Taxes are sums of money paid to a government by individuals and businesses. This money (also called revenue) is used to fund government spending on, for example, defence, policing and services such as healthcare and education. The process of charging and collecting taxes is called taxation. There are two main types of tax: direct tax, which is taken off income (earnings), and indirect tax, which is added to goods and services. Paying income tax is compulsory for everyone over a certain age, and failing to pay them usually means punishment by law. In most countries people pay different rates—and therefore different amounts—of income tax depending on how much they earn. A few countries have a system in which everyone pays a flat rate of tax: the same percentage of their income.

What are taxes for?

Money collected through taxes is known as public money. Governments use it to fund services such as welfare, education and healthcare (public services). Taxes help to build and maintain things that keep a country running (infrastructure) and which everyone uses, such as roads, bridges and sewers. In most countries taxes pay for things that improve people’s quality of life, such as parks and street lightinbg, as well as essential services like street cleaning, rubbish collection and recycling. 
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In many countries, taxes fund or part-fund a healthcare service, paying for hospitals, clinics and medical care. The UK’s National Health Service (NHS) is funded by taxpayers, and free for every citizen to use. Countries’ welfare systems are also funded by public money. They help provide people with housing, financial support and social care.
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Governments also use taxation to influence a country's economy. This is known as fiscal policy. For example, lowering tax rates, which gives people more money to spend, can help boost the economy, which in turn encourages businesses to take on staff and so reduce unemployment. Raising the level of taxes reduces people's income; demand for goods and services falls, which usually has the effect of reducing inflation (rising prices). It also provides the government with more money, enabling it to reduce borrowing and to maintain the level of services it provides.

Indirect tax

Indirect tax is a type of tax that is added to the price of goods and services—that is, it is paid to the government indirectly whenever we buy something or use a service. It is sometimes called sales tax. Value Added Tax (VAT) is a type of sales tax. It is collected by shops and businesses, who pass it on to the government.

​​​​​​​Especially high taxes are put on some items to discourage people from buying them. These are usually things considered harmful to people’s health, such as tobacco, alcohol and sugary foods. Essential goods and services, such as healthcare items and some foods, are usually exempt (sold tax-free).

Most countries do not tax goods and services that will be shipped or exported overseas; these are known as duty free. When they arrive in another country, that country’s government will usually charge an import tax, known as a duty or customs charge, or a tariff. The amount to pay depends on the value of the item. Duty free shops at airports sell goods such as alcohol, tobacco and perfume to travellers at reduced rates, on the requirement that they will be taken out of the country.

In nearly every country in the world, home-owners (and sometimes renters) also pay some form of property tax to their local government. The amount they pay is usually proportional to the value of their property, meaning that those with more valuable properties pay a higher tax. The money collected from property taxes is used to fund government services in the local area, such as rubbish collection, emergency services and road maintenance. In the UK, council tax is a type of property tax.

Corporate tax, or corporation tax, is a direct tax paid to the government by a business. In most countries, by law, businesses must pay a share of their profits each year to the government as tax.

Other taxes

Some countries charge a wealth tax either instead of or in addition to income tax. To calculate it, a person adds up the total value of their property, land, businesses and cash-in-hand (their assets). If the value is over a certain amount, they must pay a fixed tax to the government. Argentina, France, Switzerland and Norway have systems of wealth taxation. Wealth taxation aims both to raise funds for public services and to reduce wealth inequality.

In some countries, if a person receives a sum of money (an inheritance) or a property when someone dies, they must pay a percentage of its value to the government. This is known in the UK as inheritance tax or death duty, and in the US as estate tax.

Income taxes are usually deducted from (taken off) a person’s earnings before they are paid. This system of tax collecting is known as pay-as-you-earn (PAYE) or pay-as-you-go (PAYG). Self-employed people must work out by themselves how much tax they owe. They submit this information to the government in a document called a tax return. They can deduct the cost of things that they have bought to help them do their work, such as office equipment, fuel and postage; these are known as expenses.

In many systems, people can claim deductions from their taxes, known as allowances. They can earn and save a certain amount of money without paying tax on it (their personal allowance). Many countries offer tax allowances in addition to married couples or people with children in order to encourage people to raise families.

Each country or territory decides its own tax system. In many countries across Europe such as Denmark, citizens pay a high rate of tax—and usually receive a high standard of public services and social care in return. In others, such as the Cayman Islands, people and companies pay no direct tax at all. Such places are known as tax havens. This makes them attractive places for companies to set up their headquarters. In these places, a higher amount of tax is added to goods and services, and many products are expensive.

History of tax

The earliest recorded taxes were introduced 5000 years ago in ancient Egypt. The taxes, called tithes, required farmers to hand over a percentage of their crop to the pharaoh when they harvested it. Those who could not afford to pay tithes paid with their labour instead.

In the 9th century, Viking raiders demanded a tax called Danegeld from the citizens of the countries they raided, to save their land from being ravaged.
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Taxation was used by monarchs to raise money for wars. King Henry II of England, introduced an early form of income tax in 1188 to fund an army for the Third Crusade. Every person had to contribute 10% of their earnings. 

Parliament became more important in the 13th and 14th centuries because monarchs could not afford to fight wars paid out of their personal wealth. Kings were forced to call assemblies of landowners and commoners to gain their approval. In return, these assemblies demanded a say in how the country was governed. When Charles I tried to bypass Parliament and raise a tax known as "ship money" without its consent, the result was a bitter conflict that led to the outbreak of the English Civil War in 1642.
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India under the rule of the Mughal Empire was, until 1750, one of the largest and most prosperous countries in the world, producing around a quarter of the world's entire output of manufactured goods. The empire's wealth came largely from the taxes it raised from India's farmers, or raiyat. The system, known as zabt, was introduced by the third Mughal emperor, Akbar the Great (1556–1605). It encouraged farmers to grow cash crops such as cotton, indigo, sugar cane and opium, rather than the food crops they needed. Taxes were collected by landowners known as zamindars. 

When Bengal was annexed by the British East India Company in 1764, the Mughal emperor granted the Company the Diwani (the right to collect taxes) in Bengal and Bihar, a significant step in the establishment of British rule in India. 

​​​​​​​In the late 18th century, French people paid some of the highest taxes in Europe, mainly to finance the lavish lifestyle of King Louis XVI and his queen Marie-Antoinette. The least well-off, working people and peasants, paid the highest taxes, while wealthy landowners paid almost nothing. Protests broke out over this unfairness, and were part of the unrest that led to the French Revolution in 1789.

Income tax was first introduced in the UK in 1799 as a temporary measure to fund the Napoleonic Wars. It became permanent in 1842, but fewer than 2% of the population paid it. In the US, the first federal income tax was enacted in 1861 to pay for the Civil War, becoming permanent in 1913. 

​​​​​​​The 20th century saw income tax become a vital source of government finances across the world.
Governments needed vast resources to fund military campaigns in both World War I and World War II. After 1945, many Western countries developed welfare states, which needed significant public funding. Income tax became a means not only to raise revenue but also to reduce inequality. Progressive tax systems, in which higher earners pay a larger percentage of their income, became standard in many democracies.