Understanding Taxes

Taxes—we know that we hate them, we know that we resent them, we know that we want to rebel against them and we wish that they would go away. But do we understand them?

Taxes are financial burden imposed by governments on individuals. There are two main types of taxes: direct taxes such as income tax as well as indirect taxes. Taxes, whether they are referred to as tolls, tributes, tariffs, imposts, duties, customs, excises, subsidies, aids, or supplies, are not voluntary payments or donations. They are enforced and mandatory. Both direct and indirect taxes can be paid in money or in labor or goods but in modern times, taxes are levied in only money.

The funds collected by governments through taxation pay for wars, law enforcement and public order, protection of property, construction of infrastructures, public works, social engineering, welfare, public services and for the operation of governments themselves.

To distribute the tax burden among individual citizens and population groups, governments impose different kinds of taxes with varied tax rates. In the olden days, poor peasants supported nobility by the taxes they were forced to pay. Conversely, modern social security systems were established to support the poor, the disabled, and the retired by taxing those who are still working.

Taxation has four most important purposes:

• Revenue. Taxes raise money for building roads, schools, and hospitals. They also raise money for more indirect government functions such as regulation and justice systems.
• Redistribution. In The intent of these taxes is to raise money from the wealthy to distribute among the poor. The ratios of this process has always been disputed and debated.
• Repricing. This taxes cause prices of products and services to rise for a deliberate effect. A good example of this is the tax on tobacco which raises the cost of cigarettes and is meant to discourage smoking.
• Representation. This taxation dates back to the well-known slogan of the American Revolution, “no taxation without representation.” This implies that the government taxes its citizens and the citizens demand accountability from their government. Studies have shown that direct taxation such as income tax engenders maximum accountability and better governing.

The percentage of a tax burden as it relates to income is a crucial aspect of taxation and the way it progresses can be described as follows:

• Progressive tax. This is a tax that is imposed in a way that its rate increases in direct proportion to the rate of increase of that which it taxes.
• Regressive tax. The rate of this tax decreases as that which it taxes increases.
• Proportional tax. The rate of this tax is fixed as that which it taxes increases.

Ancient Egypt had the first known and documented system of taxation around 3,000 BC to 2,800 BC when the Pharaoh would decree biennial collections of tax revenues from the people of his kingdom. These early taxes were in the form of twenty percent of all crops.

Government tax collection in Europe had been meticulously recorded since the seventeenth century. Taxation in France, the Netherlands and Scandinavia were at approximately fifteen to twenty percent during that era but in the eighteenths century taxes increased by approximately eighty-five percent. Taxes in England were much higher. The average rate of taxation for 2003 in the United States was at 35.7 percent in comparison to Denmark that was at 56.1 percent.

Taxation on income, a.k.a. income tax, is a fairly modern concept and is based on the assumption that it functions in a money economy and in a society that keeps reliable records and accurate accounting. It also assumes that there is a general and common understanding of receipts, expanses and profits. These assumptions could not have been applied to most of the history of civilization. Therefore, taxes were levied on wealth, social positions, ownership of lands and slaves but never on income until modern times.

Posted in Tax Preparation & Software