Tax

A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate economic activity through measures designed to mitigate negative externalities. 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. 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). 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).

History

The first known system of taxation was in Ancient Egypt around 3000–2800 BC, in the First Dynasty of the Old Kingdom of Egypt. The earliest and most widespread forms of taxation were the corvée and the tithe: The corvée was forced labor provided to the state by peasants too poor to pay other forms of taxation (labor in ancient Egyptian is a synonym for taxes). Records from the time document that the Pharaoh would conduct a biennial tour of the kingdom, collecting tithes from the people. The Rosetta Stone, whose decipherment led to the contemporary understanding of hieroglyphics, was itself a decree issued by Ptolemy V that contained tax concessions. Early examples of taxation are also seen in the Bible, ancient Vedic texts, the Bronze-age Hittite Empire, and the Persian Empire.

Roman and civil law In the Roman Republic, taxes were collected from individuals at the rate of between 1% and 3% of the assessed value of their total property. However, since it was extremely difficult to facilitate the collection of the tax, the government auctioned it every year. The winning tax farmers (called publicani) paid the tax revenue to the government in advance and then kept the taxes collected from individuals. The publicani paid the tax revenue in coins, but collected the taxes using other exchange media, thus relieving the government of the work to carry out the currency conversion themselves. The revenue payment essentially worked as a loan to the government, which paid interest on it. Although this scheme was a profitable enterprise for the government as well as the publicani, it was later replaced by a direct tax system by the emperor Augustus; after which, each province was obliged to pay 1% tax on wealth and a flat rate on each adult. This brought about regular census and shifted the tax system more towards taxing an individual's income rather than wealth.

Islamic law Islamic rulers imposed Zakat (a tax on Muslims) and Jizya (a poll tax on conquered non-Muslims).

Modern history Numerous records of government tax collection in Europe since at least the 17th century are still available today. But taxation levels are hard to compare to the size and flow of the economy since production numbers are not as readily available. Taxation as a percentage of production of final goods may have reached 15–20% during the 17th century in places such as 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. Effective tax rates were higher in Britain than France in the years before the French Revolution, but they were mostly placed on international trade. In France, taxes were lower but the burden was mainly on landowners, individuals, and internal trade and thus created far more resentment.

Obsolete forms Obsolete forms of taxation include:

In monetary economies prior to fiat banking, a critical form of taxation was seigniorage, the tax on the creation of money. Scutage, which is paid in lieu of military service; strictly speaking, it is 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-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). This should not be confused with the modern practice of the same name which is normally voluntary. (Feudal) aids, a type of tax or due that was paid by a vassal to his lord during feudal times. Danegeld, a medieval land tax originally raised to pay off raiding Danes and later used to fund military expenditures. Carucage, a tax which replaced the Danegeld in England. Tax farming, the principle of assigning the responsibility for tax revenue collection to private citizens or groups. Socage, a feudal tax system based on land rent. Burgage, a feudal tax system based on land rent.

Taxonomy and classification The Organisation for Economic Co-operation and Development (OECD) publishes an analysis of the tax systems of member countries. As part of such analysis, OECD has developed a definition and system of classification of internal taxes.

Income tax

Negative income tax

Capital gains

Corporate

Social-security contributions Many countries provide publicly funded retirement or healthcare systems.

Payroll or workforce

Property

Property taxes

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