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 profit 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).

[edit] Principles

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).

Tax rates may be progressive, regressive, 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 regressive income tax may tax income up to a certain amount, such as taxing only the first $90,000 earned. A tax system may use different taxation methods for different types of income. However, the idea of a progressive income tax has garnered support from economists and political scientists of many different ideologies, from Adam Smith in The Wealth of Nations^[1] to Karl Marx in The Communist Manifesto.^[2]

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.

[edit] History

The concept of taxing income is a modern innovation and presupposes several things: a money economy, reasonably accurate accounts, a common understanding of receipts, expenses and profits, and an orderly society with reliable records. For most of the history of civilization, these preconditions did not exist, and taxes were based on other factors. Taxes on wealth, social position, and ownership of the means of production (typically land and slaves) were all common. Practices such as tithing, or an offering of firstfruits, existed from ancient times, and can be regarded as a precursor of the income tax, but they lacked precision and certainly were not based on a concept of net increase.

In the year 10, Emperor Wang Mang of China instituted an unprecedented tax -- the income tax -- at the rate of 10 percent of profits, for professionals and skilled labor. (Previously, all Chinese taxes were either head tax or property tax.) A true income tax was first implemented in Britain by William Pitt the Younger in his budget of December 1798 to pay for weapons and equipment in preparation for the Napoleonic wars. Pitt's new graduated income tax began at a levy of 2d in the pound (0.8333%) on incomes over £60 and increased up to a maximum of 2s (10%) on incomes of over £200. Pitt hoped that the new income tax would raise £10 million but actual receipts for 1799 totalled just over £6 million (see UK income tax history for more information).^[3] The first United States income tax was imposed in July 1861, 3% of all incomes over 600 dollars (later rescinded in 1872).^[4]

[edit] Income tax systems

Income Tax rates by Country based on OECD 2005 data (includes employer payroll tax contributions that some countries impose for programs like social security and health care).^[5]

[edit] Australia

Main article: Income tax in Australia

Since 1942, income tax in Australia has been collected solely by the Federal Government, to the exclusion of the Australian States (see Constitutional basis of taxation in Australia). Australia uses a system of progressive taxation on personal income that is collected as a pay-as-you-go tax (known as PAYG), a flat rate tax on business income (company tax), and a property tax limited to realised capital gains. Australia’s income tax system contains a complex array of deductions and offsets, and is administered by the Australian Taxation Office.

[edit] Argentina

Main article: Income tax in Argentina

Income tax in Argentina is collected solely by the Federal Government, to the exclusion of the Argentine Provinces. Argentina uses a system of progressive taxation on personal income that is collected as a deferred tax, a flat rate tax on business income (company tax, 35%), and a property tax limited to realised capital gains. Argentina’s income tax system contains a complex array of deductions and offsets, and is administered by the Administración Federal de Ingresos Públicos (AFIP).

[edit] Canada

Main article: Income taxes in Canada

The income tax was first imposed in Canada in 1917 on both individuals and corporations, collected primarily by the Federal Government originally meant to finance Canada's involvement in World War I set at a rate of 4%. Tax collection agreements enable both the federal and provincial governments to levy income taxes through a single administration and collection agency, called the Canada Revenue Agency. The federal government collects personal income taxes on behalf of all provinces except Quebec and collects corporate income taxes on behalf of all provinces except Alberta and Quebec. Canada has a graduated tax system, whereby the percentage over the "more than" amount goes up....graduated from 15.25 - 29% (2006).^[6] These rates, together with provincial income tax rates, federal and provincial surtaxes, and provincial health premium taxes (both also calculated based on income), serve to create a combined top marginal tax rate that can approach 50% in some provinces.

[edit] Denmark

The Danish income tax was introduced in 1903 and is now divided into state tax and local tax. The state tax is a progressive tax while the local tax is a flat tax.

The local tax varies from municipality to municipality. The highest local tax in 2007 is 26,71 % and the lowest is 20,14 %. Income below DKK 41,000 ($8,000) (2007-level, adjusted annually) is tax exempt.^[7]

There are three income brackets for the state tax. In 2007 income from DKK 39,500 to DKK 272,600 is taxed at 5,48%, income from DKK 272,600 to DKK 327,200 is taxed at additionally 6% and income above DKK 327,200 is taxed at 15% on top.

All income originating from terms of employment or self-employment are levied a social contribution at 8% before income tax. This contribution is widely regarded as "gross tax". The highest total income tax is therefore 62,28%.

A number of deductions apply. The general rule is that the taxpayer is able to deduct his expenses in acquiring his taxable income. There are many exceptions to this rule though. Employees have very limited possibilities for tax deduction as it is assumed that the employer covers the expenses related to the employee's work. The employer will then be able to deduct most of these expenses from his own taxable income.

[edit] France

Main article: Taxation in France

The French income tax is a progressive tax, i.e. tax is an increasing piecewise linear continuous function of income (excluding various rebates etc.). This means that the amount of income earned up to a certain amount t1 is taxed at a rate r1, then the remaining money, up to a certain amount t2 is taxed at a rate r2, etc. The income tax (impôt sur le revenu): 16% of tax revenue. The tax on corporations: 12% of tax revenue.

The French Government has launched the Copernic tax project which unifies the tax paying process.

[edit] Germany

Main article: Taxation in Germany

The German income tax is a progressive tax: income below the "existence minimum" (about 8000 EUR/year) is tax-free, higher income is taxed with a marginal tax rate running from 15 % up to 45 % (as of 2008). Additionally, earned income is subject to about 40 % of social insurance fees, half of it to be paid by the employer and the other half by the employee.

[edit] Guatemala

In Guatemala, the Superintendencia de Administracion Tributaria (SAT) levies tax on personal and corporate income.

[edit] Hong Kong

There are three income types earned in Hong Kong that are taxed, but they are not locally referred to as income taxes. Per Inland Revenue Ordinance Chapter 112 (IRO), these three types are classified into: Profit tax IRO section 14, Salaries tax IRO section 8, and Property tax IRO section 5.^[8]

[edit] India

Main article: Income tax in India

India has a three-tier tax structure, comprising the Union Government, the State Governments and the Urban/Rural Local Bodies^[9]. The power to levy taxes and duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution. The main taxes/duties that the Union Government is empowered to levy are Income Tax (except tax on agricultural income, which the State Governments can levy), Customs duties, Central Excise and Sales Tax and Service Tax. The principal taxes levied by the State Governments are Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions & Callings. The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc.

[edit] Indonesia

Main article: Taxation in Indonesia

The income tax in Indonesia is known as Pajak Penghasilan (PPh) and is considered to be a progressive tax. The rule governing this taxation is also called pph21.

[edit] Iran

Main article: Income tax in Iran

The Islamic Republic of Iran has income taxes. The highest tax bracket on profits is 46.4%.

[edit] Italy

Refer to IRPEF (in Italian) for the Italian personal taxation system.

The Italian personal income tax is a progressive tax, i.e. tax is an increasing piecewise affine continuous function of income (excluding various rebates etc.). This means that the amount of income earned up to a certain amount t1 is taxed at a rate r1, then the remaining money, up to a certain amount t2 is taxed at a rate r2, etc.

[edit] Japan

Main article: Taxation in Japan

Progressive taxation at the national level that ranges from 5% to 40%. Resident taxes are an additional 10%.^[10]

[edit] Malta

Malta has a progressive individual income tax, ranging from 0% to 35%. For single computations, income up to €8,150 is tax free, income between €8,151 and €14,000 is taxed 15%, income between €14,001 and €19,000 is taxed 20% and income above €19,000 is taxed 35%. For joint computations, income up to €11,400 is tax free, income between €11,401 and €20,500 is taxed 15%, income between €20,501 and €28,000 is taxed 20% and income above €28,000 is taxed 35%.

[edit] Netherlands

Main article: Income tax in the Netherlands

The Netherlands taxes income on personal income (wages, profits, social security); some business income; and savings and investments. The tax on personal income is progressive and casts a wide tax net over wages, profits, social security, and pensions. The tax is withheld from wages and can reach a marginal rate of 52%. As an example of the breadth of the tax net, value gains in owner-occupied homes are treated as personal income, even though those gains are not realized (i.e. do not equate to cash in hand). Interest can be deducted as a cost incurred in earning the income. The tax on business income is a flat tax of 25% and only applied to "substantial business interests", which are generally a shareholding of 5%. A flat tax is paid on savings and investments, even if the gain is not realized.

[edit] Peru

Main article: Income tax in Peru

The income tax in Peru is collected by the Superintendencia Nacional de Administración Tributaria (SUNAT). This country uses a system of progressive taxation on personal income, and a flat rate tax on business income.

[edit] Poland

Poland has a progressive personal income tax.^[11]. The first 3,013 złotys earned in the year are free of tax, then income lower than 43,405 złotys is taxed at 19%. Yearly earnings between 43,405 to 85,528 złotys incur 30% tax. Top personal income tax rate is paid on earnings above 85,528 Polish złotys (apprx. 22,500 euro) per year and is equal to 40%.

[edit] Russia

Russia imposes a flat tax of 13% on personal income and 24% on corporate income. Several types of income, such as lottery winnings, are taxed at 35%. Dividends are taxed at 9%. There is a large list income not subject to taxation.

[edit] Singapore

Main article: Individual income tax in Singapore

Singapore has a progressive individual income tax,^[12] with taxes ranging from 0% to 20% up to Year of Assessment 2007. The tax net includes employment income, dividends, interests, and rental incomes.^[12] A range of deductions are available. Singapore also has an income tax on corporations.^[13]

[edit] Sweden

Sweden has a taxation system that combines a direct tax (paid by the employee) with an indirect tax (paid by the employer). In practice, the employer provides the state with both means of taxation, but the employee only sees the direct tax on his declaration form. The compilation of taxes that compose the final income tax (2003): tax on gross income from the employer: 32.82% (indirect, fixed), pension fee on gross income: 6.95% (indirect, fixed), municipal tax on gross income less pension tax and a base deduction: ~32% (direct, varies by municipality), state tax on gross income less pension tax and a base deduction: 0%, 20%, or 25% (direct, progressive).

[edit] United Kingdom

Main article: Taxation in the United Kingdom

The British income tax system is progressive with a number of bands: 10% (only applies to savings income and from April 2008 does not apply to earnings), 20% basic rate on UK dividends, investment income and income from employment/self employment (was 22% until April 2008), and (in respect of the higher rate band and all income on certain trusts) 32.5% on UK dividends and 40% on other sources^[14] There are also a number of untaxed allowances (such as a personal allowance) to which tax bands do not apply. The tax is an annual tax and is reimposed each year in the annual Finance Act. In addition, the UK has a National Insurance contribution based on income. Although effectively another form of income tax, credits for payments of this applied to the individual's record which, in turn, will impact on entitlement to welfare and (the level of) state pension payments. Rates are levied on the self employed, the employed, and their respective employers. The United Kingdom also imposes a corporation tax, charged on the profits and chargeable gains of companies. The main rate is 30%, which is levied on taxable income above GBP 1.5 million, but it will be reduced to 28% in April 2008. Income of £300,000 or less is taxed at 20%. Marginal reliefs exist between the £300,000 and £1,500,000 bands.^[15]

Under the Scotland Act 1998 , the Scottish Parliament has the power to increase or reduce the basic rate of income tax by three pence in the pound, though not yet exercised.

[edit] United States

Main article: Income tax in the United States

The United States imposes an income tax on individuals, corporations, trusts, and certain estates. This tax is imposed on the income event, such as the receipt of wages. Another example of an income event is the realization of a gain on the disposition of property; that is, the appreciation on the value of property is not taxed until that property is sold (i.e., when the gain is "realized").

The U.S. income tax was first proposed during the War of 1812, but was defeated.^[4] In July 1861, the Congress passed a 3% tax on all net income above $600 a year (about USD 10,000 today). Income taxes were enacted at various times until 1894, but were not imposed after 1895 when an 1894 tax act was found to be unconstitutional. In response, the 16th Amendment was ratified in 1913.^[4] Ratification has been unsuccessfully disputed by some tax protesters claiming, among other things, that slight errors in punctuation in the various instruments ratified by the several states invalidates the ratification. Tax protesters have also made other arguments about the validity of the U.S. income tax, without success (see Tax protester arguments).

The top marginal tax rate in the U.S. was 67 to 73 percent from 1917 to 1921, then began to fall, reaching a low of 25 percent from 1925 to 1931. The rate was increased to 63 percent in 1932, to 79 percent in 1936, and to 88 percent in 1942. From 1951 to 1963, the top marginal tax rate was 91 percent, and was 70 percent through most of the 1970s. In 1988 it was lowered to 28 percent, but raised in 1993 to 39.6 percent.

The 2007 individual federal income tax rates are between 10% and 35%, depending on income and family status. People with relatively low incomes may pay no income tax, or may receive earned income tax credits (tax benefits); however, this does not include income based payroll taxes that fund Social Security and Medicare. The Center on Budget and Policy Priorities states that three-fourths of taxpayers pay more in payroll taxes than they do in income taxes.^[16] IRS data indicate that the wealthiest 5% of taxpayers (ranked by AGI, counting only returns with positive AGI) paid roughly 60% of all income taxes; the bottom 50% of taxpayers account for just 3% of income taxes paid.^[17]

[edit] U.S. state

Main articles: State income tax and State tax levels

Income tax may also be levied by individual U.S. states in addition to the federal income tax. Some states also allow individual cities to impose an additional income tax. Most state and local taxes are deductible expenses for federal tax purposes. Not all states levy an income tax (see State income tax)

[edit] Critique of income tax

Critics of income tax systems have argued that they can be extremely complex, requiring detailed record-keeping, lengthy instructions, and complicated schedules, worksheets, and forms. Critics further claim that income tax systems can penalize work, discourage saving and investment, and hinder the competitiveness of business.^[18] Income taxes are not border-adjustable; meaning the tax component embedded into products via taxes imposed on companies cannot be removed when exported to a foreign country (see Effect of taxes and subsidies on price). Taxation systems such as a national sales tax or value added tax remove the tax component when goods are exported and apply the tax component on imports.^[19] The principles of an income tax are also argued by critics. Frank Chodorov wrote "... you come up with the fact that it gives the government a prior lien on all the property produced by its subjects." The government "unashamedly proclaims the doctrine of collectivized wealth. ... That which it does not take is a concession."^[4]