An
income tax is a
tax levied
on the
income of individuals or business
(corporations or other legal entities). Various income tax systems
exist, with varying degrees of
tax
incidence. Income taxation can be
progressive,
proportional, or
regressive. When the tax is levied on the
income of companies, it is often called a
corporate tax, corporate income tax, or profit
tax. Individual income taxes often tax the total income of the
individual (with some deductions permitted), while corporate income
taxes often tax net income (the difference between gross receipts,
expenses, and additional write-offs). Various systems define income
differently, and often allow notional reductions of income (such as
a reduction based on number of children supported).
Principles
The "tax net" refers to the types of payment that are taxed, which
included personal earnings (
wages),
capital gains, and business income. The rates
for different types of income may vary and some may not be taxed at
all. Capital gains may be taxed when realized (e.g. when shares are
sold) or when incurred (e.g. when shares appreciate in value).
Business income may only be taxed if it is significant or based on
the manner in which it is paid. Some types of income, such as
interest on bank savings, may be considered as personal earnings
(similar to wages) or as a realized property gain (similar to
selling shares). In some tax systems, personal earnings may be
strictly defined where labor, skill, or investment is required
(e.g. wages); in others, they may be defined broadly to include
windfalls (e.g. gambling wins).
Tax rates may be progressive, regressive, or proportional. A
progressive tax taxes differentially according to how much has been
earned. For example, the first $10,000 in earnings may be taxed at
5%, the next $10,000 at 10%, and any more income at 20%.
Alternatively, a flat tax taxes all earnings at the same rate. A
regressive income tax may tax income up to a certain amount, such
as taxing only the first $90,000 earned. A tax system may use
different taxation methods for different types of income. However,
the idea of a progressive income tax has garnered support from
economists and political scientists of many different
ideologies, from
Adam
Smith in
The Wealth of
Nations to
Karl Marx in
The Communist
Manifesto.
Personal income tax is often collected on a
pay-as-you-earn basis, with small corrections made soon
after the end of the
tax year. These
corrections take one of two forms: payments to the government, for
taxpayers who have not paid enough during
the tax year; and
tax refunds from the
government for those who have overpaid. Income tax systems will
often have deductions available that lessen the total tax liability
by reducing total taxable income. They may allow losses from one
type of income to be counted against another. For example, a loss
on the stock market may be deducted against taxes paid on wages.
Other tax systems may isolate the loss, such that business losses
can only be deducted against business tax by carrying forward the
loss to later tax years.
History
The concept of taxing income is a modern innovation and presupposes
several things: a
money economy, reasonably accurate
accounts, a common understanding of
receipts, expenses and
profits,
and an orderly society with reliable records. For most of the
history of
civilization, these
preconditions did not exist, and taxes were based on other factors.
Taxes on
wealth, social position, and
ownership of the
means of
production (typically
land and
slaves) were all common. Practices such as
tithing, or an offering of firstfruits,
existed from ancient times, and can be regarded as a precursor of
the income tax, but they lacked precision and certainly were not
based on a concept of net increase.
In the
year 10, Emperor Wang Mang of China
instituted
an unprecedented tax -- the income tax -- at the rate of 10 percent
of profits, for professionals and skilled labor.
(Previously, all Chinese taxes were either head tax or property
tax.)
Another
income tax was implemented in Britain
by William Pitt
the Younger in his budget of December 1798 to pay for weapons
and equipment in preparation for the Napoleonic wars. Pitt's new
graduated income tax began at a levy of
2
d in the
pound (0.8333%) on incomes over £60 and
increased up to a maximum of 2
s (£7.11 in
2007)(10%) on incomes of over £200.(£170,542.04 in 2007) Pitt hoped
that the new income tax would raise £10 million (£8,527,100,000 in
2007)but actual receipts for 1799 totalled just over £6 million
(see UK
income tax history for more information).
The first
United
States
income tax was imposed in July 1861, at 3% of all
incomes over 800 dollars in order to help pay for the war effort in
the American Civil War.
This tax was repealed and replaced by another income tax in
1862.
Types
Personal
A personal or individual income tax is levied on the total income
of the individual (with some deductions permitted). It 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.
Corporate
Corporate tax refers to a direct tax levied by various
jurisdictions on the profits made by companies or associations and
often includes capital gains of a
company. Earnings are generally considered
gross revenue minus expenses. Corporate expenses that relate to
capital expenditures are usually deducted in full (for example,
trucks are fully deductible in the Canadian tax system, while a
corporate sports car is only partly deductible)over their useful
lives by using % rates based on the class of asset they belong
to.Notably, accounting rules about deductible expenses and tax
rules about deductible expenses will differ at times, giving rise
to book-tax differences. If the book-tax difference is carried over
more than a year, it is referred to as a temporary difference,
which then creates
deferred tax or
future assets and liabilities for the corporation, which are
carried on the
balance sheet.
- See also: Excess profits
tax, Windfall profits
tax
Payroll
A payroll tax generally refers to two kinds of
taxes. Taxes which
employers are
required to withhold from
employees'
pay, also known as
withholding,
pay-as-you-earn
(PAYE) or
pay-as-you-go (PAYG) tax. These
withholdings contribute to repayment of an employee's personal
income tax obligation; if the payments exceed this obligation, the
employee may be eligible for a
tax refund
or carryforward to future periods.
Other group of payroll taxes are paid from the employer's own
funds, either as a fixed charge per employee or as a percentage of
each employee's pay. Payroll taxes often cover government
social insurance programs such as
social security,
health care,
unemployment, and
disability. These payments do not count towards
income taxes of employees and employers, but are normally
deductible by the employers.
Inheritance
The inheritance tax, estate tax and death duty are the names given
to various taxes which arise on the death of an individual. In
international 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 is not always
respected. For example, the "inheritance tax" in the UK is a tax on
personal representatives, and is therefore, strictly speaking, an
estate tax.
Capital gains tax
A capital gains tax is the tax levied on the profit released upon
the sale of a capital asset. In many cases, the amount of a
capital gain is treated as income and
subject to the marginal rate of income tax. However, in an
inflationary environment, capital gains may be to some extent
illusory: if prices in general have doubled in five years, then
selling an asset for twice the price it was purchased for five
years earlier represents no gain at all.
Partly to compensate
for such changes in the value of money over time, some
jurisdictions, such as the United States
, give a favorable capital gains tax rate based on
the length of holding. European jurisdictions have a similar
rate reduction to nil on certain property transactions that qualify
for the participation exemption. In Canada, 20–50% of the gain is
taxable income. In India, Short Term Capital Gains Tax (arising
before 1 year) is 10% [15 % from F.Y 2008-09 as per Finance Act
2008] flat rate of the gains and Long Term Capital Gains Tax is nil
for stocks & mutual fund units held 1 year or more, provided
the sale of shares involved payment of Securities Transaction Tax
and 20% for any other assets held 3 years or more.
Around the world
Income taxes are used in most countries around the world. The tax
systems vary greatly and can be
progressive,
proportional, or
regressive, depending on the type of tax.
Comparison of tax rates around the world is a difficult and
somewhat subjective enterprise. Tax laws in most countries are
extremely complex, and tax burden falls differently on different
groups in each country and sub-national unit. Of course, services
provided by governments in return for taxation also vary, making
comparisons all the more difficult.
Critique
Critics have stated that poorly created and unfairly implemented
income tax systems can penalize work, discourage
saving and
investment,
hinder the competitiveness of business and economic growth. Income
taxes are not border-adjustable; meaning the tax component embedded
into products via taxes imposed on companies cannot be removed when
exported to a foreign country
(see Effect of taxes and
subsidies on price). Taxation systems such as a
national sales tax or
value added tax remove the tax component
when goods are exported and apply the tax component on imports. The
principles of an income tax are also argued by critics.
Frank Chodorov wrote "... you come up with
the fact that it gives the government a prior lien on all the
property produced by its subjects." The government "unashamedly
proclaims the doctrine of collectivized wealth. ... That which
it does not take is a concession."
See also
Notes
- Adam Smith, An Inquiry into the Nature And Causes of the Wealth
of Nations (1776). Book Five: Of the Revenue of the Sovereign or
Commonwealth. CHAPTER II: Of the Sources of the General or Public
Revenue of the Society. Article I: Taxes upon the Rent of House;
Article II: Taxes on Profit, or upon the Revenue arising from
Stock; Taxes upon as Profit of particular Employments; Article III:
Taxes upon the Wages of Labour. [1]
- Revenue Act of 1861, sec. 49, ch. 45, 12 Stat. 292, 309 (Aug.
5, 1861).
- Sections 49, 51, and part of 50 repealed by Revenue Act of
1862, sec. 89, ch. 119, 12 Stat. 432, 473 (July 1, 1862); income
taxes imposed under Revenue Act of 1862, section 86 (pertaining to
salaries of officers, or payments to "persons in the civil,
military, naval, or other employment or service of the United
States ...") and section 90 (pertaining to "the annual gains,
profits, or income of every person residing in the United States,
whether derived from any kind of property, rents, interest,
dividends, salaries, or from any profession, trade, employment or
vocation carried on in the United States or elsewhere, or from any
other source whatever....").
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