Young Negotiators

A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example,secessionist movements or revolutionary movements). Taxes could also be imposed by a subnational entity. Taxes consist of direct tax orindirect tax, and may be paid in money or as unpaid labour. A tax may be defined as a “pecuniary burden laid upon individuals or property to support the government a payment exacted by legislative authority.”^[1] A tax “is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority” and is “any contribution imposed by government whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name.”

In modern taxation systems, taxes are levied 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 andeconomics. Tax collection is performed by a government agency such as Canada Revenue Agency, the Internal Revenue Service (IRS) in theUnited States, or Her Majesty’s Revenue and Customs (HMRC) in the UK. When taxes are not fully paid, civil penalties (such as fines orforfeiture) or criminal penalties (such as incarceration) may be imposed on the non-paying entity or individual.

The Four “R”s

Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation.

The main purpose is revenue: taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like good regulation or justice systems. This is the most widely known function.

A second is redistribution. Normally, this means transferring wealth from the richer sections of society to poorer sections, and this function is widely accepted in mostdemocracies, although the extent to which this should happen is always controversial.

A third purpose of taxation is repricing. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax.

A fourth, consequential effect of taxation in its historical setting has been representation. The American revolutionary slogan “no taxation without representation” implied this: rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects. 

Forms of taxation

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 - 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 dependents
• 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)
• Aids - During feudal times Aids was a type of tax or due paid by a vassal to his lord.
• Danegeld - medieval land tax originally raised to pay off raiding Danes and later used to fund military expenditures.
• Carucate - tax which replaced the danegeld in England.
• Tax Farming - the principle of assigning the responsibility for tax revenue collection to private citizens or groups.

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 extraordinary 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. There are 118 laws, 185 forms, and 96,000 regulations, spending €3.7 billion to collect the income tax. Today, governments of advanced economies of EU, North America, and others rely more on direct taxes, while those of developing economies of India, Africa, and others rely more on indirect taxes.

Tax Rate  

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 (average) 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 US$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 taxes.

Tax calculation

((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%.

 Income tax

Income Tax rates by Country based on OECD 2005 data.^[18]

An income tax is a tax levied on the financial income of persons, 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 corporation 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).

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).

Personal income tax is often collected on a pay-as-you-earn basis, with small corrections made soon after the end of thetax 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.

(via wikipedia)