What Is Taxation?

Taxation is a term for when a taxing authority, usually a government, levies or imposes a financial obligation on its citizens or residents. Paying taxes to governments or officials has been a mainstay of civilization since ancient times. The term "taxation" applies to all types of mandatory levies, from income to capital gains to estate taxes.

KEY TAKEAWAYS

• Taxation occurs when a government or other authority requires that a fee be paid by citizens and corporations, to that authority.
• The fee is involuntary, and as opposed to other payments, not linked to any specific services that have been or will be provided.
• Tax occurs on physical assets, including property and transactions, such as a sale of stock, or a home.
• Types of taxes include income, corporate, capital gains, property, inheritance, and sales.

Understanding Taxation

Taxation is differentiated from other forms of payment, such as market exchanges, in that taxation does not require consent and is not directly tied to any services rendered. The government compels taxation through an implicit or explicit threat of force. Taxation is legally different from extortion or a protection racket because the imposing institution is a government, not private actors.

Tax systems have varied considerably across jurisdictions and time. In most modern systems, taxation occurs on both physical assets, such as property and specific events, such as a sales transaction. The formulation of tax policies is one of the most critical and contentious issues in modern politics.

Purposes and Justifications for Taxation

The most basic function of taxation is to fund government expenditures. Varying justifications and explanations for taxes have been offered throughout history. Early taxes were used to support the ruling classes, raise armies, and build defenses. Often, the authority to tax stemmed from divine or supranational rights.

Different Types of Taxation

As mentioned above, taxation applies to all different types of levies. These can include (but are not limited to):

• Income tax: Governments impose income taxes on financial income generated by all entities within their jurisdiction, including individuals and businesses.
• Corporate tax: This type of tax is imposed on the profit of a business.
• Capital gains: A tax on capital gains is imposed on any capital gains or profits made by people or businesses from the sale of certain assets including stocks, bonds, or real estate.
• Property tax: A property tax is assessed by a local government and paid for by the owner of a property. This tax is calculated based on property and land values.
• Inheritance: A type of tax levied on individuals who inherit the estate of a deceased person.
• Sales tax: A consumption tax imposed by a government on the sale of goods and services. This can take the form of a value-added tax (VAT), a goods and services tax (GST), a state or provincial sales tax, or an excise tax.

Why Do We Need to Pay Taxes?

There is an old saying that goes "the only sure things in life are death and taxes." Taxation has been a feature of society going back to ancient times. The role of taxes is to help governments fund various undertakings such as public works, infrastructure, and wars.