Tax





A tax is an involuntary fee paid by individuals or businesses to a 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 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 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. A poll tax may also be called a
per capita tax or a capitation.

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.

An "Ad Valorem" tax is a governmental exaction in an amount determined with
reference to the value of a good, service, or property. Sales taxes,
tariffs, property taxes, inheritance taxes, and value added taxes are
different types of ad valorem tax. An ad valorem tax is typically imposed at
the time of a transaction (sales tax or value added tax (VAT)) but it may be
imposed on an annual basis (property tax) or in connection with another
significant event (inheritance tax or tariffs). Ad valorem taxes, income
taxes, and per capita taxes are the major categories of taxes, although the
first two are the most common.

An "Excise Tax" is a type of ad valorem tax that is imposed at the time of a
purchase or sale transaction (sales tax or value added tax (VAT)) or in
connection with importation across a political border (tariffs). The tax
base is the purchase price or the declared value, however, there are many
variations to this basic rule. For example, the sales tax on used automobile
purchases in the United States is determined with reference to a published
list of prices. The purchase price may be disregarded.

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.

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).

There were certain times in the middle ages where the governments did not
tax, since they were self supporting, owning their own land and creating
their own products.

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.