Tax

Tax is a compulsory financial charge imposed by a government on individuals or organizations. Taxes fund public goods and services, finance government operations, and influence economic and social outcomes. They are usually collected nationally but may be levied by subnational authorities. Compliance is governed by law, and failure to pay can trigger penalties.

Taxes fall into direct and indirect categories. Direct taxes are paid directly by the person or entity on income, wealth, or property, such as income tax, corporate tax, and wealth taxes. Indirect taxes are levied on goods and services and collected as part of prices, such as sales or value-added tax (VAT), excise duties, and tariffs.

Principles of taxation include equity, efficiency, simplicity, certainty, and administrability. Equity encompasses vertical equity (higher earners pay more) and horizontal equity (similarly able taxpayers pay similarly). Simplicity and certainty reduce compliance costs and improve predictability.

Administration involves agencies that assess, collect, and enforce taxes. Mechanisms include withholding at source, self-assessment, and periodic filing. Audits, penalties for evasion, and appeals processes enforce compliance. Internationally, tax treaties prevent double taxation and allocate taxing rights; transfer pricing rules curb profit shifting.

Revenue from taxes funds public goods such as defense, education, health, and infrastructure and can redistribute income. Tax policy balances revenue needs with incentives for work, saving, and investment; high taxes may raise revenue but distort behavior, while lower taxes can promote growth but reduce services.

Current trends include taxing the digital economy and pursuing a global minimum corporate tax. Ongoing reforms use data analytics, digital filing, and greater information exchange.