An important feature of tax systems is whether they are flat(you pay one rate no matter how much you earn), regressive (the more you earn the lower the tax rate), or progressive (the more you earn the higher the tax rate). Progressive taxes generally target a smaller percentage of the income of poorer people, and require less record-keeping and complexity by people with simpler affairs. A flat tax would require the least amount of record-keeping. Progressive taxes reduce the tax burden of people with smaller incomes.
Another idea is to arrange the taxation so that it causes minimal economic disruption, thereby maximizing the total efficiency of the economy, and thereby making everyone wealthier. The classic economically neutral tax is a tax on land. A government's primary duty is to maintain and defend title to land, and therefore (so the theory goes) it should collect most of its revenues for this unique service. Since governments also resolve commercial disputes, especially in countries with [English Law]?, this doctrine is often used to justify a sales tax or VAT (Value Added Tax).
The most common tax is a direct tax. The best example of a direct tax is [income tax]?, which is paid by individuals and corporations on their earnings. This is most often a progressive tax, because it is adjusted to increase by income, and taxes economic activity. It distorts economies because it punishes productive people for being productive. It is socially intrusive because enforcement causes the government to collect large amounts of information about business affairs, much of which could be considered proprietary.
The crucial invention permitting the high income tax rates was direct withholding of taxes from payrolls by employers. Employees have no problem paying high taxes, because they never handle the money. This also discourages cheating, because there are fewer employers than employees, and the government can focus enforcement.
The classic way of cheating on income tax is to lie about one's affairs. Either one fails to declare income, or declares nonexistent expenses. The governemnt fights this by looking at individual ratios using computer programs. For example, if a person spends too much on cars, they might be examined.
A poll tax is a tax paid directly by an indivdual to a government. Poll taxes are infamous for causing hardship for the numerous individuals that handle their affairs poorly. In fact, they were forbidden by the U.S. consitution, as a historic abuse to be prevented. This protection had to be changed in order to enable income taxes. Poll taxes are difficult to cheat.
Indirect taxes are taxes paid while engaging in other economic activities, notably buying and selling. [Sales tax]? is a common indirect tax. It collects a tax on retail transactions. Sales tax discourages retail sales. It is common to exempt food, heating and lighting costs from sales tax, to avoid regressive taxation on the poor. Sales tax directly discourages formation of efficient capital-intensive production because it taxes the purchase of factory equipment. The classic way of cheating on sales tax is to ask a merchant for a cash discount. The merchant pockets the cash, writes off the merchandise to shrinkage, and the state fails to get the tax.
A variant on sales tax is [excise tax]? which charges for the movement of goods through a border. Excise taxes discourage trade. Excises pay government to maintain a navy or border police, and also protect domestic industry to some extent. The classic cheat is smuggling, or a war to interfere with competing countries' merchants.
A [value added tax]? applies the moral equivalent of a sales tax to every operation that creates value. A VAT was historically used when a sales tax or excise tax was uncollectable. For example, a 30% sales tax is so often cheated that most of the retail economy will go off the books. VAT distributes such a tax in small enough increments that it becomes more trouble to cheat than to pay the tax. However, a VAT punishes production, which is considered a bad effect.
A [gasoline tax]? is often used to pay for public transportation, especially roads and bridges and for the protection of the environment.
An [alcohol tax]? is used to discourage alcohol consumption and to pay for the costs of treating illness caused by alcohol abuse..
A [carbon tax]? is a tax on the consumption of carbon-based non-renewable fuels, such as gasoline, diesel-fuel, jet fuels and natural gas. The object is to reduce the release of carbon into the atmosphere.
Historical forms of taxation
Some principalities taxed windows, doors or cabinets to reduce consumption of imported glass and hardware. Armoires, hutches and wardrobes were invented to evade taxes on doors and cabinets.
see also Tax Freedom Day, Law/Tax, Taxation in the United States, inheritance tax
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