An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Taxation rates differ by type or characteristics of the taxpayer and the type of income. The tax rate may increase as taxable income increases (referred to as progressive tax rates). The tax imposed on companies is usually known as corporate tax and is commonly levied at a flat rate. Individual income is often taxed at progressive rates where the tax rate applied to each additional unit of income increases.
For most of human civilization, we did not presuppose taxes being based on factors such as a money economy, reasonably accurate accounts, a common understanding of receipts, expenses and profits, and an orderly society with reliable records instead of taxes on wealth, social position, and ownership of the means of production (typically land). 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% (3% being classified as high sounds hilarious in today’s Canada or EU) 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.
The inception date of the modern income tax is typically accepted as 1799. Prime Minister William Pitt the Younger introduced income tax into Great Britain in his budget of December 1798, to pay for weapons and equipment for the French Revolutionary War. So basically as with most problems of the modern era, it all began in “Great” Britain.
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). This tax was repealed and replaced by another income tax in 1862.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.
Soon income tax caught on, all around the world, and before you knew it, those with the least to pay were sacrificing proportionally ever more out of their salaries and wages over time, a sacrifice to the finance gods who paid pretty little in the way of taxes of any kind, let alone income. The rich and powerful – the owners of tech giants, large conglomerations and wealthy families – pay very little in terms of income tax.
But what if we got rid of income tax altogether? Income tax doesn’t really pay for government services federally. So why do we, the 99%, even need to pay it? Isn’t it just punishing people for earning? In Canada, for example, average rents in Toronto are around CAD $2500-3000 in downtown. On top of it, if you pay around 35% out of your income, after paying for rent, you are barely left with anything to feed yourself and your family as due to inflation, grocery prices are sky high.
Economist Henry George argued back in 1897 that income tax actually reduces people’s incentive to earn income. He said that taxes on income and even profit distorts economic activity and encourages off-shoring for those wealthy enough to be able to afford to pay people to hide the rest of their gains, forcing a greater burden of tax on those least capable of paying. He also claimed property tax punishes owners for improving or maintaining the quality of the establishment.
The implementation of an income tax system is very complex, especially when trying to regulate the rich and the corporations. So complicated in fact that an entire industry exists to simply monitor and control the system. The government must enforce every line of the tax code, for example in the US the IRS requires 90,000 tax accountants. Another part of the same industry of tax accountants consults the big corporations and the rich on ways how to exploit tax policies’ loopholes. Tax evasion and deceitful avoidance favors the wealthy as they are the ones able to pay for costly tax ‘advice’. As legendary investor Warren Buffet has been known to say, it is unfair that his secretary pays 30% in taxes while his accountants manage for Buffet to only have to pay 17% on his income.
Taxation exists to prevent inflation so some form of it will always be required to provide stability, but there are countless better ways to do it than taking away badly needed funds from people already struggling to pay their bills. The federal government does not need people’s taxes to pay for anything, so why are we handing over hard-earned income to be destroyed when we could be spending it? Or saving it. Or paying off debts. In the current climate, with wages stagnating or in some countries even going backwards, it makes little sense to take money away from people already struggling to pay their bills for the sake of an almost permanent deficit.
Some argue that for those in the lower middle class and lower classes, an earnings tax may be a financial hardship. Others believe that income tax is a violation of a citizen’s individual freedom. An income tax that gets progressively more burdensome the more money you make reduces the incentive to work harder and be productive the higher you move up the ladder.
Albeit differently implemented, income tax is present everywhere throughout the world. Low personal income tax countries such as the US and Japan promote their highly consuming economies through low personal rates but limit their colossal corporations through a high corporate rate. Scandinavian countries, Belgium and France need abnormal tax revenues to finance their government expenditure and social benefits. Places like Ireland, Poland Hungary and the Slovak Republic stimulate their much needed development by attracting investment with low corporate taxation.
Lately, pure tax economists argue that a consumption tax is superior to an income tax because it comes closest to attaining the so called “temporal neutrality”. Although impossible in reality, a tax would be considered to be temporal neutral if it did not alter spending habits, change behavior patterns or affect the natural allocation of resources.
An income tax creates a discrepancy between the value of a person’s work and what they actually receive (disposable income). This is weighs on the economy because it causes people to work less and pursue more leisure activities than would otherwise be the case if income taxes did not exist. The barrier created by income taxes also produces fewer saving because capital is taxed. This reduces investment, discouraging innovation and ultimately contributing to a lower standard of living when compared to a pure consumption tax. A well planned consumption tax is more neutral and does not affect the allocation of resources as dramatically as an income tax. Taxes are only assessed on any income that is consumed (spent on goods, services, etc.) while not taxing savings. This eliminates any deterrent to savings and actually would encourage people to save more, increase available capital, and ultimately produce a more solid, robust economy.
Taxation makes individuals across the world into modern day serfs. We get what’s left over in our paychecks after the federal government has taken its share. That means the fruits of our labors belong first to our government. Countries like Canada, claim that it is to maintain a welfare state that such exorbitant taxes are levied but with raging inflation and lack of rent control, people live paycheck to paycheck just to survive the month. A country as blessed in natural resources such as Canada along with a small population, can always seek to build its income from its other sources. Lowering taxes is a good start but eliminating them would ensure that the dream many dream of, migrating to a new country, would remain one that could eventually come true.
This is even truer for emerging economies like India, where the Government provides no benefits for the tax payers and a large percentage of the population do not pay taxes and the burden of the tax hits salaried individuals the highest. A rethink of taxation is the need of the hour going forward. The world is in a fragile state post-Covid and the horrors of the Russo-Ukraine war still being inflicted. The world economies must do away with income taxes and make sure corporate income taxes are levied properly and fully and the rich and the powerful do not escape being taxed on their unequal share of resources. Only then can true and equal opportunity to build a better life, be provided to all men and women and not just the sons and daughters of the already wealthy.