An income tax is a tax imposed on individuals or entities (taxpayers) that varies with respective income or profits (taxable income). Income tax generally is computed as the product of a tax rate times taxable income. Taxation rates may vary by type or characteristics of the taxpayer.
The tax rate may increase as taxable income increases (referred to as graduated or progressive rates). The tax imposed on companies is usually known as corporate tax and is levied at a flat rate. However, individuals are taxed at various rates according to the band in which they fall. Further, the partnership firms are also taxed at flat rate. Most jurisdictions exempt locally organized charitable organizations from tax. Capital gains may be taxed at different rates than other income. Credits of various sorts may be allowed that reduce tax. Some jurisdictions impose the higher of an income tax or a tax on an alternative base or measure of income.
Taxable income of taxpayers resident in the jurisdiction is generally total income less income producing expenses and other deductions. Generally, only net gain from sale of property, including goods held for sale, is included in income. Income of a corporation's shareholders usually includes distributions of profits from the corporation. Deductions typically include all income producing or business expenses including an allowance for recovery of costs of business assets. Many jurisdictions allow notional deductions for individuals, and may allow deduction of some personal expenses. Most jurisdictions either do not tax income earned outside the jurisdiction or allow a credit for taxes paid to other jurisdictions on such income. Nonresidents are taxed only on certain types of income from sources within the jurisdictions, with few exceptions.
Most jurisdictions require self-assessment of the tax and require payers of some types of income to withhold tax from those payments. Advance payments of tax by taxpayers may be required. Taxpayers not timely paying tax owed are generally subject to significant penalties, which may include jail for individuals or revocation of an entity's legal existence.
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 first fruits, 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.
The first income tax is generally attributed to Egypt. In the early days of the Roman Republic, public taxes consisted of modest assessments on owned wealth and property. The tax rate under normal circumstances was 1% and sometimes would climb as high as 3% in situations such as war. These modest taxes were levied against land, homes and other real estate, slaves, animals, personal items and monetary wealth. The more a person had in property, the more tax they paid. Taxes were collected from individuals.
In the year 10 AD, Emperor Wang Mang of the Xin Dynasty instituted an unprecedented income tax, at the rate of 10 percent of profits, for professionals and skilled labor. He was overthrown 13 years later in 23 AD and earlier policies were restored during the reestablished Han Dynasty which followed.
One of the first recorded taxes on income was the Saladin tithe introduced by Henry II in 1188 to raise money for the Third Crusade. The tithe demanded that each layperson in England and Wales be taxed one tenth of their personal income and moveable property.
The inception date of the modern income tax is typically accepted as 1799, at the suggestion of Henry Beeke, the future Dean of Bristol. This income tax was introduced into Great Britain by Prime Minister William Pitt the Younger in his budget of December 1798, to pay for weapons and equipment for the French Revolutionary War. Pitt's new graduated (progressive) income tax began at a levy of 2 old pence in the pound (1/120) on incomes over £60 (equivalent to £6,200 in 2018), and increased up to a maximum of 2 shillings in the pound (10%) on incomes of over £200. Pitt hoped that the new income tax would raise £10 million a year, but actual receipts for 1799 totalled only a little over £6 million.
Pitt's income tax was levied from 1799 to 1802, when it was abolished by Henry Addington during the Peace of Amiens. Addington had taken over as prime minister in 1801, after Pitt's resignation over Catholic Emancipation. The income tax was reintroduced by Addington in 1803 when hostilities with France recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo. Opponents of the tax, who thought it should only be used to finance wars, wanted all records of the tax destroyed along with its repeal. Records were publicly burned by the Chancellor of the Exchequer, but copies were retained in the basement of the tax court.
In the United Kingdom of Great Britain and Ireland, income tax was reintroduced by Sir Robert Peel by the Income Tax Act 1842. Peel, as a Conservative, had opposed income tax in the 1841 general election, but a growing budget deficit required a new source of funds. The new income tax, based on Addington's model, was imposed on incomes above £150 (equivalent to £13,870 in 2018),. Although this measure was initially intended to be temporary, it soon became a fixture of the British taxation system.
A committee was formed in 1851 under Joseph Hume to investigate the matter, but failed to reach a clear recommendation. Despite the vociferous objection, William Gladstone, Chancellor of the Exchequer from 1852, kept the progressive income tax, and extended it to cover the costs of the Crimean War. By the 1860s, the progressive tax had become a grudgingly accepted element of the English fiscal system.
The US federal government imposed the first personal income tax on August 5, 1861, to help pay for its war effort in the American Civil War - (3% of all incomes over US$800) (equivalent to $22,300 in 2018). This tax was repealed and replaced by another income tax in 1862. It was only in 1894 that the first peacetime income tax was passed through the Wilson-Gorman tariff. The rate was 2% on income over $4000 (equivalent to $116,000 in 2018), which meant fewer than 10% of households would pay any. The purpose of the income tax was to make up for revenue that would be lost by tariff reductions. The US Supreme Court ruled the income tax unconstitutional, the 10th amendment forbidding any powers not expressed in the US Constitution, and there being no power to impose any other than a direct tax by apportionment.
In 1913, the Sixteenth Amendment to the United States Constitution made the income tax a permanent fixture in the U.S. tax system. In fiscal year 1918, annual internal revenue collections for the first time passed the billion-dollar mark, rising to $5.4 billion by 1920. The amount of income collected via income tax has varied dramatically, from 1% in the early days of US income tax to taxation rates of over 90% during WW2.
While tax rules vary widely, there are certain basic principles common to most income tax systems. Tax systems in Canada, China, Germany, Singapore, the United Kingdom, and the United States, among others, follow most of the principles outlined below. Some tax systems, such as India, may have significant differences from the principles outlined below. Most references below are examples; see specific articles by jurisdiction (e.g., Income tax in Australia).
Individuals are often taxed at different rates than corporations. Individuals include only human beings. Tax systems in countries other than the USA treat an entity as a corporation only if it is legally organized as a corporation. Estates and trusts are usually subject to special tax provisions. Other taxable entities are generally treated as partnerships. In the US, many kinds of entities may elect to be treated as a corporation or a partnership. Partners of partnerships are treated as having income, deductions, and credits equal to their shares of such partnership items.
Separate taxes are assessed against each taxpayer meeting certain minimum criteria. Many systems allow married individuals to request joint assessment. Many systems allow controlled groups of locally organized corporations to be jointly assessed.
Tax rates vary widely. Some systems impose higher rates on higher amounts of income. Example: Elbonia taxes income below E.10,000 at 20% and other income at 30%. Joe has E.15,000 of income. His tax is E.3,500. Tax rates schedules may vary for individuals based on marital status.
Residents are generally taxed differently from nonresidents. Few jurisdictions tax nonresidents other than on specific types of income earned within the jurisdiction. See, e.g., the discussion of taxation by the United States of foreign persons. Residents, however, are generally subject to income tax on all worldwide income.[notes 1] A very few countries (notably Singapore and Hong Kong) tax residents only on income earned in or remitted to the country.
Residence is often defined for individuals as presence in the country for more than 183 days. Most countries base residence of entities on either place of organization or place of management and control. The United Kingdom has three levels of residence.
Most systems define income subject to tax broadly for residents, but tax nonresidents only on specific types of income. What is included in income for individuals may differ from what is included for entities. The timing of recognizing income may differ by type of taxpayer or type of income.
Income generally includes most types of receipts that enrich the taxpayer, including compensation for services, gain from sale of goods or other property, interest, dividends, rents, royalties, annuities, pensions, and all manner of other items. Many systems exclude from income part or all of superannuation or other national retirement plan payments. Most tax systems exclude from income health care benefits provided by employers or under national insurance systems.
Nearly all income tax systems permit residents to reduce gross income by business and some other types of deductions. By contrast, nonresidents are generally subject to income tax on the gross amount of income of most types plus the net business income earned within the jurisdiction.
Expenses incurred in a trading, business, rental, or other income producing activity are generally deductible, though there may be limitations on some types of expenses or activities. Business expenses include all manner of costs for the benefit of the activity. An allowance (as a capital allowance or depreciation deduction) is nearly always allowed for recovery of costs of assets used in the activity. Rules on capital allowances vary widely, and often permit recovery of costs more quickly than ratably over the life of the asset.
Most systems allow individuals some sort of notional deductions or an amount subject to zero tax. In addition, many systems allow deduction of some types of personal expenses, such as home mortgage interest or medical expenses.
Only net income from business activities, whether conducted by individuals or entities is taxable, with few exceptions. Many countries require business enterprises to prepare financial statements which must be audited. Tax systems in those countries often define taxable income as income per those financial statements with few, if any, adjustments. A few jurisdictions compute net income as a fixed percentage of gross revenues for some types of businesses, particularly branches of nonresidents.
Nearly all systems permit residents a credit for income taxes paid to other jurisdictions of the same sort. Thus, a credit is allowed at the national level for income taxes paid to other countries. Many income tax systems permit other credits of various sorts, and such credits are often unique to the jurisdiction.
Some jurisdictions, particularly the United States and many of its states and Switzerland, impose the higher of regular income tax or an alternative tax. Switzerland and U.S. states generally impose such tax only on corporations and base it on capital or a similar measure.
Income tax is generally collected in one of two ways: through withholding of tax at source and/or through payments directly by taxpayers. Nearly all jurisdictions require those paying employees or nonresidents to withhold income tax from such payments. The amount to be withheld is a fixed percentage where the tax itself is at a fixed rate. Alternatively, the amount to be withheld may be determined by the tax administration of the country or by the payer using formulas provided by the tax administration. Payees are generally required to provide to the payer or the government the information needed to make the determinations. Withholding for employees is often referred to as "pay as you earn" (PAYE) or "pay as you go."
Income taxes of workers are often collected by employers under a withholding or pay-as-you-earn tax system. Such collections are not necessarily final amounts of tax, as the worker may be required to aggregate wage income with other income and/or deductions to determine actual tax. Calculation of the tax to be withheld may be done by the government or by employers based on withholding allowances or formulas.
Nearly all systems require those whose proper tax is not fully settled through withholding to self-assess tax and make payments prior to or with final determination of the tax. Self-assessment means the taxpayer must make a computation of tax and submit it to the government. Some countries provide a pre-computed estimate to taxpayers, which the taxpayer can correct as necessary.
The proportion of people who pay their income taxes in full, on time, and voluntarily (that is, without being fined or ordered to pay more by the government) is called the voluntary compliance rate. The voluntary compliance rate is higher in the US than in countries like Germany or Italy. In countries with a sizeable black market, the voluntary compliance rate is very low and may be impossible to properly calculate.
Income taxes are separately imposed by sub-national jurisdictions in several countries with federal systems. These include Canada, Germany, Switzerland, and the United States, where provinces, cantons, or states impose separate taxes. In a few countries, cities also impose income taxes. The system may be integrated (as in Germany) with taxes collected at the federal level. In Quebec and the United States, federal and state systems are independently administered and have differences in determination of taxable income.
Retirement oriented taxes, such as Social Security or national insurance, also are a type of income tax, though not generally referred to as such. In the US, these taxes generally are imposed at a fixed rate on wages or self-employment earnings up to a maximum amount per year. The tax may be imposed on the employer, the employee, or both, at the same or different rates.
Some jurisdictions also impose a tax collected from employers, to fund unemployment insurance, health care, or similar government outlays.
Multiple conflicting theories have been proposed regarding the economic impact of income taxes. Income taxes are widely viewed as a progressive tax (the incidence of tax increases as income increases).
Some studies have suggested that an income tax doesn't have much effect on the numbers of hours worked.
Tax avoidance strategies and loopholes tend to emerge within income tax codes. They get created when taxpayers find legal methods to avoid paying taxes. Lawmakers then attempt to close the loopholes with additional legislation. That leads to a vicious cycle of ever more complex avoidance strategies and legislation. The vicious cycle tends to benefit large corporations and wealthy individuals that can afford the professional fees that come with ever more sophisticated tax planning, thus challenging the notion that even a marginal income tax system can be properly called progressive.
The higher costs to labour and capital imposed by income tax causes deadweight loss in an economy, being the loss of economic activity from people deciding not to invest capital or use time productively because of the burden that tax would impose on those activities. There is also a loss from individuals and professional advisors devoting time to tax-avoiding behaviour instead of economically-productive activities.
Income taxes are used in most countries around the world. The tax systems vary greatly and can be progressive, proportional, or regressive, depending on the type of tax. 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. Of course, services provided by governments in return for taxation also vary, making comparisons all the more difficult.
Countries that tax income generally use one of two systems: territorial or residential. In the territorial system, only local income – income from a source inside the country – is taxed. In the residential system, residents of the country are taxed on their worldwide (local and foreign) income, while nonresidents are taxed only on their local income. In addition, a very small number of countries, notably the United States, also tax their nonresident citizens on worldwide income.
Countries with a residential system of taxation usually allow deductions or credits for the tax that residents already pay to other countries on their foreign income. Many countries also sign tax treaties with each other to eliminate or reduce double taxation.
Countries do not necessarily use the same system of taxation for individuals and corporations. For example, France uses a residential system for individuals but a territorial system for corporations, while Singapore does the opposite, and Brunei taxes corporate but not personal income.
The Abolition of Income Tax and Usury Party was a South African political party founded in 1994.Corporate tax
A corporate tax, also called corporation tax or company tax, is a direct tax* imposed by a jurisdiction on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at state or local levels. The taxes may also be referred to as income tax or capital tax. Partnerships are generally not taxed at the entity level. A country's corporate tax may apply to:
corporations incorporated in the country,
corporations doing business in the country on income from that country,
foreign corporations who have a permanent establishment in the country, or
corporations deemed to be resident for tax purposes in the country.Company income subject to tax is often determined much like taxable income for individual taxpayers. Generally, the tax is imposed on net profits. In some jurisdictions, rules for taxing companies may differ significantly from rules for taxing individuals. Certain corporate acts, like reorganizations, may not be taxed. Some types of entities may be exempt from tax.
Countries may tax corporations on its net profit and may also tax shareholders when the corporation pays a dividend. Where dividends are taxed, a corporation may be required to withhold tax before the dividend is distributed.
Economists disagree as to how much of the burden of the corporate tax falls on owners, workers consumers and landowners, and how the corporate tax affects economic growth and economic inequality.Note:*Considered indirect because the cost of the tax can transferred to the consumer.Earned income tax credit
The United States federal earned income tax credit or earned income credit (EITC or EIC) is a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children. The amount of EITC benefit depends on a recipient’s income and number of children. For a person or couple to claim one or more persons as their qualifying child, requirements such as relationship, age, and shared residency must be met. In the 2013 tax year, working families, if they have children, with annual incomes below $37,870 to $51,567 (depending on the number of dependent children) may be eligible for the federal EITC. Childless workers that have incomes below about $14,340 ($19,680 for a married couple) can receive a very small EITC benefit. U.S. tax forms 1040EZ, 1040A, or 1040 can be used to claim EITC without qualifying children. To claim the credit with qualifying children, forms 1040A or 1040 must be used along with Schedule EITC attached.EITC phases in slowly, has a medium-length plateau, and then phases out more slowly than it was phased in. Since the credit phases out at 21% (more than one qualifying child) or 16% (one qualifying child), it is always preferable to have one more dollar of actual salary or wages considering the EITC alone. (Investment income, however, is handled far less gracefully, as one more dollar of income can result in the sudden 100% loss of the entire credit.) If the EITC is combined with multiple other means-tested programs such as Medicaid or Temporary Assistance for Needy Families, it is possible that the marginal tax rate approaches or exceeds 100% in rare circumstances depending on the state of residence; conversely, under certain circumstances, net income can rise faster than the increase in wages because the EITC phases in.For tax year 2018, the maximum EITC benefit for a single person or couple filing without qualifying children is $519. The maximum EITC with one qualifying child is $3,461, with two children it is $5,716, and with three or more qualifying children, it is $6,431. These amounts are indexed annually for inflation.
The earned income tax credit has been part of political debates in the United States regarding whether raising the minimum wage or increasing EITC is a better idea. In a random survey of 568 members of the American Economic Association in 2011, roughly 60% of economists agreed (31.7%) or agreed with provisos (30.8%) that the Earned Income Tax Credit program should be expanded.Flat tax
A flat tax (short for flat-rate tax) is a tax system with a constant marginal rate, usually applied to individual or corporate income. A true flat tax would be a proportional tax, but implementations are often progressive and sometimes regressive depending on deductions and exemptions in the tax base. There are various tax systems that are labeled "flat tax" even though they are significantly different.Income tax in India
The Constitution of India → Schedule VII → Union List → Entry 82 has given the power to the Central Government to levy a tax on any income other than agricultural income, which is defined in Section 10(1) of the Income Tax Act, 1961. The Income Tax Law consists of Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance Acts and judicial pronouncements by the Supreme Court and High Courts.
The government imposes a tax on taxable income of all persons who are individuals, Hindu Undivided Families (HUF's), companies, firms, LLP, association of persons, body of individuals, local authority and any other artificial juridical person. Levy of tax on a person depends upon his residential status. The CBDT administers the Income Tax Department, which is a part of the Department of Revenue under the Ministry of Finance, Govt. of India. Income tax is a key source of funds that the government uses to fund its activities and serve the public.
The Income Tax Department is the biggest revenue mobilizer for the Government. The total tax revenues of the Central Government increased from ₹1,392.26 billion (US$19 billion) in 1997-98 to ₹5,889.09 billion (US$82 billion) in 2007-08.Income tax in the United States
Income taxes in the United States are imposed by the federal, most state, and many local governments. The income taxes are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allowable deductions. Income is broadly defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income. Partnerships are not taxed, but their partners are taxed on their shares of partnership income. Residents and citizens are taxed on worldwide income, while nonresidents are taxed only on income within the jurisdiction. Several types of credits reduce tax, and some types of credits may exceed tax before credits. An alternative tax applies at the federal and some state levels.
In the United States, the term "payroll tax" usually refers to 'FICA taxes' that are paid to fund Social Security and Medicare, while "income tax" refers to taxes that are paid into state and federal general funds.
Most business expenses are deductible. Individuals may also deduct a personal allowance (exemption) and certain personal expenses, including home mortgage interest, state taxes, contributions to charity, and some other items. Some deductions are subject to limits.
Capital gains are taxable, and capital losses reduce taxable income to the extent of gains (plus, in certain cases, $3,000 or $1,500 of ordinary income). Individuals currently pay a lower rate of tax on capital gains and certain corporate dividends.
Taxpayers generally must self assess income tax by filing tax returns. Advance payments of tax are required in the form of withholding tax or estimated tax payments. Taxes are determined separately by each jurisdiction imposing tax. Due dates and other administrative procedures vary by jurisdiction. April 15 following the tax year is the last day for individuals to file tax returns for federal and many state and local returns. Tax as determined by the taxpayer may be adjusted by the taxing jurisdiction.Income tax threshold
The income tax threshold is the income level at which a person begins paying income taxes. The income tax threshold equates to the:
Personal allowance in the UK, which was £9,440 in 2013-14 and £10,000 in 2014-15, the highest in the G7.
Basic allowance in Germany, which was €8,004 in 2012.
Income tax threshold in France, which was €6,088 in 2012.
The standard deduction in the US, which was $12,000 in 2018 for a single person.
Basic personal amount in Canada, which was C$10,822 in 2012.
Tax-free threshold in Australia, which was A$18,200 in 2012-13.
Tax-free threshold in Greece, which was €9,545 in 2016.
Tax-free threshold in Poland is 6600 PLN in 2018. Above 6600 PLN the tax-free becomes "tax-reduction" and decreases progressivelyIndian Revenue Service
The Indian Revenue Service (IAST: Bhāratīya Rājasva Sevā), often abbreviated to I.R.S., or simply IRS, is the administrative revenue service of the Government of India. A Central Service, it functions under the Department of Revenue of the Ministry of Finance and is under the administrative direction of the Revenue Secretary and the ministerial command of the Minister of Finance. The IRS is primarily responsible for collecting and administering direct and indirect taxes accruing to the Government of India. It is the largest civil service amongst the organised civil services in the Indian government and serves the nation through discharging sovereign functions of collection of revenue for development, security and governance.As with other countries that follow the Westminster system of government, the IRS is part of the permanent bureaucracy of the nation, and is an inseparable part of the executive of the Government of India. As such, the bureaucracy remains politically neutral and guarantees administrative continuity to the ruling party.The IRS comprises two branches, IRS (Income Tax) and IRS (Customs and Indirect Taxes), controlled by two separate statutory bodies, the Central Board of Direct Taxes (CBDT) and the Central Board of indirect taxes and Customs (CBIC). The duties of the IRS (IT) include providing tax assistance to taxpayers, pursuing and resolving instances of erroneous or fraudulent tax filings, and formulating and enforcing policy concerning income tax in India. The duties of the IRS (C&IT) include formulation and enforcement of policy concerning the Goods and Services Tax, prevention of smuggling and administration of matters related to Customs and Narcotics.
In the 2015 fiscal year, the IRS (IT) processed 3,91,28,247 returns and collected ₹6.95797 lakh crore (equivalent to ₹7.8 trillion or US$110 billion in 2018) in gross revenue, spending ₹6 (equivalent to ₹7.00 or 9.7¢ US in 2018) for every ₹1,000 (equivalent to ₹1,100 or US$16 in 2018) it collected. The relative contribution of direct tax to the overall tax collection of the Central Government has risen from about 36% to 56% over the period of 2000–01 to 2013–14. The contribution of direct tax-to-GDP has doubled (from about 3% to 6%) during the same period.Negative income tax
In economics, a negative income tax (NIT) is a welfare system within an income tax where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government.
Such a system has been discussed by economists but never fully implemented. According to surveys however, the consensus view among economists is that the "government should restructure the welfare system along the lines" of one. It was described by British politician Juliet Rhys-Williams in the 1940s and later by United States free-market economist Milton Friedman.Negative income taxes can implement a basic income or supplement a guaranteed minimum income system.
In a negative income tax system, people earning a certain income level would owe no taxes; those earning more than that would pay a proportion of their income above that level; and those below that level would receive a payment of a proportion of their shortfall, which is the amount their income falls below that level.Progressive tax
A progressive tax is a tax in which the average tax rate (taxes paid ÷ personal income) increases as the taxable amount increases. The term "progressive" refers to the way the tax rate progresses from low to high, with the result that a taxpayer's average tax rate is less than the person's marginal tax rate. The term can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Progressive taxes are imposed in an attempt to reduce the tax incidence of people with a lower ability to pay, as such taxes shift the incidence increasingly to those with a higher ability-to-pay. The opposite of a progressive tax is a regressive tax, where the average tax rate or burden decreases as an individual's ability to pay increases.The term is frequently applied in reference to personal income taxes, in which people with lower income pay a lower percentage of that income in tax than do those with higher income. It can also apply to adjustments of the tax base by using tax exemptions, tax credits, or selective taxation that creates progressive distribution effects. For example, a wealth or property tax, a sales tax on luxury goods, or the exemption of sales taxes on basic necessities, may be described as having progressive effects as it increases the tax burden of higher income families and reduces it on lower income families.Progressive taxation is often suggested as a way to mitigate the societal ills associated with higher income inequality, as the tax structure reduces inequality, but economists disagree on the tax policy's economic and long-term effects. One study suggests progressive taxation can be positively associated with happiness, the subjective well-being of nations and citizen satisfaction with public goods, such as education and transportation.Revenue Act of 1861
The Revenue Act of 1861, formally cited as Act of August 5, 1861, Chap. XLV, 12 Stat. 292, included the first U.S. Federal income tax statute (see Sec.49). The Act, motivated by the need to fund the Civil War, imposed an income tax to be "levied, collected, and paid, upon the annual income of every person residing in the United States, whether such income is derived from any kind of property, or from any profession, trade, employment, or vocation carried on in the United States or elsewhere, or from any other source whatever [ . . . .]"
The tax imposed was a flat tax, with a rate of 3% on incomes above $800. The Revenue Act of 1861 was signed into law by Abraham Lincoln. This Act introduced Federal income tax as a flat rate tax.
The income tax provision (Sections 49, 50 and 51) was repealed by the Revenue Act of 1862. (See Sec.89, which replaced the flat rate with a progressive scale of 3% on annual incomes beyond $600 ($12,742 in 2009 dollars) and 5% on incomes above $10,000 ($212,369 in 2009 dollars) or those living outside the U.S., and perhaps more significantly it was explicitly temporary, specifying termination of income tax in "the year eighteen hundred and sixty-six").Sixteenth Amendment to the United States Constitution
The Sixteenth Amendment (Amendment XVI) to the United States Constitution allows Congress to levy an income tax without apportioning it among the states on the basis of population. It was passed by Congress in 1909 in response to the 1895 Supreme Court case of Pollock v. Farmers' Loan & Trust Co. The Sixteenth Amendment was ratified by the requisite number of states on February 3, 1913, and effectively overruled the Supreme Court's ruling in Pollock.
Prior to the early 20th century, most federal revenue came from tariffs rather than taxes, although Congress had often imposed excise taxes on various goods. The Revenue Act of 1861 had introduced the first federal income tax, but that tax was repealed in 1872. During the late nineteenth century, various groups, including the Populist Party, favored the establishment of a progressive income tax at the federal level. These groups believed that tariffs unfairly taxed the poor, and they favored using the income tax to shift the tax burden onto wealthier individuals. The 1894 Wilson–Gorman Tariff Act contained an income tax provision, but the tax was struck down by the Supreme Court in the case of Pollock v. Farmers' Loan & Trust Co. In its ruling, the Supreme Court did not hold that all federal income taxes were unconstitutional, but rather held that income taxes on rents, dividends, and interest were direct taxes and thus had to be apportioned among the states on the basis of population.
For several years after Pollock, Congress did not attempt to implement another income tax, largely due to concerns that the Supreme Court would strike down any attempt to levy an income tax. In 1909, during the debate over the Payne–Aldrich Tariff Act, Congress proposed the Sixteenth Amendment to the states. Though conservative Republican leaders had initially expected that the amendment would not be ratified, a coalition of Democrats, progressive Republicans, and other groups ensured that the necessary number of states ratified the amendment. Shortly after the amendment was ratified, Congress imposed a federal income tax with the Revenue Act of 1913. The Supreme Court upheld that income tax in the 1916 case of Brushaber v. Union Pacific Railroad Co., and the federal government has continued to levy an income tax since 1913.State income tax
Most individual U.S. states collect a state income tax in addition to federal income tax. The two are separate entities. Some local governments also impose an income tax, often based on state income tax calculations. Forty-three states and many localities in the United States may impose an income tax on individuals. Forty-seven states and many localities impose a tax on the income of corporations.State income tax is imposed at a fixed or graduated rate on taxable income of individuals, corporations, and certain estates and trusts. The rates vary by state. Taxable income conforms closely to federal taxable income in most states, with limited modifications. The states are prohibited from taxing income from federal bonds or other obligations. Most do not tax Social Security benefits or interest income from obligations of that state. Several states require different useful lives and methods be used by businesses in computing the deduction for depreciation. Many states allow a standard deduction or some form of itemized deductions. States allow a variety of tax credits in computing tax.
Each state administers its own tax system. Many states also administer the tax return and collection process for localities within the state that impose income tax.
State income tax is allowed as a deduction in computing federal income tax, subject to limitations for individuals.Tax evasion
Tax evasion is the illegal evasion of taxes by individuals, corporations, and trusts. Tax evasion often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned, or overstating deductions.
Tax evasion is an activity commonly associated with the informal economy. One measure of the extent of tax evasion (the "tax gap") is the amount of unreported income, which is the difference between the amount of income that should be reported to the tax authorities and the actual amount reported.
In contrast, tax avoidance is the legal use of tax laws to reduce one's tax burden. Both tax evasion and avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that intend to subvert a state's tax system, although such classification of tax avoidance is not indisputable, given that avoidance is lawful, within self-creating systems.Tax rates in Europe
This is a list of the maximum potential tax rates around Europe for certain income brackets. It is focused on three types of taxes: corporate, individual, and value added taxes (VAT). It is not intended to represent the true tax burden to either the corporation or the individual in the listed country.Taxation in Sweden
Taxation in Sweden on salaries for an employee involves contributing to three different levels of government: the municipality, the county council, and the central government. Social security contributions are paid to finance the social security system.
Income tax on salaries is deducted by the employer (a PAYE system) and paid directly by the employer to the Swedish Tax Agency (Skatteverket).
The effective taxation rate in Sweden is commonly cited as among the highest in the world; see list of countries by tax rates.
Sweden has a taxation system for income from work that combines an income tax (paid by the employee) with social security contributions (employers contributions) that are paid by the employer. The total salary cost for the employer is thereby the gross salary plus the social security contributions. The employer makes monthly preliminary deductions (PAYE) for income tax and also pays the social security contributions to the Swedish Tax Agency.
The income tax is contingent on the person being taxable in Sweden, and the social security contributions are contingent on the person being part of the Swedish social insurance plan. The income tax is finalised through a yearly tax assessment the year following the income year.27% of taxpayer money in Sweden go to education and healthcare, whereas 5% go to the police and military, and 42% to social security.Taxation in the United Kingdom
Taxation in the United Kingdom may involve payments to at least three different levels of government: central government (Her Majesty's Revenue and Customs), devolved governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England, Council Tax and increasingly from fees and charges such as those for on-street parking. In the fiscal year 2014–15, total government revenue was forecast to be £648 billion, or 37.7 per cent of GDP, with net taxes and National Insurance contributions standing at £606 billion.Taxation in the United States
The United States of America has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. In 2010, taxes collected by federal, state, and municipal governments amounted to 24.8% of GDP. In the OECD, only Chile and Mexico are taxed less as a share of their GDP.However, taxes fall much more heavily on labor income than on capital income. Divergent taxes and subsidies for different forms of income and spending can also constitute a form of indirect taxation of some activities over others. For example, individual spending on higher education can be said to be "taxed" at a high rate, compared to other forms of personal expenditure which are formally recognized as investments.Taxes are imposed on net income of individuals and corporations by the federal, most state, and some local governments. Citizens and residents are taxed on worldwide income and allowed a credit for foreign taxes. Income subject to tax is determined under tax accounting rules, not financial accounting principles, and includes almost all income from whatever source. Most business expenses reduce taxable income, though limits apply to a few expenses. Individuals are permitted to reduce taxable income by personal allowances and certain non-business expenses, including home mortgage interest, state and local taxes, charitable contributions, and medical and certain other expenses incurred above certain percentages of income. State rules for determining taxable income often differ from federal rules. Federal marginal tax rates vary from 10% to 39.6% of taxable income. State and local tax rates vary widely by jurisdiction, from 0% to 13.30% of income, and many are graduated. State taxes are generally treated as a deductible expense for federal tax computation, although the 2017 tax law imposed a $10,000 limit on the state and local tax ("SALT") deduction, which raised the effective tax rate on medium and high earners in high tax states. Prior to the SALT deduction limit, the average deduction exceeded $10,000 in most of the Midwest, and exceeded $11,000 in most of the Northeastern United States, as well as California and Oregon. The states impacted the most by the limit were the tri-state area (NY, NJ, and CT) and California; the average SALT deduction in those states was greater than $17,000 in 2014.The United States is one of two countries in the world that taxes its non-resident citizens on worldwide income, in the same manner and rates as residents; the other is Eritrea. The U.S. Supreme Court upheld the constitutionality of imposition of such a tax in the case of Cook v. Tait.Payroll taxes are imposed by the federal and all state governments. These include Social Security and Medicare taxes imposed on both employers and employees, at a combined rate of 15.3% (13.3% for 2011 and 2012). Social Security tax applies only to the first $106,800 of wages in 2009 through 2011. However, benefits are only accrued on the first $106,800 of wages. Employers must withhold income taxes on wages. An unemployment tax and certain other levies apply to employers. Payroll taxes have dramatically increased as a share of federal revenue since the 1950s, while corporate income taxes have fallen as a share of revenue. (Corporate profits have not fallen as a share of GDP).Property taxes are imposed by most local governments and many special purpose authorities based on the fair market value of property. School and other authorities are often separately governed, and impose separate taxes. Property tax is generally imposed only on realty, though some jurisdictions tax some forms of business property. Property tax rules and rates vary widely with annual median rates ranging from 0.2% to 1.9% of a property's value depending on the state.Sales taxes are imposed by most states and some localities on the price at retail sale of many goods and some services. Sales tax rates vary widely among jurisdictions, from 0% to 16%, and may vary within a jurisdiction based on the particular goods or services taxed. Sales tax is collected by the seller at the time of sale, or remitted as use tax by buyers of taxable items who did not pay sales tax.
The United States imposes tariffs or customs duties on the import of many types of goods from many jurisdictions. These tariffs or duties must be paid before the goods can be legally imported. Rates of duty vary from 0% to more than 20%, based on the particular goods and country of origin.
Estate and gift taxes are imposed by the federal and some state governments on the transfer of property inheritance, by will, or by lifetime donation. Similar to federal income taxes, federal estate and gift taxes are imposed on worldwide property of citizens and residents and allow a credit for foreign taxes.The Income-tax Act, 1961
The Income-tax Act, 1961 is the charging Statute of Income Tax in India. It provides for levy, administration, collection and recovery of Income Tax. The Government of India brought a draft statute called the "Direct Taxes Code" intended to replace the Income Tax Act,1961 and the Wealth Tax Act, 1957. However the bill was later scrapped.
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