taxation

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Raising of money from individuals and organizations by the state in order to pay for the goods and services it provides. Taxation can be direct (a deduction from income) or indirect (added to the purchase price of goods or services, that is, a tax on consumption). The proportions of direct and indirect taxation in the total tax revenue vary widely from country to country. In the UK, taxation is below average by comparison with other members of the Organization for Economic Cooperation and Development (OECD).

Taxes can be progressive, proportional, or regressive. A progressive tax is one that takes an increasing proportion of income as income rises; most income taxes, for example, have higher rates for those with higher incomes. A proportional tax takes the same proportion of income across all levels. A regressive tax takes a decreasing proportion of income as income rises, thus affecting the poor more than the rich. Indirect taxes are regressive.

Taxation can be an important social and economic policy tool. For instance, by taxing the rich more severely and by returning some of the collected wealth in the form of benefits, a government can attempt to redistribute wealth from the richer to the poorer.

Tax rates, which in the UK are decided each year by the chancellor of the Exchequer in the annual budget, can be of considerable importance for the broader economy. A lowering of the total amount of tax the government takes is intended to increase demand for goods and services, or expand the economy. A rise in overall tax rates is designed to slow economic growth, typically in the interest of controlling inflation.

Many countries have local property taxes or a local income tax to pay for local government spending (sometimes along with grants from central government). In the UK, this is the council tax, based on property values. It replaced the unpopular poll tax or community charge 1989–93, levied on each person of voting age.

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