Tax

A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax compliance refers to policy actions and individual behavior 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. The first known taxation occurred in Ancient Egypt around 3000–2800 BC. Taxes consist of direct or indirect taxes and may be paid in money or as labor equivalent.
All countries have a tax system in place 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 yearly income amounts. Most countries charge a tax on an individual's income and corporate income. Countries or sub-units often also impose wealth taxes, inheritance taxes, gift taxes, property taxes, sales taxes, use taxes, environmental taxes, payroll taxes, duties, or tariffs. It is also possible to levy a tax on tax, as with a gross receipts tax.
In economic terms, taxation transfers wealth from households or businesses to the government. This affects economic growth and welfare, which can be increased or decreased. Consequently, taxation is a highly debated topic by some, as although taxation is deemed necessary by consensus for society to function and grow in an orderly and equitable manner through the government provision of public goods and public services, others such as libertarians 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 the most viable option to operate the government, 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 companies 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 corporate income. These tax havens attract capital from abroad while resulting in loss of tax revenues within other non-haven countries.

Overview

Legal and economic definitions of taxes differ, such that multiple 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, through voluntary gifts, by imposing penalties, 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 in the United States, His Majesty's Revenue and Customs in the United Kingdom, the Canada Revenue Agency or the Australian Taxation Office. Certain taxes are also collected by subnational authorities, for example council tax, Local Body Tax, or rates. When taxes are not fully paid, the state may impose civil penalties or criminal penalties on the non-paying entity or individual.

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 multiple functions. Some of these include expenditures on economic infrastructure, 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, pensions, subsidies, and other public services not already mentioned above.
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.

Types

The Organisation for Economic Co-operation and Development 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, generally followed below. In addition, a number of countries impose taxes on the import of goods.

Taxes on income, profits and capital gains

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 by income level. Multiple 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 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 a number of 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

Many countries provide publicly funded retirement or healthcare systems. In connection with these systems, the country typically requires employers or employees to make compulsory payments. 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. 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 and across 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.

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. Liabilities are typically deducted, hence it is sometimes called a net wealth tax.