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A tax is an involuntary fee paid by individuals or businesses to an public administration[?], to support the operation of that government, or to otherwise achieve government goals (also called fiscal policy). Other purposes might include redistribution of income from the rich to the poor, or the support and maintenance of public works[?]. Taxes are most often levied as a percentage, called the tax rate, of a certain value, the tax base (how much you have, earn, spend, inherit, etc.).

An important feature of tax systems is whether they are flat (the percentage does not depend on the base, hence the tax is proportional to how much you have), regressive (the more you have the lower the tax rate), or progressive (the more you have the higher the tax rate). In theory, progressive taxes[?] get a smaller percentage of the income of poorer people, and require less record-keeping and complexity by people with simpler affairs. Progressive taxes reduce the tax burden of people with smaller incomes.

The most common tax is a direct tax. The best example of a direct tax is income tax, which is paid by individuals and corporations on their earnings. This is commonly a progressive tax because the tax rate increases with increasing income. Some critics characterize this tax as a form of punishment for economic productivity. Other critics charge that progressive income taxation is inherently socially intrusive because enforcement requires the government to collect large amounts of information about business and personal affairs, much of which could be considered proprietary.

The crucial invention permitting the high income tax rates was direct withholding of taxes from payrolls by employers. Employees have less visibility to the taxes they are paying because they never handle the money. Direct withholding also discourages cheating because there are fewer employers than employees and the government can focus enforcement.

The classic way of cheating on income tax is to lie about one's affairs. Either one fails to declare income, or declares nonexistent expenses. The government fights this by looking at individual ratios using computer programs. For example, if a person spends too much on cars, they might be examined.

The collection of tax in order or to spend it on 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 money is fungible.

Another idea is to arrange the taxation so that it causes minimal economic disruption, with the hope of maximizing the total efficiency of the economy, thereby making everyone wealthier. The classic 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).

Types of Taxes

A poll tax is a tax paid directly by an individual to a government. The earliest tax 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 infamous for causing hardship for individuals who handle their affairs poorly. In fact, they were forbidden by the U.S. constitution as a historic abuse to be prevented. (This protection had to be changed in order to enable income taxes.) Poll taxes are difficult to cheat.

Indirect taxes are hidden taxes. Value Added Taxes, when they do not appear on the sales receipt are a form of indirect tax. Taxes are not always paid in cash. For example, the labor and expense of complying with tax laws and rules are also examples of hidden taxes.

Sales taxes on retail transactions may be applied as either direct or indirect taxes. Sales taxes discourage retail sales. The question of whether sales taxes are generally progressive or regressive is a subject of much current debate. It is common to exempt food, heating and lighting costs from sales tax to avoid regressive taxation on the poor. Sales tax directly discourages formation of efficient production because it taxes the purchase of factory equipment. The classic way of cheating on sales tax is to ask a merchant for a cash discount. The merchant pockets the cash and writes off the merchandise to shrinkage and the state fails to get the tax.

An import or export tariff is a charge for the movement of goods through a political border.

Excise taxes discourage trade. Excises pay government to maintain a navy or border police, and also protect domestic industry to some extent. The classic cheat is smuggling, or a war to interfere with competing countries' merchants.

A value added tax (also called a goods and services tax[?]) applies the equivalent of a sales tax to every operation that creates value. A VAT was historically used when a sales tax or excise tax was uncollectable. For example, a 30% sales tax is so often cheated that most of the retail economy will go off the books. VAT distributes such a tax in small enough increments that it becomes more trouble to cheat than to pay the tax. However, a VAT punishes production, which is considered a bad effect.

An inheritance tax is imposed in many countries on the estates of the deceased. Some believe that inheritance taxes do not have any harmful effect on the economy and may even be beneficial as they encourage consumer spending by the elderly. However, they are also believed to discourage productivity and to disrupt the continuity of many family-owned businesses. Inheritance taxes are extremely unpopular and many countries such as Canada and the United States have gotten rid of theirs or are in the process of doing so.

A fuel excise[?] is often used to pay for public transportation, especially roads and bridges and for the protection of the environment.

An alcohol excise[?] is used to discourage alcohol consumption and 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.

A blank media tax is a tax on recordable media such as CD-Rs. The proceeds are typically allocated to copyright holders.

A History of Taxation

Political authority has been used to raise capital throughout history. In many pre-monetary societies, such as the Incan empire, taxes were owed in labor. King Solomon of the Old Testament pointed to the need for taxes to be applied for civil purposes (1 Kings 4:7; 9:15; 12:4), and these amounts were increased during times of foreign occupation.

In more sophisticated economies such as the Roman Empire, tax farming[?] and feudalism 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).

In monetary economies prior to fiat banking, a critical form of taxation was seigniorage, the tax on the creation of money. Seigniorage has been replaced by central banking.

Historical forms of taxation

  • scutage[?] - paid in lieu of military service
  • tallage - a tax on feudal dependants
  • a tithe - a tax (one tenth of one's earnings or agricultural produce), paid to the Church

Some principalities taxed windows, doors or cabinets to reduce consumption of imported glass and hardware. Armoires, hutches and wardrobes were invented to evade taxes on doors and cabinets.

See also Tax Freedom Day, Law/Tax, Taxation in the United States, inheritance tax, dividend tax.



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