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What is Income Tax?
Income tax is a tax levied by governments on the income earned by individuals and businesses. It is one of the primary sources of public revenue and is typically applied progressively, meaning higher incomes are taxed at higher rates.
Definition
Income tax is a government-imposed charge on earnings, including wages, salaries, business profits, and investment income.
Key Takeaways
- Applied to individual and corporate income.
- Often progressive, with rates increasing as income rises.
- Funds public services such as healthcare, education, and infrastructure.
Understanding Income Tax
Income tax systems vary by country but generally classify income into categories such as employment income, business income, and investment income. Taxpayers may be allowed deductions, exemptions, or credits that reduce taxable income or tax payable.
Governments use income tax as a policy tool to redistribute wealth, influence economic behavior, and stabilize public finances. Compliance is enforced through filing requirements, withholding systems, and audits.
Real-World Example
An individual earning $60,000 annually may pay income tax at graduated rates, resulting in a lower effective tax rate than their highest marginal rate.
Importance in Business or Economics
Income tax is important because it:
- Generates government revenue
- Influences labor supply and investment decisions
- Supports redistribution and social programs
- Affects business profitability and planning
Types or Variations
- Personal Income Tax — Tax on individual earnings
- Corporate Income Tax — Tax on business profits
- Progressive Tax — Rates rise with income levels
- Flat Tax — Single tax rate on all income
Related Terms
- Taxable Income
- Marginal Tax Rate
- Tax Deduction
Sources and Further Reading
Quick Reference
- Tax on earned income
- Major source of public revenue
- Varies by jurisdiction
Frequently Asked Questions (FAQs)
Is income tax the same everywhere?
No; rates, thresholds, and rules differ by country.
What is a marginal tax rate?
The tax rate applied to the last dollar earned.
Do businesses pay income tax?
Yes, corporate income tax applies to business profits.
