Common Principles: Meaning

Meaning
An income tax is a tax imposed on individuals or entities (taxpayers) that varies with their
respective income or profits (taxable income). Many jurisdictions refer to income tax on business
entities as companies tax or corporate tax. Partnerships generally are not taxed; rather, the
partners are taxed on their share of partnership items. Tax may be imposed by both a country
and subdivisions. Most jurisdictions exempt locally organized charitable organizations from tax.
Income tax generally is computed as the product of a tax rate times taxable income. The tax rate
may increase as taxable income increases (referred to as graduated or progressive rates).
Taxation rates may vary by type or characteristics of the taxpayer. Capital gains may be taxed at
different rates than other income. Credits of various sorts may be allowed that reduce tax. Some
jurisdictions impose the higher of an income tax or a tax on an alternative base or measure of
income.
Taxable income of taxpayers resident in the jurisdiction is generally total income less income
producing expenses and other deductions. Generally, only net gain from sale of property,
including goods held for sale, is included in income. Income of a corporation's shareholders
usually includes distributions of profits from the corporation. Deductions typically include all
income producing or business expenses including an allowance for recovery of costs of business
assets. Many jurisdictions allow notional deductions for individuals, and may allow deduction of
some personal expenses. Most jurisdictions either do not tax income earned outside the
jurisdiction or allow a credit for taxes paid to other jurisdictions on such income. Nonresidents are
taxed only on certain types of income from sources within the jurisdictions, with few exceptions.
Most jurisdictions require self-assessment of the tax and require payers of some types of income
to withhold tax from those payments. Advance payments of tax by taxpayers may be required.
Taxpayers not timely paying tax owed are generally subject to significant penalties, which may
include jail for individuals or revocation of an entity's legal existence.
Concept
The concept of taxing income is a modern innovation and presupposes several things:
a money economy, reasonably accurate accounts, a common understanding of receipts,
expenses and profits, and an orderly society with reliable records.
For most of the history of civilization, these preconditions did not exist, and taxes were based on
other factors. Taxes on wealth, social position, and ownership of the means of
production (typically land and slaves) were all common. Practices such as tithing, or an offering
of first fruits, existed from ancient times, and can be regarded as a precursor of the income tax,
but they lacked precision and certainly were not based on a concept of net increase.
Common principles
While tax rules vary widely, there are certain basic principles common to most income tax
systems. Tax systems in Canada, China, Germany, Singapore, the United Kingdom, and the
United States, among others, follow most of the principles outlined below. Some tax systems,
such as India, may have significant differences from the principles outlined below. Most
references below are examples; see specific articles by jurisdiction (e.g., Income tax in
Australia).
Taxpayers and rates

Individuals are often taxed at different rates than corporations. Individuals include only human
beings. Tax systems in countries other than the USA treat an entity as a corporation only if it is
legally organized as a corporation. Estates and trusts are usually subject to special tax
provisions. Other taxable entities are generally treated as partnerships. In the USA, many kinds
of entities may elect to be treated as a corporation or a partnership. Partners of partnerships are
treated as having income, deductions, and credits equal to their shares of such partnership
items.
Separate taxes are assessed against each taxpayer meeting certain minimum criteria. Many
systems allow married individuals to request joint assessment. Many systems allow controlled
groups of locally organized corporations to be jointly assessed.
Tax rates vary widely. Some systems impose higher rates on higher amounts of income.
Example: Elbonia taxes income below E.10,000 at 20% and other income at 30%. Joe has
E.15,000 of income. His tax is E.3,500. Tax rates schedules may vary for individuals based on
marital status.[15]
Residents and nonresidents

Residents are generally taxed differently from nonresidents. Few jurisdictions tax nonresidents
other than on specific types of income earned within the jurisdiction. See, e.g., the discussion of
taxation by the United States of foreign persons. Residents, however, are generally subject to
income tax on all worldwide income.[notes 1] A very few countries (notably Singapore and Hong
Kong) tax residents only on income earned in or remitted to the country.
Residence is often defined for individuals as presence in the country for more than 183 days.
Most countries base residence of entities on either place of organization or place of management
and control. The United Kingdom has three levels of residence.

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Common Principles: Meaning

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Meaning

Taxpayers and rates

Residents and nonresidents

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