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WHAT IS INCOME TAX?
Income tax
Income tax is commonly a progressive tax because the tax rate increases with
increasing income. For this reason, it is generally advocated by those who think
that taxation should be borne more by the rich than by the poor, even to the
point of serving as a form of social redistribution. Some critics characterize
this tax as a form of punishment for economic productivity. Other critics charge
that income taxation is inherently socially intrusive because enforcement
requires the government to collect large amounts of information about business
and personal affairs, much of which could be considered proprietary.
The crucial invention permitting the reliable collection of high income taxes
was direct withholding of taxes from payrolls by employers; this works because
most people in modern societies are salaried workers. This reduces the perceived
burden of the tax, because employees never handle the money. Direct withholding
also discourages cheating, because it requires the collaboration of employers,
and as there are fewer employers than employees, the government's enforcement
efforts can be deployed more effectively. However, direct withdrawal also has
some drawbacks: it puts part of the burden of processing taxes on the employer,
and it also complicates matters when the employee is in a situation where he or
she should pay significantly less or more than what is expected from its salary
(because of tax-deductible expenses, or side revenues). Direct withholding is
the method of collection of choice in most countries implementing income taxes,
with the exception of France, where direct withholding is periodically
discussed, but has so far not been implemented.
Where income tax is not collected at source, it may become easier to cheat by
lying about one's affairs. The government may then require that employers report
the amounts they pay to employees.
Income tax, in addition to income, generally takes into account a variety of
factors. Certain expenses, such as work-related expenses, donations to charities
etc..., may be tax-deductible: that is, they are subtracted from the taxable
revenue. Investments in some impoverished areas or industrial sectors may be
encouraged through tax breaks (reduced rates). Donations to charities may be
partly subtracted from the tax, in an original form of subsidy. Because of
various exemptions, rebates etc..., income tax codes tend to be complicated. In
some countries such as the United States, individuals often hire the service of
a tax accountant so as to find the best way to reduce their tax.
Income tax fraud is a problem in most, if not all, countries implementing an
income tax. Either one fails to declare income, or declares nonexistent
expenses. Failure to declare income is especially easy for non-salaried work,
especially if paid in cash. Tax enforcement authorities fight tax fraud using
various methods, nowadays with the help of computer databases. They may, for
instance, look for discrepancies between declared revenue and expenses along
time. Tax enforcement authorities then target individuals for a tax audit – a
more or less detailed review of the income and tax-deductible expenses of the
individual.
Income tax may be collected from legal persons (companies) as well as natural
persons (individuals), although, in some cases, the income tax is levied on a
slightly different basis that the usual income tax and may be called a
corporation tax or a corporate income tax.
The source of this article is
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