Taxation

Cities, states, and countries pay for most of the expenses of government through taxes. Taxes are payments to the government that are

required by law. Almost every country in the world levies, or charges, taxes from its citizens, though the amount and type of taxes vary greatly from place to place.

Governments use the money raised from taxes for a variety of purposes. The primary purpose is to pay for the things that a government must provide to the people it serves. For example, taxes are used to build schools, roads, and bridges and to maintain services such as police and firefighting. Local, state, and national taxes also pay the salaries of all government officials, such as presidents, legislators, governors, mayors, and other leaders.

Beginning in the 20th century, historical events such as the Great Depression and new theories of economics led to new purposes for taxing citizens. Governments increasingly monitored the economy

to ensure better lives for their citizens. Some governments began to raise or lower taxes to improve national rates of employment or to spur economic growth.

Another major purpose of taxation that arose in the 20th century is the redistribution of wealth. The goal of this type of taxation is to provide assistance for those who need the help. For example, tax revenues are often applied to welfare programs that provide jobs and other benefits to people who cannot work.

Some countries levy other taxes to encourage certain types of behavior. In the United States high taxes on alcohol and tobacco products help to discourage their use and tax revenues help to offset the costs of health care for people who need treatment as a result of these drugs. Some nations use taxes in an attempt to change patterns in population. One example is taxing single people at a higher rate than married people to encourage marriage.

There are many different types of taxes. Among them are income taxes, property taxes, sales taxes, inheritance taxes, and estate taxes.

An individual income tax, also called a personal income tax, is a tax on a person’s income. Income includes wages, salaries, and other earnings from one’s occupation; interest earned by savings accounts and certain types of bonds; rents (earnings from rented properties); royalties earned on sales of patented or copyrighted items, such as inventions and books; and dividends from stock. Income also includes capital gains, which are profits from the sale of stock, real estate, or other investments whose value has increased over time.

Whereas an income tax is levied on all sources of income, a payroll tax applies only to wages and salaries. Employers automatically withhold payroll taxes from employees’ wages and forward them to the government. Payroll taxes are the main sources of funding for various social insurance programs, such as those that provide benefits to the poor, elderly, unemployed, and disabled. In 1994 payroll taxes accounted for about 26 percent of all tax revenues in the United States; in Canada, the figure was 17 percent. For most people, payroll taxes are the second-largest tax they must pay each year, after individual income taxes.

Corporate income taxes make up another large portion of tax revenue in many countries. Companies pay taxes based on net profits, or the amount of money left over after the costs of conducting business plus other exemptions and deductions.

Property taxes are among the oldest type of taxation in the world. In many countries, including the United States, property is taxed at the state or local level instead of the national level. These taxes often provide the chief source of revenue for local governments. Most types of property are taxed. Exceptions include property owned by government, such as schools, libraries, and parks. Religious and charitable institutions can also be free from having to pay property taxes.

Sales taxes are among the most widely used type of taxes. These taxes are imposed as a percentage of the cost of goods and services, and they are charged upon purchase of those items. Many countries have national sales taxes, but only the states impose sales taxes in the United States. Different states have different percentage rates for their sales taxes, with some having no sales tax at all.

Inheritance and estate taxes create revenue from the transfer of property that happens when someone dies. An inheritance tax is charged on items that are handed down from one person to another. An estate tax applies when the object being handed down is the total estate left by the deceased. These taxes do not represent a large portion of income for state and national governments.

The system by which all citizens pay taxes to support the government is relatively new.

For a long time taxes played a very small role in the conduct of government. In ancient Greece and Rome, governments owned so much wealth that they did not require additional money to operate. The government received money from mining operations and from wealthy citizens in the form of gifts (though some were required by law). With the growth of trade, taxes were levied to pay for transportation and related costs. Taxes known as tariffs were imposed on imported goods.

During this time personal income taxes did not exist, but individuals did pay other taxes. Ancient Rome, for example, had an inheritance tax. In the 1st century BC Rome under Julius Caesar instituted a 1 percent sales tax.

The Middle Ages saw very little use of taxes. Under the system known as feudalism, wealthy kings and nobles offered protection in exchange for land. People who gave up their land could use it during their lifetime, but it often passed to the protector upon their death. This system

began to fall apart as people gained greater rights under the law, such as the rights outlined in the Magna Carta. With less control over the people and the land, kings and nobles saw their wealth shrink. To restore their wealth, they introduced income and property taxes.

The American and French revolutions in the late 18th century were largely caused by people who were fighting against unjust tax systems. In particular, the American colonies complained of "taxation without representation." In other words, the colonies paid taxes to the British government, but Great Britain did not allow the colonies to have a voice in the government.

The income tax was introduced in Great Britain in 1799. The first income tax in the United States was adopted in 1862, during the American Civil War. The 1862 income tax was cancelled ten years later, and an attempt to reintroduce it in 1894 was declared unconstitutional, or contrary to the written guidelines of the government. The United States did not have a permanent national income tax until 1913. It required an amendment, or change, to the U.S. Constitution.

The 20th century brought about many changes to tax systems. In the United States many states began to abolish poll taxes, which were levied on voters at election time. (Poll taxes were declared unconstitutional in 1964.) The major change, however, was the changing of tax systems to redistribute wealth and to manage economic growth.

The 20th century also saw the United States and other governments experiment with new methods for obtaining revenue. Many states began lotteries, or games of chance in which players could win millions of dollars. Revenues from state lotteries were often set aside to pay for certain areas of government, such as education. Along the same lines, some state governments allowed the creation of casinos, or organized gambling establishments, which had been limited to very few locations in the country. These efforts were not considered taxes, but they did have the goal of reducing the burdens of taxation on the nation's citizens.

DATA SHEET

The primary purpose of taxation	is to pay for the things (schools, roads) and services (police, firefighting) the government provides to the people of the country.
The secondary purpose of taxation
Types of taxes. The oldest type of taxation.
The most widely used type of taxes.
Sources of income tax revenues
Payroll tax refers only to… and is the source of …
The proportion of payroll taxes in the USA
Payments of corporate income taxes
Peculiarity of sales taxes in the USA.
Revenues from the transfer of property
Tariffs are imposed on…
The taxes paid in Ancient Rome.
Taxes introduced in the Middle Ages
The introduction of income tax in Great Britain and the USA
The major changes in tax systems in the 20th century.