Taxation is the primary method by which governments finance themselves. Taxes are compulsory payments to government, levied against individuals and businesses. Most governments strive to keep the tax burden – the total cost to a country of paying taxes (including not just the taxes themselves, but the cost of administering and collecting them) – at the minimum level necessary to raise sufficient funds to carry out its obligations.
It has been said that there are but two certainties in this world – death and taxes. Certainly, tax has been with us for a long time – the ancient Egyptians, Greeks and Romans all had highly developed systems in place, often to support military endeavours. Indeed, income tax was invented by the British government to raise funds to fight Napoleon. And tax has never been popular. In 60 CE, Boadicea, leader of the Iceni, led an uprising in England against its Roman occupiers, at least in part inspired by corrupt tax collectors. Disputes over tax would subsequently lead to such landmark events as the drawing up of the Magna Carta and the onset of both the English Civil War and the American War of Independence. As J. K. Galbraith would later observe: ‘The American colonies, all know, were greatly opposed to taxation without representation. They were also, a less celebrated quality, equally opposed to taxation with representation.’
Progressive taxes require those with the most to pay a greater proportion. Income tax is, typically, a progressive tax, charged at a lower rate for those with a lower income, and increasing incrementally for incomes above certain thresholds. Other taxes, such as sales taxes, are charged at a flat rate regardless of personal circumstances. While it is generally accepted that progressive taxes are more socially equitable, there are those who argue that a system deemed to unfairly tax the rich risks losing its wealthiest members to more sympathetic tax regimes, with knock-on effects for the economy as a whole. For instance, in the aftermath of the global economic slowdown in the noughties it was suggested that banks should be subject to punitive charges, while others warned that bankers would respond by taking their business elsewhere, costing jobs and reducing the total volume of wealth in the economy.
Tax avoidance
Others unsatisfied at the tax demands upon them (and rich enough to employ someone to navigate loopholes for them) can attempt to reduce what they have to pay by practising tax avoidance. This is a legal – if morally suspect – strategy that can involve, for example, setting up companies in low-tax offshore jurisdictions, establishing shell companies (i.e. companies with legal status but not actively trading, through which to funnel money) and moving to a tax haven. Tax evasion, meanwhile, is any illegal attempt to shirk one’s tax bill (for example, by misrepresenting income).