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Tax

A tax is an involuntary fee or, more precisely, "unrequited payment", paid by individuals or businesses to a government (central or local). Taxes may be paid in cash or kind (although payments in kind may not always be allowed or classified as taxes in all systems). The means of taxation, and the uses to which the funds raised through taxation should be put, are a matter of hot dispute in politics and economics, so discussions of taxation are frequently tendentious.

The field of economics that deals with taxation is public finance.

Table of contents

1 Purposes and effects of taxation 2 Tax rates 3 Progressive and regressive taxation 4 Direct and indirect taxation 5 Economics of Taxation 6 Types of Taxes 6.1 Income tax 6.2 Poll tax 6.3 Excises 6.3.1 Definition 6.3.2 Purposes and effects of excises 6.3.3 Sales tax 6.3.4 Tariffs 6.3.5 Value-added tax 6.4 Stamp duty 6.5 Property taxes 6.6 Capital gains tax 6.7 Corporation tax 7 A History of Taxation 7.8 Historical forms of taxation 8 See also 9 External links

Purposes and effects of taxation

• to support the operation of that government itself;
• to influence the macroeconomic performance of the economy (the government's strategy for doing this is called its fiscal policy);
• to carry out the functions of the government, such as national defence, and providing government services
• to redistribute resources between individuals or classes in the population. Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor by taxes on the rich.
• to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less attractive.

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. The practice is often disliked by finance ministers, since it reduces their freedom of action. Some economic theorists consider the concept to be intellectually dishonest since in reality money is fungible. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general fund.

Some economists, especially neo-classical economists argue that all taxation distorts the market and results in economic inefficiency. They have therefore sought to identify the kind of tax system that would minimise this distortion. A theory is that the most economically neutral tax is a tax on land. A government's primary duty is to maintain and defend title to land, and therefore (so the theory goes) it should collect most of its revenues for this unique service. Since governments also resolve commercial disputes, especially in countries with common law, this doctrine is often used to justify a sales tax or VAT (value-added tax). Others (e.g. libertarians) argue that most or all forms of taxes are immoral due to their involuntary (and therefore eventually coercive/violent) nature.

Tax rates

Progressive and regressive taxation

Direct and indirect taxation

In law, the terms may have different meanings. In US 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 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.

The distinction can be subtle, but it is important under US law, since the United States Constitution formerly required that direct taxes be apportioned according to population. That is, if one state had twice the population of another state, then the direct tax revenue from that state must be exactly twice that from the other state. In 1895, the US Supreme Court interpreted the income tax as a direct tax when applied to income from property, and struck down the tax as a result. The federal government then had no income tax until the Sixteenth Amendment was ratified, which removed the apportionment requirement for income taxes.

Economics of Taxation

Some economists view taxes as creating inefficiencies in the economy.

Figure 1: Equilibirum

Figure 1 indicates a good without any government interference. This good could represent anything from televisions to labour. At this equilibrium quantity Q1 of the good are sold at price P1. The consumer and producer surplus are both high.

Figure 2: With a tax

Figure 2 shows the introduction of a very simple tax. The tax charges a flat fee whenever a consumer wishes to purchase the good. The price thus rises to P2, and since fewer consumers wish to purchase the good at the higher price, the quantity produced falls to Q2. The government receives the amount of the tax for each unit sold, and this amounts to the region shown in grey. This is the amount of revenue the government receives for this tax.

Note that in this situation the price of the good to consumers only increases by half the amount of the tax, the other half of the tax is borne by the producer. Thus both consumer and producer surpluses shrink by equal amounts. For many goods this is not the case. Who bears the cost of the tax is determined by the elasticity of the good. For inelastic goods like cigarettes, and gasoline almost all of the tax is paid by the consumer.

Also note that this flat tax is extremely simplistic. Almost all taxes are a percentage of the cost of the good, many are also progressive. This is especially true with income taxes.

Figure 3: Net Societal Loss

The tax is not a simple transfer of wealth from producers and consumers to government. A perminant loss of surplus available to society occurs, shown in orange. This inefficiency loss is often called dead weight loss or the excess burden of taxation. This shrinkage of the surplus available to society is a reason why many economists dislike taxes.

This model does not take into account what the government uses the tax money for, however, and a tax could be justified if it removes other greater inefficiencies in the economy, such as negative externalities or monopolies. In these cases a tax can be used as a tool, known as a pigouvian tax, to reduce the inefficiency in the market.

Types of Taxes

The crucial invention permitting the reliable collection of high income taxes was direct withholding of taxes from payrolls by employers. This reduces the perceived burden of the tax, because employees never handle the money. Direct withholding also discourages cheating, because it requires the collaboration of employers, and as there are fewer employers than employees, the government's enforcement efforts can be deployed more effectively.

Where income tax is not collected at source, it becomes possible to cheat by lying about one's affairs. Either one fails to declare income, or declares nonexistent expenses. Tax enforcement authorities fight this by looking at individual spending ratios using computer programs. For example, if a person spends too much on cars, their tax affairs might be audited.

Poll tax

Excises

Definition

Purposes and effects of excises

Excises (or exemptions from them) are also used to modify consumption patterns. For example, a high alcohol 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. 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.

Sales tax

Tariffs

Value-added tax

Stamp duty

Property taxes

See also: allodial. death tax, estate tax, Pigovian tax

Capital gains tax

Corporation tax

A History of Taxation

In more sophisticated economies such as the Roman Empire, tax farming developed, as the central powers could not practically enforce their tax policy across a wide realm. The tax farmers were obligated to raise large sums for the government, but were allowed to keep whatever else they raised. The early Christians of the New Testament including Jesus supported the payment of taxes. "Render unto Caesar the things that are Caesar's". It is even recognized as a duty whether as a "telos" on merchandise or travellers (Matt. 17:25), an annual "phoros" on property tax (Luke 20:22;23:2), a "kensos" or poll tax (Matt. 22:17; Mark 12:14, or the tribute money of a temple-tax (Matt. 17:24-27).

There were certain times in the middle ages where the governments did not explicitly tax, since they were self supporting, owning their own land and creating their own products. The appearance of doing without taxes was however illusory, since the government's (usually the Crown's) independent income sources depended on labour enforced under the feudal system, which is a tax exacted in kind.

Historical forms of taxation

Other obsolete forms of taxation include:

• scutage - paid in lieu of military service; strictly speaking 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 dependants
• a tithe - a tax, or more precisely 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 even though appearing as one to the payer)

See also

• Deposit Insterest Retention Tax
• Tax Freedom Day
• tax law
• taxation in Canada
• taxation in the United States
• dividend tax
• fiscal neutrality
• tax haven
• tax evasion
• laffer curve and the optimal tax rate argument

• About Taxes
• International Tax News - Daily updated taxation news courtesy of Ocra Worldwide.