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A tax (also known as a "duty") 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 (e.g. tribes, secessionist movements or revolutionary movements). Taxes could also be imposed by a subnational entity.

Taxes consist of direct tax or indirect tax, and may be paid in money or as corvée labor. In modern, capitalist 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.

Taxes are usually collected by a governmental agency such as the Internal Revenue Service in the United States or HM Revenue and Customs (HMRC) in the UK. When taxes are not paid to a government's satisfaction, civil penalties such as fines or forfeiture are carried out against the non-paying entity or individual. These penalties could also have criminal penalties such as imprisonment enforced by governmental investigators, such as the Federal Bureau of Investigation and the Department of Justice in the US. In most modern industrialized countries, when an individual fails to pay his government the taxes, it will ultimately result in the loss of money and maybe even imprisonment if fraud is a serious factor.

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.

Public finance is the field of political science / economics that deals with taxation.


[edit] Purposes and effects of taxation

Funds provided by taxation have been used by states and their functional equivalents throughout history to carry out the functions such as:

Most modern governments also use taxes to fund welfare and public services, such as:

Colonial states and moderning states have also used cash taxes to draw or force reluctant subsistence producers into cash economies.

Governments use different kinds of taxes and vary the tax rates:

  • to distribute the tax burden between individuals or classes of the population involved in taxable activities, such as business,
  • 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, the disabled or the retired by taxes on those who are still working,
  • to fund foreign aid and military aid,
  • to influence the macroeconomic performance of the economy (the government's strategy for doing this is called its fiscal policy) (see also tax exemption),
  • to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less attractive.

The resource taken from the public through taxation is always somewhat greater than the amount which can be used by the government. The difference is called compliance cost, and includes for example the labour cost and other expenses incurred in complying with tax laws and rules.

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. This 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. In some cases, such taxes are collected in fundamentally inefficient ways, for example highway tolls.

Some economists, especially neo-classical economists argue that all taxation creates market distortion and results in economic inefficiency. They have therefore sought to identify the kind of tax system that would minimise this distortion. Economists have known for centuries that the most economically neutral tax is a tax on land because land is in fixed supply: taxes on personal income, retail sales, etc. will reduce the amount of those activities, but a tax on land cannot reduce the amount of land. Also, one of every government's most fundamental duties is to administer possession and use of land in the geographic area over which it is sovereign, and it is considered economically efficient for government to recover for public purposes the additional value it creates by providing this unique service.

Since governments also resolve commercial disputes, especially in countries with common law, similar arguments are sometimes used to justify a sales tax or 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. The most extreme anti-tax view is anarcho-capitalism, in which the provision of all social services should be a matter of voluntary private contracts.

[edit] Tax rates

Taxes are most often levied as a percentage, called the tax rate, of a certain value, the tax base (how much income and assets one has, earns, spends, inherits, etcetera). An ad valorem tax is one where the tax base is 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). An alternative to ad valorem taxation is an excise tax, where the tax base is the quantity of something, regardless of its price: for example, in the United Kingdom, a tax is collected on the sale of alcoholic drinks that is calculated by volume and beverage type rather than the price of the drink.

An important distinction when talking about tax rates is to distinguish between the marginal rate and the average rate. The average 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. In a “progressive” tax system, these can be very different. For example, if income is taxed on a formula of 5% from $0 up to $49,999, 10% from $50,000 to $99,999, and 15% over $100,000, a taxpayer with income of $175,000 would pay a total of $18,750:

((0.05*50,000) + (0.10*50,000) + (0.15*75,000))

His average rate would be 10.7%:

= 0.107

However, his marginal rate would be 15%.

[edit] Proportional, Progressive, and Regressive taxation

An important feature of tax systems is whether they are proportional tax (the tax as a percentage of income is constant over all income levels), progressive tax (the tax as a percentage of income rises as income rises), or regressive tax (the tax as a percentage of income falls as income rises). Progressive taxes reduce the tax incidence of people with smaller incomes, as they shift the incidence disproportionately to those with higher incomes.

[edit] Direct and indirect taxation

Main articles: Direct tax and Indirect tax

Taxes are sometimes referred to as direct tax or indirect tax. The meaning of these terms can vary in different contexts, which can sometimes lead to confusion. In economics, direct taxes refer to those taxes that are collected from the people or organizations on whom they are ostensibly imposed. For example, income taxes are collected from the person who earns the income. By contrast, indirect taxes are collected from someone other than the person ostensibly responsible for paying the taxes.

The person or other entity from whom a tax is collected (i.e., the nominal "taxpayer") is a matter of law. However, who "pays" the tax (in the sense of who bears the ultimate economic burden of the tax) is determined by the market place and is found by comparing the price of the good (including tax) after the tax is imposed to the price of the good before the tax was imposed. For example, suppose the price of gas in the U.S., without taxes, were $2.00 per gallon. Suppose the U.S. government imposes a tax of $0.50 per gallon on the gas. Forces of demand and supply will determine how that $0.50 tax burden is distributed among the buyers and sellers. For example, it is possible that the price of gas, after the tax, might be $2.40. In such a case, buyers would be paying $0.40 of the tax while the sellers would be paying $0.10 of the tax.

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. Until 1913 the United States Constitution required that all 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 had to 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 ruling did not affect the status of income taxes on income from personal services, which continued to be classified as an excise, or indirect tax, not required to be apportioned. However, the Court ruled the entire income tax law invalid, including the tax on income from personal services, reasoning that Congress had not anticipated that only part of that particular law would be deemed enforceable.)

The federal government then had no income tax until the Sixteenth Amendment was ratified in 1913. The Sixteenth Amendment removed the apportionment requirement for income taxes (whether considered direct or indirect).

The apportionment requirement under the U.S. Constitution remains for other direct taxes, such as taxes on property by reason of ownership. Because there is no such national property tax under U.S. law, however, this legal restriction is not fiscally or politically significant.

[edit] Economics of taxing a good

Figure 1: Equilibrium

Figure 1 indicates a good in a free market. This good could represent anything from apples to zippers. At this equilibrium quantity, Q1 units of the good are sold at price P1. Social surplus, here equal to the consumer plus the producer surplus producer surplus, is maximized (assuming no externalities).

Figure 2: With a tax

Figure 2 shows a marginal tax on production of a good. The tax charges a fee whenever a producer wishes to produce an extra unit of the good or, in the case of transaction taxes, when a consumer receives a good. When a marginal tax is placed on production, the market price will rise 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, amounting to the region shown in grey. This is the revenue the government receives for this tax. The social surplus is now the consumer surplus plus the producer surplus plus the government revenue.

Note that in this situation, where price elasticities of demand and supply are equal, the price of the good that consumers face (the market price) 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. This property occurs infrequently. Who bears the cost of the tax is determined by the price elasticities of the demand and supply of the good. For goods with inelastic demands (at least in the short-run) like cigarettes, and gasoline almost all of the tax is paid by the consumer. Alternatively, for goods with inelastic supply curves, like event tickets where seats remain fixed, the producer bears almost all, if not all, of the tax.

Figure 3: Net Societal Loss

In addition to administrative costs, there are effects on economic efficiency that can result due to marginal taxes, in the form of a loss in social surplus (shown in orange). This loss is often called deadweight loss which is a loss created because potential trades (in the amount of Q1-Q2) are not executed. The deadweight loss is proportional to the square of the tax rate. Thus if the tax rate is doubled, the deadweight loss will quadruple. This means a small tax on a broad tax base (sales tax) would normally be more efficient, or result in less deadweight loss, than a large tax rate on a narrow tax base (taxing a particular good heavily).

[edit] Types of taxes

Comparison of Taxes paid by a household earning the country's average wage

no kids
2 kids
no kids
2 kids

Czech Republic43.8%27.1%New Zealand20.5%14.5%
Germany51.8%35.7%Slovak Republic38.3%23.2%
Italy45.4%35.2%United Kingdom33.5%27.1%
Japan27.7%24.9%United States29.1%11.9%

Source: OECD, 2005 data [1]

[edit] OECD classification of taxes

The Organisation for Economic Co-operation and Development (OECD) publishes perhaps the most comprehensive analysis of worldwide tax systems. In order to do this it has created a comprehensive categorisation of all taxes in all regimes which it covers: ([2])

[edit] Income Tax

Income tax is a tax on earnings – money that individuals, corporations, trusts or other legal entities receive in different ways and from different sources.

The 'tax net' refers to what types of money payments are charged the tax. Generally, tax will be charged on 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 realised (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 realised property gain (similar to selling shares). In some tax systems ‘personal earnings’ may be strictly defined to require that labour, skill, or investment was required (e.g. wages); in others they may be defined broadly to include windfalls (e.g. gambling wins).

Tax rates may be progressive or flat. A progressive tax taxes differentially based on 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 tax system may use both progressive and flat taxes for different types of income.

Often income tax systems will have deductions available. Deductions lessen the total tax liability by reducing total taxable income. Income tax systems 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 taxable 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.

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.

[edit] Retirement tax

Some countries with social security systems, which provide income to retired workers, fund those systems with specific dedicated taxes. These often differ from comprehensive income taxes in that they are levied only on specific sources of income, generally wages and salary (in which case they are called payroll taxes). A further difference is that the total amount of the taxes paid by or on behalf of a worker is typically considered in the calculation of the retirement benefits to which that worker is entitled. Examples of retirement taxes include the FICA tax, a payroll tax that is collected from employers and employees in the United States to fund the country's Social Security system; and the National Insurance Contributions (NICs) collected from employers and employees in the United Kingdom to fund the country's national insurance system.

These taxes are sometimes regressive in their immediate effect. For example, in the United States, each worker, whatever his or her income, pays at the same rate up to a specified cap, but income over the cap is not taxed. A further regressive feature is that such taxes often exclude investment earnings and other forms of income that are more likely to be received by the wealthy. The regressive effect is somewhat offset, however, by the eventual benefit payments, which typically replace a higher percentage of a lower-paid worker's pre-retirement income.

[edit] Capital gains tax

Main article: 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, 50% of the gain is taxable income.

If such a tax is levied on inherited property then it can act as a de facto probate or inheritance tax.

[edit] Corporation tax

Main article: Corporate tax

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 less expenses. However, corporate expenses that relate to capital expenditures are rarely deducted in full (such as the entire cost of a company truck) and are often deducted over the useful life of the asset purchase. Generally, industrialized countries also use a regressive rate of tax upon corporate income.

See also: excess profits tax, windfall profits tax

[edit] Poll tax

Main article: Poll tax

A poll tax, also called a per capita tax, or capitation tax, is a tax that levies a set amount per individual. One of the earliest taxes 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 administratively cheap because they are easy to compute and collect and difficult to cheat. Economists have considered poll taxes economically efficient because people are presumed to be in fixed supply. However, poll taxes are very unpopular because they are strongly regressive (poorer people pay a higher proportion of their income than richer people). In addition, the supply of people is in fact not fixed over time: on average, couples will choose to have fewer children if a poll tax is imposed. The introduction of a poll tax in medieval England was the primary cause of the 1381 Peasants' Revolt, and in England and Wales in 1990 the change from a progressive local taxation based on property values to a single-rate form of taxation regardless of ability to pay (the Community Charge, but more popularly referred to as the Poll Tax) was instrumental in the demise of the then Prime Minister Margaret Thatcher.

[edit] Excises

Main article: Excise

Unlike an ad valorem, an excise is not a function of the value of the product being taxed. Excise taxes are based on the quantity, not the value, of product purchased. For example, in the United States, the Federal government imposes an excise tax of 18.4 cents per US gallon (4.86 ¢/L) of gasoline, while state governments levy an additional 8 to 28 cents per US gallon.

[edit] Purposes and effects of excises

Excises on particular commodities are frequently Hypothecated. For example, a fuel excise is often used to pay for public transportation, especially roads and bridges and for the protection of the environment. A special form of hypothecation arises where an excise is used to compensate a party to a transaction for alleged uncontrollable abuse: for example, a blank media tax is a tax on recordable media such as CD-Rs, whose proceeds are typically allocated to copyright holders. Critics charge that such taxes tax blindly those who make legitimate and illegitimate usages of the products; for instance, a person or corporation using CD-R's for data archival should not have to subsidize the producers of popular music.

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. Similar taxes may exist on tobacco, pornography, etc..., and they may be collectively referred to as sin taxes. 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. In the UK, vehicle excise duty is an annual tax on vehicle ownership.

[edit] Sales tax

Main article: Sales tax

Sales taxes are a form of excise levied when a commodity is sold to its final consumer. Retail organizations contend that such taxes discourage retail sales. The question of whether they are generally progressive or regressive is a subject of much current debate. People with higher incomes spend a lower proportion of them, so a flat-rate sales tax will tend to be regressive. It is therefore common to exempt food, utilities and other necessities from sales taxes, since poor people spend a higher proportion of their incomes on these commodities, so such exemptions would make the tax more progressive. This is the classic "You pay for what you spend" tax, as only those who spend money on non-exempt (i.e. luxury) items pay the tax.

A small number of US states rely entirely on sales taxes for state revenue, as those states do not levy a state income tax. Such states tend to have a moderate to large amount of tourism or inter-state travel that occurs within their borders, allowing the state to benefit from taxes from people the state would otherwise not tax. In this way, the state is able to reduce the tax burden on its citizens.

The US states that do not levy a state income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington state, and Wyoming. Additionally, New Hampshire and Tennessee only levy state income taxes on dividends and interest income. Of the above states, only Alaska and New Hampshire do not levy a state sales tax. Additional information can be obtained at the Federation of Tax Administrators website.

In the United States, there is a growing movement for the replacement of all federal payroll and income taxes (both corporate and personal) with a national retail sales tax and monthly tax rebate to households of citizens and legal resident aliens. The tax proposal is named FairTax. In Canada the federal sales tax is called the Goods and Services tax (GST) and now stands at 6%. All provinces except Alberta also have a provincial sales tax. Most businesses can claim back the taxes they pay and so effectively it is the final consumer who pays the tax.

[edit] Tariffs

Main article: Tariff

An import or export tariff (also called customs duty or impost) is a charge for the movement of goods through a political border. Tariffs discourage trade, and they may be used by governments to protect domestic industries. A proportion of tariff revenues is often hypothecated to pay government to maintain a navy or border police. The classic ways of cheating a tariff are smuggling or declaring a false value of goods.

[edit] Toll Tax

A Toll Tax is a tax has been often used historically on roads and bridges to pay for state bridge and road projects.

[edit] Use taxes

Gas taxes are a form of Use Tax that is collected for a particular need and to maintain roads.

[edit] Value added tax

Main article: Value added tax

A value added tax (VAT), also known as 'Goods and Services Tax' (G.S.T), or 'Impuesto Indirecto sobre la Prestacion de Servicios' (I.S.I.), Sales Tax, Business Tax, or Turnover Tax in some countries, applies the equivalent of a sales tax to every operation that creates value. To give an example, sheet steel is imported by a machine manufacturer. That manufacturer will pay the VAT on the purchase price, remitting that amount to the government. The manufacturer will then transform the steel into a machine, selling the machine for a higher price to a wholesale distributor. The manufacturer will collect the VAT on the higher price, but will remit to the government only the excess related to the "value added" (the price over the cost of the sheet steel). The wholesale distributor will then continue the process, charging the retail distributor the VAT on the entire price to the retailer, but remitting only the amount related to the distribution markup to the government. The last VAT amount is paid by the eventual retail customer who cannot recover any of the previously paid VAT. Economic theorists have argued that this minimises the market distortion resulting from the tax, compared to a sales tax. However, VAT is held by some to discourage production.

VAT was historically used when a sales tax or excise tax was uncollectible. For example, a 30% sales tax is so often cheated that most of the retail economy will go off the books. By collecting the tax at each production level, and requiring the previous production level to collect the next level tax in order to recover the VAT previously paid by that production level, the theory is that the entire economy helps in the enforcement. In reality, forged invoices and the like demonstrate that tax evaders will always attempt to cheat the system.

[edit] Input versus Output Tax

When a company that is registered for VAT, buys goods or services from another supplier, VAT is charged based on the purchase cost. This is known as input tax.

Similarly, when the company sells its own goods or services it charges its customers VAT at the same rate. This is output tax.

At regular intervals, the company may have to complete a VAT return, giving details of its input tax and output tax. The difference between output tax and input tax is payable to the Local Tax Authority. If input tax is greater than output tax the company can claim back money from Local Tax Authority.

[edit] Property taxes

Main article: Property tax

A property tax is usually levied on the value of property owned, usually real estate. Property taxes may be charged on a recurrent basis, or upon a certain event.

A common type of property tax is an annual charge on the ownership of real estate, where the tax base is the supposed value of the property. For a period of over 150 years from 1695 a window tax was levied in England, with the result that you can still see listed buildings with windows bricked up [3] in order to save their owner's money. A similar tax on hearths existed in France and elsewhere, with similar results.

The two most common type of event driven property taxes are stamp duty, charged upon change of ownership, and inheritance tax, which is imposed in many countries on the estates of the deceased.

In contrast with a tax on buildings, a land value tax is levied only on the unimproved value of the land ("land" in this instance may mean either the economic term, i.e., all natural resources, or the natural resources associated with specific areas of the earth's surface: "lots" or "land parcels"). Land tax has long been recognised as the only tax which does not distort market relations or carry an excess burden. See Excess Burden of Taxation. However, this holds true only as long as the tax does not exceed the land's economic rent. Some political economists claim that because land is not the product of labour, is in fixed supply, and because its value is publicly created and not the result of any activity of the owner, it should be the only tax base. See Georgism.

When real estate is held by a higher government unit or some other entity not subject to taxation by the local government, the taxing authority may receive a payment in lieu of taxes to compensate it for some or all of the foregone tax revenue.

[edit] Transfer taxes

Main article: Transfer tax

Historically, in many countries, a contract needed to have a stamp affixed to make it valid. The charge for the stamp was either a fixed amount or a percentage of the value of the transaction. In most countries the stamp has been abolished but stamp duty remains. Stamp duty is levied in the UK on the purchase of shares and securities, the issue of bearer instruments, and certain partnership transactions. Its modern derivatives, stamp duty reserve tax and stamp duty land tax, are respectively charged on transactions involving securities and land. Stamp duty has the effect of discouraging speculative purchases of assets by decreasing liquidity. In the US transfer tax is often charged by the state or local government and (in the case of real property transfers) can be tied to the recording of the deed or other transfer documents. Taxes on currency transactions are known as Tobin taxes.

See also: stamp duty

[edit] Inheritance tax

Main article: Inheritance tax

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, some also believe them to discourage productivity and to disrupt the continuity of family-owned businesses.

See also: allodial, death tax, Pigovian tax, Estate tax (United States), Inheritance Tax (United Kingdom).

[edit] Wealth (net worth) tax

Some countries' governments will require declaration of the tax payers' balance sheet (assets and liabilities), and from that exact a tax on net worth (assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax is in place for both "natural" and in some cases legal "persons".

[edit] Personal property tax

In many jurisdictions (including many American states), there is a general tax levied periodically on residents who own personal property within the jurisdiction. Vehicle and boat registration fees are subsets of this kind of tax.

Usually, the tax is designed with blanket coverage but with large exceptions for obvious things like food and clothing. Household goods are exempt as long as they are kept or used within the household. However, any otherwise non-exempt object can lose its exemption if regularly kept outside the household. Thus, tax collectors often monitor newspaper articles for stories about wealthy people who have lent art to museums for public display, because the artworks have then become subject to personal property tax. And if an artwork had to be sent to another state for some touch-ups, it may have become subject to personal property tax in that state as well.

[edit] Tax Burden

Main article: Tax incidence
Image:Tax supply and demand.png
Diagram illistrating taxes effect

Law establishes from whom a tax is collected. In many countries, taxes are imposed on business (such as corporate taxes or portions of payroll taxes). However, who ultimately pays the tax (the tax "burden") is determined by the marketplace as taxes become embedded into production costs. Depending on how quantities supplied and demanded vary with price (the "elasticities" of supply and demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the buyer (in the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will be paid by the supplier. If the elasticity of demand is low, more will be paid by the customer. And contrariwise for the cases where those elasticities are high. If the seller is a competitive firm, the tax burden flows back to the factors of production depending on the elasticities thereof; this includes workers (in the form of lower wages), capital investors (in the form of loss to shareholders), landowners (in the form of lower rents) and entrepreneurs (in the form of lower wages of superintendence).

To illustrate this relationship, suppose the market price of a product is $1.00, and that a $0.50 tax is imposed on the product that, by law, is to be collected from the seller. If the product is a luxury (in the economic sense of the term), a greater portion of the tax will be absorbed by the seller. For example, the seller might drop the price of the product to $0.70 so that, after adding in the tax, the buyer pays a total of $1.20, or $0.20 more than he did before the $0.50 tax was imposed. In this example, the buyer has paid $0.20 of the $0.50 tax (in the form of a post-tax price) and the seller has paid the remaining $0.30 (in the form of a lower pre-tax price).<ref>Parkin, Michael (2006), Principles of Microeconomics, p. 134.</ref>

[edit] Representation of Tax

There are three schools of thought in tax representation.

  1. Taxation represented of the need or purpose.
  2. Taxation by representative in person.
  3. Taxation by consent.

The first two issues were at hand during the American Revolution. The thought that no taxation without representation was meant solely to give authority to the peoples' representative to tax as he wished is incorrect. This type of taxation is what the people at the time were fighting against. They had British colonial "representatives" in person that taxed without consideration of those they represented or to any defined need or true representation of the colonist's wishes.

The definition of representation by person for a defined need that truly represents those being taxed is best described in the Declaration of Independence where the definition of Tyranny is presented.

The 17th Grievance of the Declaration of Independence clearly states: "He (the king, and British government) has taxed us without our consent". The opposite defining the inalienable right of No Taxation Without Consent.

"Taxation by consent" is the original intent of taxation through representation of the need or purpose and through the representative in person by the founders and implementors of freedom of the American revolution and is one of many inalienable rights of citizens of a free society. 17th Grievance of the Declaration of Independence.

[edit] Historical taxation levels

The first account of taxation is from the Bible. In Genesis, chapter 47, verse 24. The New International Version says,"'But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children.'" This is Joseph telling the people of Egypt what to do on how to purchase their food during the famine. This tax was of crops, not of money. However it is the same idea.

Quite a few records of the government tax collection in Europe since at least the 17th century are still available today. But the taxation levels are hard to compare to the size and flow of the economy since production numbers are not as readily available. The government expenditures and revenue in France during the 17th century went from about 20 million livres in 1600 to about 60 million livres in 1650 to about 150 million livres in 1700 when the government debt had reached 1.6 billion livres.

The taxation as a percentage of production of final goods may have reached 15%-20% during the 17th century in places like, France, the Netherlands, and Scandinavia. During the war filled years of the eighteenth and early nineteenth century tax rates in Europe increased dramatically as war became more expensive and governments became more centralized and adept at gathering taxes. This increase was greatest in England, Peter Mathias and Patrick O'Brien found that the tax burden increased by 85% over this period. Another study confirmed this number, finding that per capita tax revenues had grown almost six-fold over the eighteenth century, but that steady economic growth had made the real burden on each individual only double over this period before the industrial revolution. Average tax rates were higher in Britain than France the years before the French Revolution, but they were mostly placed on international trade. In France the taxes were lower but the burden was mainly on landowners, individuals, and internal trade and thus created far more resentment.

Taxation as a percentage of GDP in 2003 was 56.1% in Denmark, 54.5% in France, 49.0% in the Euro area, 42.6% in the United Kingdom, 35.7% in the United States, 35.2% in The Republic of Ireland, and among all OECD members an average of 40.7%. (OECD national accounts) (Forbes magazine)

[edit] Historical 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 invented 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 in order to get people to shave them off so that Russians would look more "Western".

Today, one of the most complicated taxation-systems worldwide is perhaps the German one. Three quarters of the world's taxation-literature refers to the German system. There are 118 laws, 185 forms and 96,000 regulations (only one comment to taxation covers 2671 pages). The administration spends €3.7 billion just to collect income tax.

Today, governments of advanced economies of EU, North America, et al rely more on direct taxes while those of backward economies of India, Africa, et al rely more on indirect taxes.

[edit] Morality of taxation

Under most political views, activities funded by taxes can be beneficial to society and progressive taxation can be used in most modern countries to provide an overall benefit to the majority of the population and social justice. However, since payment of tax is compulsory, libertarians consider taxation to be tantamount to theft, accusing the government of levying taxes via coercive means. However, some libertarians recommend a minimal level of taxation in order to maximize the protection of liberty.

One counter-argument is that since the government is the party performing the act, and if there is a democracy in place, then it is society as a whole that decides how the tax system should be organised. The American Revolution's "No taxation without representation" slogan implied this view. According to methodological individualism, however, "society as a whole" cannot make such decisions.<ref>Human Action Chapter II. Sec. 4. The Principle of Methodological Individualism by Ludwig von Mises</ref> Thus, an assertion is made that the moral stature of any act, such as slavery or theft, is not contingent upon its legality or popularity. Thomas Jefferson argued that, "A [direct] democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine."[citation needed]

There are several justifications that are offered for taxation. Taxation of business is justified on the grounds that business necessarily involves use of publicly established and maintained economic infrastructure, and businesses are in effect charged for this use. Again, libertarians argue that government services used by businesses are either already paid for directly or are services that ought to be provided by a free market. Such taxes, they argue, are a way for the majority to exploit businesspeople. Compulsory taxation of individuals, such as income tax, is justifed on similar grounds, including territorial sovereignty, and the social contract.

[edit] See also

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