TAXATION

the imposition of compulsory levies on persons or other entities by governments. In modern economies taxes are the most important source of government revenues. They represent a general obligation of taxpayers and are not levied or paid in exchange for any particular benefit. Taxes are considered to have three functions: (1) fiscal or budgetary, to cover government expenditures, (2) economic, to promote stable economic growth, and (3) social, to lessen inequalities in the distribution of income and wealth. Conflict may arise among these functions. The level or composition of taxes necessary for budgetary purposes may retard economic growth; a highly redistributive tax may have similar consequences. In addition to these main functions, taxes have also been used for nonfiscal ends, such as to encourage or discourage certain activities, (e.g., alcohol consumption, family size). In the literature of public finance, taxes have been classified in various ways according to who pays them, who bears the ultimate burden of them, the extent to which the burden can be shifted, and other criteria. The most common distinction is between direct and indirect taxes. Direct taxes are those that cannot be shifted by the taxpayer onto someone else. They are primarily taxes on persons and are aimed at the individual's ability to pay as measured by his income or his net wealth. The main types of direct taxes are individual income taxes, taxes on net worth, death duties (i.e., the inheritance tax and the estate tax), gift taxes, and general expenditure or spending taxes. Indirect taxes are those that can be shifted in whole or in part to someone other than the person legally responsible for payment. These include excise taxes, sales taxes, value-added taxes, taxes on legal transactions, and the like. Some taxes cannot be classified as direct or indirect with certainty because they may or may not be shifted depending on circumstances. Taxes may also be distinguished according to the effect they have on the distribution of income and wealth. A proportional tax is one that imposes the same relative burden on all taxpayers. A progressive tax is characterized by a more than proportional rise in the tax liability relative to the increase in the tax base, and a regressive tax is characterized by a less than proportional rise in relative burden. Taxes played a relatively minor role in the ancient world. Tariffs were often more important than internal excises for raising revenue. Poll taxes, real property taxes, and sales taxes were all known in Rome. In modern times the level of general taxation has risen substantially and so has the ratio of tax revenues to national income. Income taxation, both of individuals and of corporations, occupies a leading position in modern tax systems. In addition to general and substantial income taxes, there has been a trend away from excises and tariffs (customs duties). The value-added tax has become increasingly important since World War II. Adam Smith first systematized the rules that should govern a rational system of taxation: taxes should be based on the individual's ability to pay, and they should be certain, convenient, and economical. Modern criteria of tax systems also include revenue productivity and considerations of social justice. A tax system should provide adequate revenues to cover expenditures and should be capable of producing more on short notice when circumstances require. Conceptions of social justice may require in addition that taxes be more or less redistributive of income or wealth or both. As governments have come to play a larger part in controlling their national economies, taxes have been used to moderate cyclical economic fluctuations, to promote a higher level of economic activity, and to affect the allocation of economic resources. imposition of compulsory levies on persons or other entities by governments. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well. This article is concerned with taxation in general, its principles, its objectives, and its effects; specifically, the article discusses the nature and purposes of taxation, classes of taxes, the history of taxation, canons and criteria of taxation, and shifting and incidence. For further discussion of taxation's role in fiscal policy, see government economic policy. See also the article international trade for additional information on tariffs. In modern economies taxes are the most important source of governmental revenue. Taxes differ from other sources of revenue in that they are compulsory levies and are unrequitedi.e., they are not paid in exchange for some specific thing, such as the sale of public property or the issue of public debt. While taxes are presumably collected for the sake of the welfare of taxpayers as a whole, the liability of the individual taxpayer is independent of any benefit received. There are important exceptions to this characterization. Payroll taxes are commonly levied on labour income in order to finance retirement benefits, medical payments, and other social security programs. Because there may be some link between taxes paid and benefits received, payroll taxes are sometimes called contributions, as in the United States. Nevertheless, the payments are commonly compulsory and the link to benefits is usually quite weak. Additional reading Problems of taxation are treated in all textbooks on public finance. Standard sources on government finance include Richard A. Musgrave and Peggy B. Musgrave, Public Finance in Theory and Practice, 4th ed. (1984); Harvey S. Rosen, Public Finance, 2nd ed. (1988); Joseph E. Stiglitz, Economics of the Public Sector, 2nd ed. (1988); and Robin W. Boadway and David E. Wildasin, Public Sector Economics, 2nd ed. (1984). More advanced works include Richard A. Musgrave, The Theory of Public Finance: A Study in Public Economy (1959), a classic though somewhat dated treatise; Carl S. Shoup, Public Finance (1969); and Richard W. Tresch, Public Finance: A Normative Theory (1981). A mathematical treatment of theoretical issues is presented in Anthony B. Atkinson and Joseph E. Stiglitz, Lectures on Public Economics (1980). Alan J. Auerbach and Martin Feldstein (eds.), Handbook of Public Economics, 2 vol. (198587), surveys issues in government finance.Useful works on the historical development of fiscal thought include: Fritz Karl Mann, Steuerpolitische Ideale: Vergleichende Studien zur Geschichte der konomischen und politischen Ideen und ihres Wirkens in der ffentlichen Meinung 16001935 (1937, reprinted 1978), a comprehensive history of the ideals, ideologies, and theories of taxation from both the economic and the political-sociological standpoints; Richard A. Musgrave and Alan T. Peacock (eds.), Classics in the Theory of Public Finance (1958, reprinted 1967); and American Economic Association, Readings in the Economics of Taxation, comp. by Richard A. Musgrave and Carl S. Shoup (1959). Peter-Christian Witt (ed.), Wealth and Taxation in Central Europe: The History and Sociology of Public Finance (1987), is a brief but informative collection of articles.Academic thinking about tax policy is reported in economic journals and law reviews. Among economic journals devoted primarily to tax analysis are the Canadian Tax Journal (bimonthly); National Tax Journal (quarterly); Public Finance (three times a year); Public Finance Quarterly; and Finanzarchiv: Zeitschrift fr das gesamte Finanzwesen (three times a year). Journal of Public Economics (nine times a year), provides highly mathematical analyses of taxation. Proposals for tax reform and legislative, judicial, and regulatory developments in the United States are reported in Tax Notes (weekly). Excellent analyses of tax policy are offered in the annual Report of Proceedings of the Tax Conference Convened by the Canadian Tax Foundation. John Eatwell, Murray Milgate, and Peter Newman (eds.), The New Palgrave: A Dictionary of Economics, 4 vol. (1987), includes comprehensive articles on taxation and related topics.For overviews of tax systems, see John A. Kay and Mervyn A. King, The British Tax System, 4th ed. (1986); Joseph A. Pechman, Federal Tax Policy, 5th ed. (1987), and Who Paid the Taxes, 196685? (1985); Sijbren Cnossen (ed.), Tax Coordination in the European Community (1986); and Organisation for Economic Co-operation and Development, Personal Income Tax Systems Under Changing Economic Conditions (1986), and Revenue Statistics of OECD Member Countries, 19651985 (1986). United States, Internal Revenue Service, Statistics of Income: Compendium of Studies of International Income and Taxes (1985), provides statistical information on tax systems. Council of Economic Advisers (U.S.), Annual Report, also contains a useful statistical appendix. Advisory Commission on Intergovernmental Relations, Tax Capacity of the States (annual), provides information on state and local government finance. Publications of the International Bureau of Fiscal Documentation, such as its Bulletin (monthly), European Taxation (monthly), or Corporate Taxation in Latin America (quarterly), describe developments in tax policy around the world and summarize the important features of many tax systems. Confederation of British Industry, Taxation in Western Europe (annual), provides a comparative study of the modern tax systems of various countries; somewhat dated studies of the tax systems of particular countries may be found in the World Tax Series, prepared by the International Program in Taxation at the Harvard Law School. On specifics of taxation in developing countries, see Haskell P. Wald, Taxation of Agricultural Land in Underdeveloped Economies: A Survey and Guide to Policy (1959); Richard M. Bird and Oliver Oldman, Readings on Taxation in Developing Countries, 3rd ed. (1975); Richard Goode, Government Finance in Developing Countries (1984); John F. Due, Indirect Taxation in Developing Economies, rev. ed. (1988); Malcolm Gillis (ed.), Fiscal Reform for Colombia (1971); and David Newbery and Nicholas Stern (eds.), The Theory of Taxation for Developing Countries (1987), a highly theoretical treatment of the topic.On the taxation of income from capital, see Martin Feldstein, Capital Taxation (1983); Arnold C. Harberger, Taxation and Welfare (1974, reprinted 1988); Charles R. Hulten (ed.), Depreciation, Inflation, and the Taxation of Income from Capital (1981); Mervyn A. King and Don Fullerton (eds.), The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and West Germany (1984); C. Eugene Steuerle, Taxes, Loans, and Inflation: How the Nation's Wealth Becomes Misallocated (1985); Martin Feldstein (ed.), The Effect of Taxation on Capital Accumulation (1987); and Hans-Werner Sinn, Capital Income Taxation and Resource Allocation (1987; originally published in German, 1985).Effects of taxation are analyzed in Henry J. Aaron and Michael J. Boskin (eds.), The Economics of Taxation (1980); Henry J. Aaron and Joseph A. Pechman (eds.), How Taxes Affect Economic Behavior (1981); C.V. Brown, Taxation and the Incentive to Work, 2nd ed. (1983); G.A. Hughes and G.M. Heal (eds.), Public Policy and the Tax System (1980); and Lawrence H. Summers (ed.), Tax Policy and the Economy, 2 vol. (198788).Discussions of the choice between income and consumption as the basis for taxation include Nicholas Kaldor, An Expenditure Tax (1955, reprinted 1977); Joseph A. Pechman (ed.), What Should Be Taxed, Income or Expenditure? (1980); J.E. Meade (ed.), The Structure and Reform of Direct Taxation (1978); and Henry J. Aaron, Harvey Galper, and Joseph A. Pechman (eds.), Uneasy Compromise: Problems of a Hybrid Income-Consumption Tax (1988).Studies of tax reform and contemporary proposals for tax reform include: for the United States, Albert Ando, Marshall E. Blume, and Irwin Friend, The Structure and Reform of the U.S. Tax System (1985); Robert E. Hall and Alvin Rabushka, The Flat Tax (1985); Henry J. Aaron and Harvey Galper, Assessing Tax Reform (1985); David F. Bradford et al., Blueprints for Basic Tax Reform, 2nd rev. ed. (1984); and United States, Department of the Treasury, Tax Reform for Fairness, Simplicity, and Economic Growth, 3 vol. (1984); for Canada, Canada, Department of Finance, Tax Reform 1987: Income Tax Reform (1987), and Tax Reform 1987: Sales Tax Reform (1987); for Australia, John G. Head (ed.), Taxation Issues of the 1980s (1983), and Changing the Tax Mix (1986). For a survey of developed countries, see Joseph A. Pechman (ed.), World Tax Reform: A Progress Report (1988). Charles E. McLure, Jr.