Taxation is a means by which governments finance their expenditure by imposing chares on citizens and

corporate entities. Governments use taxation to encourage or discourage certain economic decisions. For
example, reduction in taxable personal (or household) income by the amount paid as interest on
home mortgage loans results in greater construction activity, and generates more jobs.
Taxation principles are basic concepts by which a government is meant to be guided in designing and
implementing an equitable taxation regime. These include:
(1) Adequacy: taxes should be just-enough to generate revenue required for provision of essential public

services.
(2) Broad Basing: taxes should be spread over as wide as possible section of the population, or
sectors of economy, to minimize the individual tax burden.
(3) Compatibility: taxes should be coordinated to ensure tax neutrality and overall objectives of
good governance.
(4) Convenience: taxes should be enforced in a manner that facilitates voluntary compliance to the
maximum extent possible.
(5) Earmarking: tax revenue from a specific source should be dedicated to a specific purpose only when
there is a direct cost-and-benefit link between the tax source and the expenditure, such as use
of motor fuel tax

for

road maintenance.

(6) Efficiency:

tax collection

efforts

should

not cost an

inordinately high percentage of tax revenues.

(7) Equity: taxes should equally burden all individuals or entities in similar economic circumstances.
(8) Neutrality: taxes should not favor any one group or sector over another, and should not
be designed to interfere-with or influence individual decisions-making.
(9) Predictability: collection of taxes should reinforce their inevitability and regularity.
(10) Restricted exemptions: tax exemptions must
encourage investment) and for a limited period.

only

be

for

specific

purposes

(such

as

to

(11) Simplicity: tax assessment and determination should be easy to understand by an average taxpayer.

A tax is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by
a state or the functional equivalent of a state to fund various public expenditures. A failure to pay, or
evasion of or resistance to taxation, is usually punishable by law. Taxes are also imposed by
many administrative divisions. Taxes consist of direct or indirect taxes and may be paid in money or as
its labour equivalent. Few countries impose no taxation at all, such as the United Arab Emirates and Saudi

Arabia. A direct tax is generally a tax paid directly to the government by the person on whom it is
imposed. Indirect taxation is policy commonly used to generate tax revenue. Indirect tax is so called as it
is paid indirectly by the final consumer of goods and services while paying for purchase of goods or for
enjoying services. It is broadly based since it is applied to everyone in the society whether rich or poor.
Since the cost of the tax does not vary according to income, indirect taxation is a proportional tax.
However, indirect taxation can be viewed as having the effect of a regressive tax as it imposes a greater
burden (relative to resources) on the poor than on the rich. The taxpayer who pays the tax does not bear
the burden of tax; the burden is shifted to the ultimate consumers. In the case of a direct tax, the taxpayer
has to bear the burden of tax personally; in case of indirect tax the taxpayer and the taxbearer are not the
same person.
An indirect tax may increase the price of a good to raise the price of the products for the consumers.
Examples would be fuel, liquor, and cigarette taxes. An excise duty on motor cars is paid in the first
instance by the manufacturer of the cars; ultimately, the manufacturer transfers the burden of this duty to
the buyer of the car in the form of a higher price. Thus, an indirect tax is one that can be shifted or passed
on. The degree to which the burden of a tax is shifted determines whether a tax is primarily direct or
primarily indirect. This is a function of the relative elasticity of the supply and demand of the goods or
services being taxed.
Types of taxes:
A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a noninventory asset that was purchased at a cost amount that was lower than the amount realized on the sale.
The

most

common

capital

gains

are

realized

from

the

sale

of stocks, bonds, precious

metals and property. Not all countries implement a capital gains tax and most have different rates of
taxation for individuals and corporations. Conversely, a capital loss arises if the proceeds from the sale of
a capital asset are less than the purchase price. Capital gains may refer to "investment income" that

arises in relation to real assets, such as property; financial assets, such as shares/stocks or bonds;
and intangible assets.
Value added Tax, or VAT, is a tax on the added value of a good as it moves through the supply chain to
the end consumer. In effect, the tax is levied on the gross margin at each point in the manufacturingdistribution-sales process. VAT is primarily used in the European Union.
VAT is assessed and collected at each stage of the supply chain, in contrast to sales tax that is assessed
and paid by the final consumer at the very end of the supply chain.
Dulce is an expensive candy manufactured and sold in the country of Alexia. Alexia has a 10% valueadded tax. Dulces manufacturer buys the raw materials for $2.00, plus a VAT of $.20 -- payable to Alexia
-- for a total price of $2.20. The manufacturer then sells Dulce to a retailer for $5.00 plus a VAT of $.50 for
a total of $5.50. However, the manufacturer renders only $.30 to Alexia, which is the total VAT at this
point minus the prior VAT charged by the raw material supplier. Note the $.30 also equals 10% of the
manufacturers gross margin of $3.00.
Finally, the retailer sells Dulce to consumers for $10 plus a VAT of $1 for a total of $11. The retailer
renders $.50 to Alexia, which is the total VAT at this point ($1) minus the prior $.50 VAT charged by the
manufacturer. The $.50 also represents 10% of the retailers gross margin on Dulce.
Corporate tax or company tax refers to a tax imposed on entities that are taxed at the entity level in a
particular jurisdiction. Such taxes may include income or other taxes. The tax systems of most countries
impose an income tax at the entity level on certain type(s) of entities (company or corporation). Many
systems additionally tax owners or members of those entities on dividends or other distributions by the
entity to the members. The tax generally is imposed on net taxable income. Net taxable income for
corporate tax is generally financial statement income with modifications, and may be defined in great
detail within the system. The rate of tax varies by jurisdiction. The tax may have an alternative base, such
as assets, payroll, or income computed in an alternative manner.
Most income tax systems provide that certain types of corporate events are not taxable transactions.
These generally include events related to formation or reorganization of the corporation. In addition, most
systems provide specific rules for taxation of the entity and/or its members upon winding up or dissolution
of the entity.

In systems where financing costs are allowed as reductions of the tax base (tax deductions), rules may
apply that differentiate between classes of member-provided financing. [Tax deduction is a reduction of
the income subject to tax, for various items, especially expenses incurred to produce income. Often these
deductions are subject to limitations or conditions. Tax deductions generally are allowed only for
expenses incurred that produce current benefits, and capitalization of items producing future benefit is
required, sometimes with exceptions. Most systems allow recovery in some manner over a period of time
of capitalized business and investment items, such as through allowances for depreciation, obsolescence,
or decline in value. Many systems reduce taxable income for personal allowances or provide a range of
income subject to zero tax. In addition, some systems allow deductions from the tax base for items the tax
levying government desires to encourage. Some systems distinguish among types of deductions
(business versus non-business).]
Various tax systems grant a tax exemption to certain organizations, persons, income, property or other
items taxable under the system. Tax exemption may also refer to a personal allowance or specific
monetary exemption which may be claimed by an individual to reduce taxable income under some
systems. Tax exempt status may provide a potential taxpayer complete relief from tax, tax at a reduced
rate, or tax on only a portion of the items subject to tax. Examples include exemption of charitable
organizations from property taxes and income taxes, exemptions provided to veterans, and exemptions
under cross-border or multi-jurisdictional principles. Tax exemption generally refers to a statutory
exception to a general rule rather than the mere absence of taxation in particular circumstances (i.e., an
exclusion). Tax exemption also generally refers to removal from taxation of a particular item or class
rather than a reduction of taxable items by way of deduction of other items (i.e., a deduction). Tax
exemptions may theoretically be granted at any governmental level that imposes taxation, though in some
broader systems restraints are imposed on such exemptions by lower tier governmental units.
Moreover, international duty free shopping may be termed "tax-free shopping". In tax-free shopping, the
goods are permanently taken outside the jurisdiction, thus paying taxes is not necessary. Tax-free
shopping is also found in ships, airplanes and other vessels traveling between countries (or tax areas).
Tax-free shopping is usually available in dedicated duty-free shops. However, any transaction may be
duty-free given that the goods are presented to the customs when exiting the country (or tax area). In this
case, a sum equivalent to the tax is paid, but then reimbursed on exit. Common in Europe, tax-free is
uncommon in the United States, with the exception of Louisiana. However, current European Union rules
prohibit most intra-EU tax-free trade, with the exception of certain special territories outside the tax area.
Most systems also tax company shareholders on distribution of earnings as dividends.

Many systems (particularly sub-country level systems) impose a tax on particular corporate attributes.
Such non-income taxes may be based on capital stock issued or authorized (either by number of shares
or value), total equity, net capital, or other measures unique to corporations.
Corporations, like other entities, may be subject to withholding tax obligations upon making certain
varieties of payments to others. These obligations are generally not the tax of the corporation, but the
system may impose penalties on the corporation or its officers or employees for failing to withhold and
pay over such taxes. A company has been defined as a juristic person having an independent and
separate existence from its shareholders. Income of the company is computed and assessed separately
in the hands of the company. In certain cases, distributions from the company to its shareholders as
dividends are taxed as income to the shareholders.
TAXATION IN THE UNITED STATES
Corporate tax is imposed in the United States at the federal, most state, and some local levels on the
income of entities treated for tax purposes as corporations. Shareholders of a corporation wholly owned
by U.S. citizens and resident individuals may elect for the corporation to be taxed similarly to partnerships
(see S Corporation). Corporate income tax is based on taxable income, which is defined similarly to
individual taxable income.
Shareholders (including other corporations) of corporations (other than S Corporations) are taxed
on dividend distributions from the corporation. They are also subject to tax on capital gains upon sale or
exchange of their shares for money or property. However, certain exchanges, such as in reorganizations,
are not taxable. Multiple corporations may file a consolidated return at the federal and some state levels
with their common parent.
Corporate tax rates
Federal corporate income tax is imposed at graduated rates from 15% to 35%. The lower rate brackets
are phased out at higher rates of income, with all income subject to tax at 34% to 35% where taxable
income exceeds $335,000. All income is taxed at the same rate. Additional tax rates imposed below the
federal level vary widely by jurisdiction, from under 1% to over 16%. State and local income taxes are
allowed as tax deductions in computing federal taxable income.
Deductions for corporations

What expenses can a company set against its profits?

A company is, in general, entitled to deductions in respect of revenue expenditure - wholly and exclusively
incurred for the purposes of its trade - against its profits.
It may, however, be entitled to capital allowances in respect of certain capital expenditure e.g. wear & tear
allowances. There is an allowance for wear and tear of plant and machinery in use for the purposes of a
trade at the end of an accounting period. The allowance is calculated by reference to the cost of the item
(less any grants received) and the allowable expenditure may be written down at the rate of 12.5% on a
straight line basis. A wear and tear allowance is also available in respect of expenditure incurred on motor
vehicles - also at the rate of 12.5% on a straight line basis.
Capital allowances are also available in respect of expenditure on transmission capacity rights, computer
software, energy efficient equipment including electric and alternative fuel vehicles, and industrial
buildings and specified intangible assets.
Corporations are not allowed the personal deductions allowed to individuals, such as deductions
for exemptions and the standard deduction. However, most other deductions are allowed. In addition,
corporations are allowed certain deductions unique to corporate status. These include a partial deduction
for dividends received from other corporations, deductions related to organization costs, and certain other
items.
What are progressive, regressive and proportional taxes?
1) Proportional tax:
It is a tax where the rate of taxation is fixed. The amount of the tax is a fixed proportion (say 20%) of one's
income. It stays fixed irrespective of how high or low the income is.
For example:
A 10% proportional tax would mean that one making 100 dollars pays 10% or 10 dollars in taxes, while
someone making 500,000 dollars pays 50,000 dollars in taxes. The rate of taxation does not change as
income changes. Proportional taxes are also called flat tax. A sales tax is a type of proportional tax since
all consumers, regardless of earnings, are required to pay the same fixed rate.

Many arguments exist for and against the proportional tax system:
It is equal all across the income board and hence in theory is a fair system. Since there are no
exceptions, the rules are easy to understand and apply. The tax administration and collection is also
simple and straight forward. It is difficult to evade. Another argument for a proportional tax system is the
motivation factor, since people who earn more are not charged at a higher percentage rate. The main
argument against proportional taxes is that it is regressive in application.
2) Progressive tax:
It is a tax in which the tax rate increases as the income increases. A progressive tax takes a larger
percentage of income in taxes from the high-income group than it does from the low-income group.
Personal income taxes in the USA are progressive and so, people with higher income pay a higher
percentage of their income in taxes. On the other hand, people with lower income, pay a smaller % of
their income in taxes. Under progressive taxes, the lowest income group including ones below the poverty
level would pay little to nothing in taxes.
Arguments for and against:
Progressive taxes are based on the logic of the "ability to pay" principle. Higher income people should pay
more since they are capable of paying more. The fairness of progressive taxes are built on the fact that
those who make more money should also contribute more to society in form of taxes. Those who make
less, are less able to pay and so should pay less.
The counter argument to progressive taxes is that it penalizes people who work harder and make more
money. In a sense, you are being punished for your success. Those taxes are then used to fund social
welfare programs that help raise the real income of the lower income group. Critics of the progressive tax
consider it to be discriminatory and reduces the incentive to work hard and excel in life.
3) Regressive tax:
It is a tax imposed in such a manner that the tax rate decreases as the amount of taxable income
increases. The higher income group pays less in taxes than the lower income group. Regressive taxes
impose greater tax burden on the poor relative to the rich. In case of regressive taxes there is an inverse
relationship between the tax rate and the taxpayer's ability to pay. People with low income and low ability

to pay, will pay higher taxes. This means that it hits lower-income individuals harder. Sales tax on food,
clothing and transportation can be regressive. Since each person pays the same amount of money, it is a
lower proportion for people with higher incomes. Tobacco and gasoline taxes are highly regressive.
For example:
If a person with 50 dollar income pays 5 dollars in gasoline tax, it is 10% of his income in taxes. But the
person making 500 dollars, paying 5 dollars in gas taxes is only paying 1% of his income in this tax.
Hence it is regressive. Sales taxes on essentials like food, clothing and housing make up a higher
percentage of a lower income persons budget. In this case, even though the tax may be uniform (such as
7% sales tax in the state of Georgia), the lower income group is more affected by it because they are less
able to afford the tax. Lotteries are also regressive by nature.
Double Taxation: After all is said and done, companies that have made a profit can do one of two things
with the excess cash. They can (1) take the money and reinvest it to earn even more money, or (2) take
the excess funds and divide them among the company's owners, the shareholders, in the form of
a dividend.
If the company decides to pay out dividends, the earnings are taxed twice by the government because of
the transfer of the money from the company to the shareholders. The first taxation occurs at the
company's year-end when it must pay taxes on its earnings. The second taxation occurs when the
shareholders receive the dividends, which come from the company's after-tax earnings. The shareholders
pay taxes first as owners of a company that brings in earnings and then again as individuals, who must
pay income taxes on their own personal dividend earnings.
This may not seem like a big deal to some people who don't really earn substantial amounts of dividend
income, but it does bother those whose dividend earnings are larger. Consider this: you work all week and
get a paycheck from which tax is deducted. After arriving home, you give your children their weekly
allowances, and then an IRS representative shows up at your front door to take a portion of the money
you give to your kids. You would complain since you already paid taxes on the money you earned, but in
the context of dividend payouts double taxation of earnings is legal.
The double taxation also poses a dilemma to CEOs of companies when deciding whether to reinvest the
company's earnings internally. Because the government takes two bites out of the money paid as

dividends, it may seem more logical for the company to reinvest the money into projects that may instead
give shareholders earnings in capital gains.