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Total revenue from direct and indirect taxes given as share of GDP in 2017[1]

A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures.[2] A failure to pay, along with evasion of or resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent. The first known taxation took place in Ancient Egypt around 3000–2800 BC.

Most countries have a tax system in place to pay for public, common, or agreed national needs and government functions. Some levy a flat percentage rate of taxation on personal annual income, but most scale taxes based on annual income amounts. Most countries charge a tax on an individual's income as well as on corporate income. Countries or subunits often also impose wealth taxes, inheritance taxes, estate taxes, gift taxes, property taxes, sales taxes, payroll taxes or tariffs.

In economic terms, taxation transfers wealth from households or businesses to the government. This has effects that can both increase and reduce economic growth and economic welfare. Consequently, taxation is a highly debated topic.


Pieter Brueghel the Younger, The tax collector's office, 1640


In modern taxation systems, governments levy taxes in money; but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated in politics and economics. Tax collection is performed by a government agency such as the Ghana Revenue Authority, Canada Revenue Agency, the Internal Revenue Service (IRS) in the United States, Her Majesty's Revenue and Customs (HMRC) in the United Kingdom or Federal Tax Service in Russia. When taxes are not fully paid, the state may impose civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration) on the non-paying entity or individual.[3]

Purposes and effects[edit]



According to the proponents of the chartalist theory of money creation, taxes are not needed for government revenue, as long as the government in question is able to issue fiat money. According to this view, the purpose of taxation is to maintain the stability of the currency, express public policy regarding the distribution of wealth, subsidizing certain industries or population groups or isolating the costs of certain benefits, such as highways or social security.[4]

Effects of taxes can be divided into two fundamental categories:

Substitution effect and income effect with a taxation on y good.

If we consider, for instance, two normal goods, x and y, whose prices are respectively px and py and an individual budget constraint given by the equation xpx + ypy = Y, where Y is the income, the slope of the budget constraint, in a graph where is represented good x on the vertical axis and good y on the horizontal axes, is equal to -py/px . The initial equilibrium is in the point (C), in which budget constraint and indifference curve are tangent, introducing an ad valorem tax on the y good (budget constraint: pxx + py(1 + τ)y = Y), the budget constraint's slope becomes equal to -py(1 + τ)/px. The new equilibrium is now in the tangent point (A) with a lower indifferent curve.

As can be noticed the tax's introduction causes two consequences:

  1. It changes the consumers' real income (less purchasing power)
  2. It raises the relative price of y good.

The income effect shows the variation of y good quantity given by the change of real income. The substitution effect shows the variation of y good determined by relative prices' variation. This kind of taxation (that causes the substitution effect) can be considered distortionary.

Budget's constraint shift after an introduction of a lump sum tax or a general tax on consumption or a proportional income tax.

Another example can be the introduction of an income lump-sum tax (xpx + ypy = Y - T), with a parallel shift downward of the budget constraint, can be produced a higher revenue with the same loss of consumers' utility compared with the property tax case, from another point of view, the same revenue can be produced with a lower utility sacrifice. The lower utility (with the same revenue) or the lower revenue (with the same utility) given by a distortionary tax are called excess pressure. The same result, reached with an income lump-sum tax, can be obtained with these following types of taxes (all of them cause only a budget constraint's shift without causing a substitution effect), the budget constraint's slope remains the same (-px/py):

  • A general tax on consumption: (Budget constraint: px(1 + τ)x + py(1 + τ)y = Y)
  • A proportional income tax: (Budget constraint: xpx + ypy = Y(1 - t))

When the t and τ rates are chosen respecting this equation (where t is the rate of income tax and tau is the consumption tax's rate):

the effects of the two taxes are the same.

A tax effectively changes the relative prices of products. Therefore, most economists, especially neoclassical economists, argue that taxation creates market distortion and results in economic inefficiency unless there are (positive or negative) externalities associated with the activities that are taxed that need to be internalized to reach an efficient market outcome. They have therefore sought to identify the kind of tax system that would minimize this distortion. Recent scholarship suggests that in the United States of America, the federal government effectively taxes investments in higher education more heavily than it subsidizes higher education, thereby contributing to a shortage of skilled workers and unusually high differences in pre-tax earnings between highly educated and less-educated workers.

Taxes can even have effects on labor supply: we can consider a model in which the consumer chooses the number of hours spent working and the amount spent on consumption. Let us suppose that only one good exists and no income is saved.

Consumers have a given number of hours (H) that is divided between work (L) and free time (F = H - L). The hourly wage is called w and it tells us the free time's opportunity cost, i.e. the income to which the individual renounces consuming an additional hour of free time. Consumption and hours of work have a positive relationship, more hours of work mean more earnings and, assuming that workers don't save money, more earnings imply an increase in consumption (Y = C = wL). Free time and consumption can be considered as two normal goods (workers have to decide between working one hour more, that would mean consuming more or having one more hour of free time) and the budget constraint is negatively inclined (Y = w(H - F)). The indifference curve related to these two goods has a negative slope and free time becomes more and more important with high levels of consumption. This is because a high level of consumption means that people are already spending many hours working, so, in this situation, they need more free time than consume and it implies that they have to be paid with a higher salary to work an additional hour. A proportional income tax, changing budget constraint's slope (now Y = w(1 - t)(H - F)), implies both substitution and income effects. The problem now is that the two effects go in opposite ways: the income effect tells us that, with an income tax, the consumer feels poorer and for this reason he wants to work more, causing an increase in labor offer. On the other hand, the substitution effect tells us that free time, being a normal good, is now more convenient compared to consume and it implies a decrease in labor offer. Therefore, the total effect can be both an increase or a decrease of labor offer, depending on the indifference curve's shape.

The Laffer curve. In this case, the critical point is at a tax rate of 70%. Revenue increases[5] until this peak, then it starts decreasing.

The Laffer curve depicts the amount of government revenue as a function of the rate of taxation. It shows that for a tax rate above a certain critical rate, government revenue starts decreasing as the tax rate rises, as a consequence of a decline in labor supply. This theory supports that, if the tax rate is above that critical point, a decrease in the tax rate should imply a rise in labor supply that in turn would lead to an increase in government revenue.



All large businesses incur administrative costs in the process of delivering revenue collected from customers to the suppliers of the goods or services being purchased. Taxation is no different, as governments are large organizations; the resource collected from the public through taxation is always greater than the amount which can be used by the government.[6] The difference is called the compliance cost and includes (for example) the labor cost and other expenses incurred in complying with tax laws and rules. The collection of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism-rehabilitation centers, is called hypothecation. Finance ministers often dislike this practice, since it reduces their freedom of action. Some economic theorists regard hypothecation as intellectually dishonest since, in reality, money is fungible. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general fund. In some cases, such taxes are collected in fundamentally inefficient ways, for example, through highway tolls.

Since governments also resolve commercial disputes, especially in countries with common law, similar arguments are sometimes used to justify a sales tax or value added tax. Some (libertarians, for example) portray most or all forms of taxes as immoral due to their involuntary (and therefore eventually coercive or violent) nature. The most extreme anti-tax view, anarcho-capitalism, holds that all social services should be voluntarily bought by the people using them.


The Organisation for Economic Co-operation and Development (OECD) publishes an analysis of the tax systems of member countries. As part of such analysis, OECD has developed a definition and system of classification of internal taxes,[7] generally followed below. In addition, many countries impose taxes (tariffs) on the import of goods.


Income tax[edit]

Many jurisdictions tax the income of individuals and of business entities, including corporations. Generally, the authorities impose a tax on net profits from a business, on net gains, and on other income. Computation of income subject to tax may be determined under accounting principles used in the jurisdiction, which tax-law principles in the jurisdiction may modify or replace. The incidence of taxation varies by system, and some systems may be viewed as progressive or regressive. Rates of tax may vary or be constant (flat) by income level. Many systems allow individuals certain personal allowances and other non-business reductions to taxable income, although business deductions tend to be favored over personal deductions.

Tax-collection agencies often collect personal income tax on a pay-as-you-earn basis, with corrections made after the end of the tax year. These corrections take one of two forms:

  • payments to the government, from taxpayers who have not paid enough during the tax year
  • tax refunds from the government to those who have overpaid

Income-tax systems often make deductions available that reduce the total tax liability by reducing total taxable income. They may allow losses from one type of income to count 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 income tax by carrying forward the loss to later tax years.

Negative income tax[edit]

In economics, a negative income tax (abbreviated NIT) is a progressive income tax system where people earning below a certain amount receive supplemental payment from the government instead of paying taxes to the government.

Capital gains[edit]



Corporate tax refers to income tax, capital tax, net-worth tax, or other taxes imposed on corporations. Rates of tax and the taxable base for corporations may differ from those for individuals or for other taxable persons.

Social-security contributions[edit]

General government revenue, in % of GDP, from social contributions. For this data, the variance of GDP per capita with purchasing power parity (PPP) is explained in 20% by social contributions revenue.

Many countries provide publicly funded retirement or health-care systems.[8] In connection with these systems, the country typically requires employers and/or employees to make compulsory payments.[9] These payments are often computed by reference to wages or earnings from self-employment. Tax rates are generally fixed, but a different rate may be imposed on employers than on employees.[10] Some systems provide an upper limit on earnings subject to the tax. A few systems provide that the tax is payable only on wages above a particular amount. Such upper or lower limits may apply for retirement but not for health-care components of the tax. Some have argued that such taxes on wages are a form of "forced savings" and not really a tax, while others point to redistribution through such systems between generations (from newer cohorts to older cohorts) and across income levels (from higher income-levels to lower income-levels) which suggests that such programs are really taxed and spending programs.

Payroll or workforce[edit]

Unemployment and similar taxes are often imposed on employers based on the total payroll. These taxes may be imposed in both the country and sub-country levels.[11]


A wealth tax is levied on the total value of personal assets, including: bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated businesses, financial securities, and personal trusts.[12] Typically liabilities (primarily mortgages and other loans) are deducted, hence it is sometimes called a net wealth tax.


Recurrent property taxes may be imposed on immovable property (real property) and on some classes of movable property. In addition, recurrent taxes may be imposed on the net wealth of individuals or corporations.[13] Many jurisdictions impose estate tax, gift tax or other inheritance taxes on property at death or at the time of gift transfer. Some jurisdictions impose taxes on financial or capital transactions.

Property taxes[edit]

A property tax (or millage tax) is an ad valorem tax levy on the value of a property that the owner of the property is required to pay to a government in which the property is situated. Multiple jurisdictions may tax the same property. There are three general varieties of property: land, improvements to land (immovable man-made things, e.g. buildings), and personal property (movable things). Real estate or realty is the combination of land and improvements to the land.

Property taxes are usually charged on a recurrent basis (e.g., yearly). A common type of property tax is an annual charge on the ownership of real estate, where the tax base is the estimated value of the property. For a period of over 150 years from 1695, the government of England levied a window tax, with the result that one can still see listed buildings with windows bricked up in order to save their owner's money. A similar tax on hearths existed in France and elsewhere, with similar results. The two most common types of event-driven property taxes are stamp duty, charged upon change of ownership, and inheritance tax, which many countries impose on the estates of the deceased.

In contrast with a tax on real estate (land and buildings), a land-value tax (or LVT) is levied only on the unimproved value of the land ("land" in this instance may mean either the economic term, i.e., all-natural resources, or the natural resources associated with specific areas of the Earth's surface: "lots" or "land parcels"). Proponents of the land-value tax argue that it is economically justified, as it will not deter production, distort market mechanisms or otherwise create deadweight losses the way other taxes do.[14]


In many jurisdictions (including many American states), there is a general tax levied periodically on residents who own personal property (personalty) within the jurisdiction. Vehicle and boat registration fees are subsets of this kind of tax. The tax is often designed with blanket coverage and large exceptions for things like food and clothing. Household goods are often exempt when kept or used within the household.[15] Any otherwise non-exempt object can lose its exemption if regularly kept outside the household.[15] Thus, tax collectors often monitor newspaper articles for stories about wealthy people who have lent art to museums for public display, because the artworks have then become subject to personal property tax.[15] If an artwork had to be sent to another state for some touch-ups, it may have become subject to personal property tax in that state as well.[15]







Wealth (net worth)[edit]

Some countries' governments will require a declaration of the taxpayers' balance sheet (assets and liabilities), and from that exact a tax on net worth (assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax may be levied on "natural" or "legal persons."

Goods and services[edit]

Value added[edit]







In the United States, there is a growing movement[18] for the replacement of all federal payroll and income taxes (both corporate and personal) with a national retail sales tax and monthly tax rebate to households of citizens and legal resident aliens. The tax proposal is named FairTax. In Canada, the federal sales tax is called the Goods and Services Tax (GST) and now stands at 5%. The provinces of British Columbia, Saskatchewan, Manitoba, and Prince Edward Island also have a provincial sales tax [PST]. The provinces of Nova Scotia, New Brunswick, Newfoundland & Labrador, and Ontario have harmonized their provincial sales taxes with the GST—Harmonized Sales Tax [HST], and thus is a full VAT. The province of Quebec collects the Quebec Sales Tax [QST] which is based on the GST with certain differences. Most businesses can claim back the GST, HST, and QST they pay, and so effectively it is the final consumer who pays the tax.








License fees[edit]



A poll tax, also called a per capita tax, or capitation tax, is a tax that levies a set amount per individual. It is an example of the concept of fixed tax. One of the earliest taxes mentioned in the Bible of a half-shekel per annum from each adult Jew (Ex. 30:11–16) was a form of the poll tax. Poll taxes are administratively cheap because they are easy to compute and collect and difficult to cheat. Economists have considered poll taxes economically efficient because people are presumed to be in fixed supply and poll taxes, therefore, do not lead to economic distortions. However, poll taxes are very unpopular because poorer people pay a higher proportion of their income than richer people. In addition, the supply of people is in fact not fixed over time: on average, couples will choose to have fewer children if a poll tax is imposed.[20][failed verification] The introduction of a poll tax in medieval England was the primary cause of the 1381 Peasants' Revolt. Scotland was the first to be used to test the new poll tax in 1989 with England and Wales in 1990. The change from progressive local taxation based on property values to a single-rate form of taxation regardless of ability to pay (the Community Charge, but more popularly referred to as the Poll Tax), led to widespread refusal to pay and to incidents of civil unrest, known colloquially as the 'Poll Tax Riots'.



Descriptive labels[edit]

Ad valorem and per unit[edit]

An ad valorem tax is one where the tax base is the value of a good, service, or property. Sales taxes, tariffs, property taxes, inheritance taxes, and value-added taxes are different types of ad valorem tax. An ad valorem tax is typically imposed at the time of a transaction (sales tax or value-added tax (VAT)) but it may be imposed on an annual basis (property tax) or in connection with another significant event (inheritance tax or tariffs).



Consumption tax refers to any tax on non-investment spending and can be implemented by means of a sales tax, consumer value-added tax, or by modifying an income tax to allow for unlimited deductions for investment or savings.





  • A lump-sum tax is a tax that is a fixed amount, no matter the change in circumstance of the taxed entity. This in actuality is a regressive tax as those with lower income must use a higher percentage of their income than those with higher income and therefore the effect of the tax reduces as a function of income.


Direct and indirect[edit]


In law, the terms may have different meanings. In U.S. constitutional law, for instance, direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership. Indirect taxes are imposed on events, rights, privileges, and activities.[25] Thus, a tax on the sale of the property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax.

Fees and effective[edit]


  • Tolls: a fee charged to travel via a road, bridge, tunnel, canal, waterway or other transportation facilities. Historically tolls have been used to pay for public bridge, road, and tunnel projects. They have also been used in privately constructed transport links. The toll is likely to be a fixed charge, possibly graduated for vehicle type, or for distance on long routes.
  • User fees, such as those charged for use of parks or other government-owned facilities.



The first known system of taxation was in Ancient Egypt around 3000–2800 BC, in the First Dynasty of the Old Kingdom of Egypt.[29] The earliest and most widespread forms of taxation were the corvée and the tithe. The corvée was forced labour provided to the state by peasants too poor to pay other forms of taxation (labor in ancient Egyptian is a synonym for taxes).[30] Records from the time document that the Pharaoh would conduct a biennial tour of the kingdom, collecting tithes from the people. Other records are granary receipts on limestone flakes and papyrus.[31] Early taxation is also described in the Bible. In Genesis (chapter 47, verse 24 – the New International Version), it states "But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children". Joseph was telling the people of Egypt how to divide their crop, providing a portion to the Pharaoh. A share (20%) of the crop was the tax (in this case, a special rather than an ordinary tax, as it was gathered against an expected famine) The stock made by was returned and equally shared with the people of Egypt and traded with the surrounding nations thus saving and elevating Egypt.[32] Samgharitr is the name mentioned for the Tax collector in the Vedic texts.[33] In Hattusa, the capital of the Hittite Empire, grains were collected as a tax from the surrounding lands, and stored in silos as a display of the king's wealth.[34]



Islamic rulers imposed Zakat (a tax on Muslims) and Jizya (a poll tax on conquered non-Muslims). In India this practice began in the 11th century.



Taxation as a percentage of GDP 2016 was 45.9% in Denmark, 45.3% in France, 33.2% in the United Kingdom, 26% in the United States, and among all OECD members an average of 34.3%.[41][42]



Other obsolete forms of taxation include:

  • Tallage, a tax on feudal dependents.
  • Tithe, a tax-like payment (one-tenth of one's earnings or agricultural produce), paid to the Church (and thus too specific to be a tax in strict technical terms). This should not be confused with the modern practice of the same name which is normally voluntary.
  • Carucage, a tax which replaced the Danegeld in England.
  • Socage, a feudal tax system based on land rent.
  • Burgage, a feudal tax system based on land rent.

Some principalities taxed windows, doors, or cabinets to reduce consumption of imported glass and hardware. Armoires, hutches, and wardrobes were employed to evade taxes on doors and cabinets. In some circumstances, taxes are also used to enforce public policy like congestion charge (to cut road traffic and encourage public transport) in London. In Tsarist Russia, taxes were clamped on beards. Today, one of the most-complicated taxation systems worldwide is in Germany. Three-quarters of the world's taxation literature refers to the German system.[citation needed] Under the German system, there are 118 laws, 185 forms, and 96,000 regulations, spending 3.7 billion to collect the income tax.[citation needed] In the United States, the IRS has about 1,177 forms and instructions,[43] 28.4111 megabytes of Internal Revenue Code[44] which contained 3.8 million words as of 1 February 2010,[45] numerous tax regulations in the Code of Federal Regulations,[46] and supplementary material in the Internal Revenue Bulletin.[47] Today, governments in more advanced economies (i.e. Europe and North America) tend to rely more on direct taxes, while developing economies (i.e. several African countries) rely more on indirect taxes.

Economic effects[edit]

Public finance revenue from taxes in % of GDP. For this data, the variance of GDP per capita with purchasing power parity (PPP) is explained in 32% by tax revenue.




A 2019 study looking at the impact of tax cuts for different income groups, it was tax cuts for low-income groups that had the greatest positive impact on employment growth.[49] Tax cuts for the wealthiest top 10% had a small impact.[49]





Increased economic welfare[edit]

Government spending[edit]





Reduced inequality[edit]


Reduced economic welfare[edit]


Cost of compliance[edit]


Deadweight costs[edit]

Diagram illustrating deadweight costs of taxes




Perverse incentives[edit]


To address these issues, economists often suggest simple and transparent tax structures that avoid providing loopholes. Sales tax, for instance, can be replaced with a value added tax which disregards intermediate transactions.

In developing countries[edit]

Following Nicolas Kaldor's research, public finance in developing countries is strongly tied to state capacity and financial development. As state capacity develops, states not only increase the level of taxation but also the pattern of taxation. With the increase of larger tax bases and the diminish of the importance of trading tax, while income tax gains more importance.[53] According to Tilly's argument, state capacity evolves as a response to the emergence of war. War is an incentive for states to raise taxes and strengthen states' capacity. Historically, many taxation breakthroughs took place during wartime. The introduction of income tax in Britain was due to the Napoleonic War in 1798. US first introduce income tax during Civil War.[54] Taxation is constrained by the fiscal and legal capacities of a country.[55] Fiscal and legal capacities also complement each other. A well-designed tax system can minimize efficiency loss and boost economic growth. With better compliance and better support to financial institutions and individual property, the government will be able to collect more tax. Although wealthier countries have higher tax revenue, economic growth does not always translate to higher tax revenue. For example, in India, increases in exemptions lead to the stagnation of income tax revenue at around 0.5% of GDP since 1986.[56]

Researchers for EPS PEAKS [57] stated that the core purpose of taxation is revenue mobilisation, providing resources for National Budgets, and forming an important part of macroeconomic management. They said economic theory has focused on the need to 'optimize' the system through balancing efficiency and equity, understanding the impacts on production, and consumption as well as distribution, redistribution, and welfare.

They state that taxes and tax reliefs have also been used as a tool for behavioral change, to influence investment decisions, labor supply, consumption patterns, and positive and negative economic spill-overs (externalities), and ultimately, the promotion of economic growth and development. The tax system and its administration also play an important role in state-building and governance, as a principal form of 'social contract' between the state and citizens who can, as taxpayers, exert accountability on the state as a consequence.


However, in a quarter of African countries Overseas Development Assistance does exceed tax collection,[58] with these more likely to be non-resource-rich countries. This suggests countries making the most progress replacing aid with tax revenue tend to be those benefiting disproportionately from rising prices of energy and commodities.

The author[57] found tax revenue as a percentage of GDP varying greatly around a global average of 19%.[59] This data also indicates countries with higher GDP tend to have higher tax to GDP ratios, demonstrating that higher income is associated with more than proportionately higher tax revenue. On average, high-income countries have tax revenue as a percentage of GDP of around 22%, compared to 18% in middle-income countries and 14% in low-income countries.

In high-income countries, the highest tax-to-GDP ratio is in Denmark at 47% and the lowest is in Kuwait at 0.8%, reflecting low taxes from strong oil revenues. The long-term average performance of tax revenue as a share of GDP in low-income countries has been largely stagnant, although most have shown some improvement in more recent years. On average, resource-rich countries have made the most progress, rising from 10% in the mid-1990s to around 17% in 2008. Non-resource-rich countries made some progress, with average tax revenues increasing from 10% to 15% over the same period.[60]

Many low-income countries have a tax-to-GDP ratio of less than 15% which could be due to low tax potentials, such as a limited taxable economic activity, or low tax effort due to policy choice, non-compliance, or administrative constraints.



One indicator of the taxpaying experience was captured in the 'Doing Business' survey,[62] which compares the total tax rate, time spent complying with tax procedures, and the number of payments required through the year, across 176 countries. The 'easiest' countries in which to pay taxes are located in the Middle East with the UAE ranking first, followed by Qatar and Saudi Arabia, most likely reflecting low tax regimes in those countries. Countries in Sub-Saharan Africa are among the 'hardest' to pay with the Central African Republic, Republic of Congo, Guinea and Chad in the bottom 5, reflecting higher total tax rates and a greater administrative burden to comply.

Key facts[edit]

The below facts were compiled by EPS PEAKS researchers:[57]

  • Trade liberalisation has led to a decline in trade taxes as a share of total revenues and GDP.[57][63]
  • Resource-rich countries tend to collect more revenue as a share of GDP, but this is more volatile. Sub-Saharan African countries that are resource-rich have performed better tax collecting than non-resource-rich countries, but revenues are more volatile from year to year.[63] By strengthening revenue management, there are huge opportunities for investment for development and growth.[57][64]
  • Developing countries have an informal sector representing an average of around 40%, perhaps up to 60% in some.[65] Informal sectors feature many small informal traders who may not be efficient in bringing into the tax net since the cost of collection is high and revenue potential limited (although there are broader governance benefits). There is also an issue of non-compliant companies who are 'hard to tax', evading taxes and should be brought into the tax net.[57][66]
  • In many low-income countries, the majority of revenue is collected from a narrow tax base, sometimes because of a limited range of taxable economic activities. There is therefore dependence on few taxpayers, often multinationals, that can exacerbate the revenue challenge by minimizing their tax liability, in some cases abusing a lack of capacity in revenue authorities, sometimes through transfer pricing abuse.[further explanation needed][57][66]
  • Countries use incentives to attract investment but doing this may be unnecessarily giving up revenue as evidence suggests that investors are influenced more by economic fundamentals like market size, infrastructure, and skills, and only marginally by tax incentives (IFC investor surveys).[57] For example, even though the Armenian government supports the IT sector and improves the investment climate, the small size of the domestic market, low wages, low demand for productivity enhancement tools, financial constraints, high software piracy rates, and other factors make growth in this sector a slow process. Meaning that tax incentives do not contribute to the development of the sector as much as it is thought to contribute.[68]
  • In low-income countries, compliance costs are high, they are lengthy processes, frequent tax payments, bribes and corruption.[57][66][69]
  • Administrations are often under-resourced, resources aren't effectively targeted on areas of greatest impact, and mid-level management is weak. Coordination between domestic and customs is weak, which is especially important for VAT. Weak administration, governance, and corruption tend to be associated with low revenue collections (IMF, 2011).[57]
  • Of all regions, Africa has the highest total tax rates borne by the business at 57.4% of the profit on average but has reduced the most since 2004, from 70%, partly due to introducing VAT and this is likely to have a beneficial effect on attracting investment.[57][70]
  • Fragile states are less able to expand tax revenue as a percentage of GDP and any gains are more difficult to sustain.[71] Tax administration tends to collapse if conflict reduces state-controlled territory or reduces productivity.[72] As economies are rebuilt after conflicts, there can be good progress in developing effective tax systems. Liberia expanded from 10.6% of GDP in 2003 to 21.3% in 2011. Mozambique increased from 10.5% of GDP in 1994 to around 17.7% in 2011.[57][73]


Aid interventions in revenue can support revenue mobilization for growth, improve tax system design and administrative effectiveness, and strengthen governance and compliance.[57] The author of the Economics Topic Guide found that the best aid modalities for revenue depend on country circumstances, but should aim to align with government interests and facilitate effective planning and implementation of activities under evidence-based tax reform. Lastly, she found that identifying areas for further reform requires country-specific diagnostic assessment: broad areas for developing countries identified internationally (e.g. IMF) include, for example, property taxation for local revenues, strengthening expenditure management, and effective taxation of extractive industries and multinationals.[57]



Every tax, however, is, to the person who pays it, a badge, not of slavery, but of liberty. – Adam Smith (1776), Wealth of Nations[74]

According to most political philosophies, taxes are justified as they fund activities that are necessary and beneficial to society. Additionally, progressive taxation can be used to reduce economic inequality in a society. According to this view, taxation in modern nation-states benefit the majority of the population and social development.[75] A common presentation of this view, paraphrasing various statements by Oliver Wendell Holmes Jr. is "Taxes are the price of civilization".[76]

It can also be argued that in a democracy, because the government is the party performing the act of imposing taxes, society as a whole decides how the tax system should be organized.[77] The American Revolution's "No taxation without representation" slogan implied this view. For traditional conservatives, the payment of taxation is justified as part of the general obligations of citizens to obey the law and support established institutions. The conservative position is encapsulated in perhaps the most famous adage of public finance, "An old tax is a good tax".[78] Conservatives advocate the "fundamental conservative premise that no one should be excused from paying for government, lest they come to believe that government is costless to them with the certain consequence that they will demand more government 'services'."[79] Social democrats generally favor higher levels of taxation to fund public provision of a wide range of services such as universal health care and education, as well as the provision of a range of welfare benefits.[80] As argued by Anthony Crosland and others, the capacity to tax income from capital is a central element of the social democratic case for a mixed economy as against Marxist arguments for comprehensive public ownership of capital.[81] American libertarians recommend a minimal level of taxation in order to maximize the protection of liberty.[citation needed]



Because payment of tax is compulsory and enforced by the legal system, rather than voluntary like crowdfunding, some political philosophies view taxation as theft, extortion, (or as slavery, or as a violation of property rights), or tyranny, accusing the government of levying taxes via force and coercive means.[83] Objectivists, anarcho-capitalists, and right-wing libertarians see taxation as government aggression (see non-aggression principle). The view that democracy legitimizes taxation is rejected by those who argue that all forms of government, including laws chosen by democratic means, are fundamentally oppressive. According to Ludwig von Mises, "society as a whole" should not make such decisions, due to methodological individualism.[84] Libertarian opponents of taxation claim that governmental protection, such as police and defense forces might be replaced by market alternatives such as private defense agencies, arbitration agencies or voluntary contributions.[85]




Tax choice is the theory that taxpayers should have more control with how their individual taxes are allocated. If taxpayers could choose which government organizations received their taxes, opportunity cost decisions would integrate their partial knowledge.[87] For example, a taxpayer who allocated more of his taxes on public education would have less to allocate on public healthcare. Supporters argue that allowing taxpayers to demonstrate their preferences would help ensure that the government succeeds at efficiently producing the public goods that taxpayers truly value.[88] This would end real estate speculation, business cycles, unemployment and distribute wealth much more evenly. Joseph Stiglitz's Henry George Theorem predicts its sufficiency because—as George also noted—public spending raises land value.


Geoists (Georgists and geolibertarians) state that taxation should primarily collect economic rent, in particular the value of land, for both reasons of economic efficiency as well as morality. The efficiency of using economic rent for taxation is (as economists agree[89][90][91]) due to the fact that such taxation cannot be passed on and does not create any dead-weight loss, and that it removes the incentive to speculate on land.[92] Its morality is based on the Geoist premise that private property is justified for products of labour but not for land and natural resources.[93]

Economist and social reformer Henry George opposed sales taxes and protective tariffs for their negative impact on trade.[94] He also believed in the right of each person to the fruits of their own labour and productive investment. Therefore, income from labour and proper capital should remain untaxed. For this reason many Geoists—in particular those that call themselves geolibertarian—share the view with libertarians that these types of taxation (but not all) are immoral and even theft. George stated there should be one single tax: the Land Value Tax, which is considered both efficient and moral.[93] Demand for specific land is dependent on nature, but even more so on the presence of communities, trade, and government infrastructure, particularly in urban environments. Therefore, the economic rent of land is not the product of one particular individual and it may be claimed for public expenses. According to George, this would end real estate bubbles, business cycles, unemployment and distribute wealth much more evenly.[93] Joseph Stiglitz's Henry George Theorem predicts its sufficiency for financing public goods because those raise land value.[95]




Laffer curve[edit]




Most governments take revenue that exceeds that which can be provided by non-distortionary taxes or through taxes that give a double dividend. Optimal taxation theory is the branch of economics that considers how taxes can be structured to give the least deadweight costs, or to give the best outcomes in terms of social welfare. The Ramsey problem deals with minimizing deadweight costs. Because deadweight costs are related to the elasticity of supply and demand for a good, it follows that putting the highest tax rates on the goods for which there are most inelastic supply and demand will result in the least overall deadweight costs. Some economists sought to integrate optimal tax theory with the social welfare function, which is the economic expression of the idea that equality is valuable to a greater or lesser extent. If individuals experience diminishing returns from income, then the optimum distribution of income for society involves a progressive income tax. Mirrlees optimal income tax is a detailed theoretical model of the optimum progressive income tax along these lines. Over the last years the validity of the theory of optimal taxation was discussed by many political economists.[102]



Tax calculation
The "effective rate" would be 10.7%:
18,750/175,000 = 0.107
The "marginal rate" would be 15%.

See also[edit]

By country or region[edit]


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Further reading[edit]

External links[edit]