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Taxation |
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An aspect of fiscal policy |
A tax is a mandatory financial charge or levy imposed on a taxpayer (an individual or legal entity) by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities.[1] Tax compliance refers to policy actions and individual behavior aimed at ensuring that taxpayers are paying the right amount of tax at the right time and securing the correct tax allowances and tax relief.[2] The first known taxation occurred in Ancient Egypt around 3000–2800 BC.[3] Taxes consist of direct or indirect taxes and may be paid in money or as labor equivalent.
All countries have a tax system in place to pay for public, common societal, or agreed national needs and for the functions of government.[citation needed] Some countries levy a flat percentage rate of taxation on personal annual income, but most scale taxes are progressive based on brackets of yearly income amounts. Most countries charge a tax on an individual's income and corporate income. Countries or sub-units often also impose wealth taxes, inheritance taxes, gift taxes, property taxes, sales taxes, use taxes, environmental taxes, payroll taxes, duties, or tariffs. It is also possible to levy a tax on tax, as with a gross receipts tax.
In economic terms (circular flow of income), taxation transfers wealth from households or businesses to the government. This affects economic growth and welfare, which can be increased (known as fiscal multiplier) or decreased (known as excess burden of taxation). Consequently, taxation is a highly debated topic by some, as although taxation is deemed necessary by consensus for society to function and grow in an orderly and equitable manner through the government provision of public goods and public services,[4][5][6][7] others such as libertarians and anarcho-capitalists are anti-taxation and denounce taxation broadly or in its entirety, classifying taxation as theft or extortion through coercion along with the use of force. Within market economies, taxation is considered the most viable option to operate the government (instead of widespread state ownership of the means of production), as taxation enables the government to generate revenue without heavily interfering with the market and private businesses; taxation preserves the efficiency and productivity of the private sector by allowing individuals and companies to make their own economic decisions, engage in flexible production, competition, and innovation as a result of market forces.
Certain countries (usually small in size or population, which results in a smaller infrastructure and social expenditure) function as tax havens by imposing minimal taxes on the personal income of individuals and corporate income. These tax havens attract capital from abroad (particularly from larger economies) while resulting in loss of tax revenues within other non-haven countries (through base erosion and profit shifting).
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