income tax

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Direct tax levied on personal income, mainly wages and salaries, but which may include the value of receipts other than in cash. It is one of the main instruments for achieving a government's income redistribution objectives, to make incomes less unequal. In contrast, indirect taxes are duties payable whenever a particular product or service is purchased; examples include VAT and customs duties.

Most countries impose income taxes on company (corporation) profits and on individuals (personal), although the rates and systems differ widely from country to country. In the case of companies in particular, income tax returns are prepared by an accountant, who will take advantage of the various exemptions, deductions, and allowances available. Personal income taxes are usually progressive so that the poorest members of society pay little or no tax, while the rich make much larger contributions. In the 1980s many countries underwent tax reforms that led to simplification and reductions in income tax rates. This had the effect of stimulating economic activity by increasing consumer spending and in some cases discouraged tax evasion. In the UK the rates of tax and allowances are set out yearly in the annual Finance Act, which implements the recommendations agreed to by the House of Commons in the budget presented by the chancellor of the Exchequer. William Pitt introduced an income tax between 1799 and 1801 to finance the wars with revolutionary France; it was re-imposed between 1803 and 1816 for the same purpose, and was so unpopular that all records of it were destroyed when it was abolished. Peel reintroduced the tax in 1842 and it has been levied ever since, forming an important part of government finance. At its lowest, from 1874 to 1876, it was 0.83%; at its highest, between 1941 and 1946, the standard rate was 50%.

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