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Posted on: Dec 05, '08

Tax

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 . Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent. A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government a payment exacted by legislative authority." 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 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 and economics. Tax collection is performed by a government agency. When taxes are not fully paid, civil penalties or criminal penalties.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 market 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. This function is widely accepted in most democracies, 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.

Kinds 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:

Ad valorem

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.

Environment Affecting Tax

This includes natural resources consumption tax, GreenHouse gas tax (Carbon tax), "sulfuric tax", and others.

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. In India, Short Term Capital Gains Tax (arising before 1 year) is 10% flat rate of the gains and Long Term Capital Gains Tax is nil for stocks & mutual fund units held 1 year or more and 20% for any other assets held 3 years or more. If such a tax is levied on inherited property, it can act as a de facto probate or inheritance tax.

Consumption tax

A consumption tax is a tax on non-investment spending, and can be implemented by means of a sales tax or by modifying an income tax to allow for unlimited deductions for investment or savings.

Corporation 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. Corporate expenses that relate to capital expenditures are usually deducted in full (for example, trucks are fully deductible in the Canadian tax system, while a corporate sports car is only partly deductible). They are often deducted over the useful life of the asset purchase. Notably, accounting rules about deductible expenses and tax rules about deductible expense will differ at times, giving rise to book-tax differences. If the book-tax difference is carried over more than a year, it is referred to as a temporary difference, which then creates deferred tax assets and liabilities for the corporation, which are carried on the balance sheet.

Excises

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 U.S. gallon (4.86¢/L) of gasoline, while state governments levy an additional 8 to 28 cents per U.S. gallon. Excises on particular commodities are frequently hypothecated. For example, a fuel excise (use tax) 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 blindly tax 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 (social engineering). For example, a high 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 United Kingdom, vehicle excise duty is an annual tax on vehicle ownership.

Income tax

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 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. 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.

Inheritance tax

Inheritance tax, estate tax, and death tax or duty are the names given to various taxes which arise on the death of an individual. In United States tax law, there is a distinction between an estate tax and an inheritance tax: the former taxes the personal representatives of the deceased, while the latter taxes the beneficiaries of the estate. However, this distinction does not apply in other jurisdictions; for example, if using this terminology UK inheritance tax would be an estate tax.

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 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), led to widespread refusal to pay and to incidents of civil unrest, known colloquially as the 'Poll Tax riots'.

Property tax

A property tax is a tax imposed on property by reason of its ownership. A property tax is usually levied on the value of property owned. There are three species of property: land, improvements to land (immovable man-made things, e.g. buildings) and personal property (movable things). Real estate or realty is the combination of land and improvements to land.

Property taxes are usually charged on a recurrent basis (e.g., yearly). A common type of property tax is an annual charge on the ownership of real estate, where the tax base is the estimated value of the property. For a period of over 150 years from 1695 a window tax was levied in England, with the result that one can still see listed buildings with windows bricked up in order to save their owners 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 real estate (land and 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"). Proponents of land value tax argue that it is economically justified, as it will not deter production, distort market mechanisms or otherwise create deadweight losses the way other taxes do.

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.

In many jurisdictions (including many American states), there is a general tax levied periodically on residents who own personal property (personalty) within the jurisdiction. Vehicle and boat registration fees are subsets of this kind of tax. The tax is often designed with blanket coverage and large exceptions for things like food and clothing.

Household goods are often exempt when kept or used within the household. 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. 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.

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.

Sales tax

Sales taxes are 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 U.S. 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 U.S. states that do not levy a state income tax are Alaska, Tennessee, Florida, Nevada, South Dakota, Texas, Washington state, and Wyoming. Additionally, New Hampshire and Tennessee levy state income taxes only 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 5%. The provinces of British Columbia, Saskatchewan, Manitoba, Ontario and Prince Edward Island also have a provincial sales tax [PST]. The provinces of Nova Scotia, New Brunswick, and Newfoundland & Labrador have harmonized their provincial sales taxes with the GST - Harmonized Sales Tax [HST], and thus is a full VAT. The province of Quebec collects the Quebec Sales Tax [QST] which is based on the GST with certain differences. Most businesses can claim back the GST, HST and QST they pay, and so effectively it is the final consumer who pays the tax.

Tariffs

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. Tax, tariff and trade rules in modern times are usually set together because of their common impact on industrial policy, investment policy, and agricultural policy. A trade bloc is a group of allied countries agreeing to minimize or eliminate tariffs against trade with each other, and possibly to impose protective tariffs on imports from outside the bloc. A customs union has a common external tariff, and, according to an agreed formula, the participating countries share the revenues from tariffs on goods entering the customs union.

Toll

A toll is a tax or fee charged to travel via a road, bridge, tunnel or other route. Historically tolls have been used to pay for state bridge, road and tunnel projects. They have also been used in privately constructed transport links. The toll is likely to be a fixed charge, possibly graduated for vehicle type, or for distance on long routes.
Shunpiking is the practice of finding another route to avoid payment of tolls. In some situations where tolls were increased or felt to be unreasonably high, informal shunpiking by individuals escalated into a form of boycott by regular users, with the goal of applying the financial stress of lost toll revenue to the authority determining the levy.

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 United States 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.

Value Added Tax / Goods and Services Tax

A value added tax (VAT), also known as 'Goods and Services Tax' (G.S.T), Single 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 mark-up to the government. The last VAT amount is paid by the eventual retail customer who cannot recover any of the previously paid VAT. For a VAT and sales tax of identical rates, the total tax paid is the same, but it is paid at differing points in the process.

VAT is usually administrated by requiring the company to complete a VAT return, giving details of VAT it has been charged (referred to as input tax) and VAT it has charged to others (referred to as 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 the Local Tax Authority. VAT was historically used to counter evasion in a sales tax or excise. By collecting the tax at each production level, the theory is that the entire economy helps in the enforcement. However, forged invoices and similar evasion methods have demonstrated that there are always those who will attempt to evade taxation.

Economic theorists have argued that the collection process of VAT minimises the market distortion resulting from the tax, compared to a sales tax. However, VAT is held by some to discourage production.

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".

Tax Rates around the world
Comparison of Tax Rates around the world is a difficult and somewhat subjective enterprise. Tax laws in most countries are extremely complex, and tax burden falls differently on different groups in each country and sub-national unit. The lists below give an indication by rank of some raw indicators.

List

This is a list of tax rates around the world. It is focused on three types of taxes: corporate and individual taxes and sales taxes (value added taxes (VAT) / goods and services taxes (GST) / sales). It is not intended to represent the true tax burden to either the corporation or the individual in the listed country.

Country                         Corporate                          Individual
Algeria                          30% 3%                             0-40%
Argentina                       35%                                 9-35%
Australia                        30%                                  0-45%
Austria                           25%                                21-50%
Azerbaijan                      22%                                  0-35%
Bangladesh                      0-40%                               0-25%
Barbados                         40%                                25%-40%
Belarus                            24%                                 12-30%
Belgium                          33.99%                              25-50%
Bosnia and Herzegovina     10%                                    10%
Brazil                            12-34%                               0-27.5%
Tarafina                          40%                                  20-38%
Burundi                           35%                                    35%
Cameroon                       38.5%                                 10-35%
Canada                      29.5-35.5%               15-29% (f) 4-17.95% (p)
Chile                              17%                                     0-40%
China                            25%                                     5-45%
Colombia                        35%                                 0.29-38.5%
Croatia                          20%                                     15-45%
Cuba                              30%                                    10-50%
Cyprus                           10%                                     20-30%
Czech Republic               21%                                       15%
Denmark                         25%                                     0-59%
Egypt                             20%                                     10-20%
El Salvador                     25%                                     0-25%
Estonia                             22%                                     22%
Finland                             26%                       0-32% (n), 16-21% (m)
France                            33.33%                              10-50%
Germany                  29.8% (average)                         0-45%
Georgia                            20%                                   12%
Gibraltar                          33%                                17-40%
Greece                            22/25%                             0-40%
Guatemala                         31%                              15-31%
Guyana                            35%/45%                           33%u2153%
Hong Kong                         16.5%                               0-15%
Hungary                            16%                             18% and 36%
Iceland                           18/26%                            0-36.72%
India                              30-40%                             10-30%
Indonesia                          30%                                 5-35%
Iran                                 25%                                 0-35%
Ireland                            12.5%                               20-41%
Israel                              27%                                 10-47%
Italy                                33%                                23-43%
Japan                              30%                                  5-40%
Jordan                        15/25/35%                           5-30%
South Korea                    13/25%                9%-21.375% 36% (e)
Latvia                               15%                                 25%
Lebanon                        15/4-21%                           2-20%
Lithuania                          15%                               15%/24%
Luxembourg                    29.63%                           6-38.95%
Malaysia                          28%                                0-28%
Malta                              35%                                0-35%
Mexico                            29%                               3-29%
Monaco                          33.33%                              0%
Montenegro                      9%                                 15%
Morocco                          35%                              0-41.5%
Nepal                              N/A                            10% to 25%
Netherlands                    25.5%                              0-52%
New Zealand                    30%                                0-39%
Norway                            28%                               0-47.8%
Pakistan                           35%                               7.5-35%
Panama                             30%                                0-27%
Peru                                 27%                               15-27%
Philippines                        35%                                5-32%
Poland                              19%                                19-40%
Portugal                         27.5%                              10.5-40%
Romania                           16%                                   16%
Russia 24% 13%
Saudi Arabia               20%-85%           11% (SSR) 2.5% (ZNR) 20%
Senegal                                                              33% up to 50%
Serbia                              10%                                  10/14%
Singapore                         18%                                 3.5%-20%
Slovakia                           19%                                     19%
Slovenia                           22%                                  16-41%
South Africa                    28%                                  18-40%
Spain                             25-30%                               0-42%
Sweden                             28%                            28.89%-59.09%
Switzerland                   13-25%                              0-13.2% (f)
Syria                             10-45%                               5-15%
Republic of China              25%                                 6-40%
Tanzania                           30%                                15%-30%
Thailand                            30%                                5-37%
Trinidad and Tobago          25%                                 25%
Tunisia                              30%                                0-35%
Turkey                              20%                               15-35%
Ukraine                             25%                                  13%
United Arab Emirates         0%                                    0%
United Kingdom               21-28%                           0,20,40%
United States         15-39% (f) 0-12% (s)        0-35% (f) 0-10.3% (s)
Uruguay                             30%                             0-24.125%
Uzbekistan                         12%                              13-30%
Venezuela                      15/22/34%                        6-34%
Vietnam                              28%                             0-40%
British Virgin Islands          0%                                 0%
Zambia                               35%                           10-30%

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