBN 0-275-93688-0.
^ Frey, Bruno S.; Torgler, Benno (2007). "
Tax morale and conditional
cooperation" (PDF). Journal of Comparative Economics. 35: 136–59.
doi:10.1016/j.jce.2006.10.006. Archived from the original (PDF) on 20
January 2013. Retrieved 3 January 2013.
^ "Do Earmarks Increase Giving to Government?" (PDF).
Cbees.utdallas.edu. Archived from the original (PDF) on 3 March 2013.
Retrieved 3 January 2013.
^ Adam Smith, The
Wealth of Nations Book V, Chapter 2, Part 2, Article
I: Taxes upon the Rent of Houses
^ McCluskey, William J.; Franzsen, Riël C. D. (2005). Land Value
Taxation: An Applied Analysis. Ashgate Publishing, Ltd. p. 4.
^ "Archived copy". Archived from the original on 29 March 2015.
^ William J. McCluskey; Riël C. D. Franzsen. "Land Value Taxation: An
Applied Analysis". Ashgate. p. 73.
^ a b c George, Henry (1879). Progress and Poverty: An Inquiry into
the Cause of Industrial Depressions and of Increase of Want with
Increase of Wealth.
^ George, Henry (1886). Protection or Free Trade.
^ Arnott, Richard J.; Joseph E. Stiglitz (Nov 1979). "Aggregate Land
Rents, Expenditure on Public Goods, and Optimal City Size". Quarterly
Journal of Economics. 93 (4): 471–500. doi:10.2307/1884466.
^ Locke, John. "5". 'Second Treatise of Government.
^ "What is LVT?". landvaluetax.org.
^ Kerr, Gavin (10 March 2015). "'Predistribution', property-owning
democracy and land value taxation'". 'Politics, philosophy and
^ Davies, Lindy. "The Science of Political Economy: What George "Left
Out"". politicaleconomy.org. Retrieved 16 June 2014.
^ Batt, H. William. "The Compatibility of
Ecological Economics". Retrieved 9 June 2014.
^ Fullerton, Don (2008). Laffer curve. The New Palgrave Dictionary of
Economics, Second Edition. Palgrave Macmillan. Retrieved 5 July 2011.
The mid-range for this elasticity is around 0.4, with a revenue peak
around 70 per cent.
^ "Libertarian & Conservative News". Words Of Liberty. Archived
from the original on 22 January 2013. Retrieved 22 January 2013.
Library resources about
Resources in your library
My taxes go where? How countries spend your money (17 February 2015),
Minarik, Joseph J. (2008). "Taxation". In
David R. Henderson
David R. Henderson (ed.).
Concise Encyclopedia of
Economics (2nd ed.). Library of
Liberty. ISBN 978-0865976658. OCLC 237794267. CS1
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