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income tax, assessment levied upon individual or corporate incomes. Although personal incomes were occasionally taxed in medieval Italian cities, the income tax is essentially a modern form of taxation. The first important income tax was levied in Great Britain from 1799 to 1816 in order to raise funds for the Napoleonic Wars. After several other temporary income taxes, Britain adopted a permanent one in 1874. The first income tax in the United States was imposed in 1864, during the Civil War, but was discontinued in 1872. Various European countries, as well as Australia, New Zealand, and Japan, adopted regular income taxes during the latter half of the 19th cent.
In the United States, the income tax law of 1894 was declared unconstitutional on the grounds that it was a direct tax not apportioned according to state population. The adoption of the Sixteenth Amendment (1913) permitted both the corporate and individual income tax to become a lawful element in the federal tax structure. Since then they have been a major source of revenue for the federal government, yielding as much as 85% of all its receipts in some years. Income taxes had been levied sporadically by various states since 1789; since 1919 most states have adopted the tax. The first major American city to impose a tax on incomes was Philadelphia (1939).
In general, personal incomes below a certain amount are exempted from the individual income tax, with the actual income subject to tax affected by exemptions, deductions, credits, and the like. The tax is applied to the net income remaining after these modifications, and the rate becomes progressively higher for larger incomes. From the mid-1960s until 1982 the tax rate ranged from about 15% for the lowest brackets to about 70% for the highest, with a similar structure for corporate income taxes. In 1982, Congress passed President Reagan's plan to cut the highest rate on personal income tax from 70% to 50% and the capital gains tax from 50% to 20%. The Tax Reform Act of 1986 further lowered the maximum marginal tax rates from 50% to 28%, the lowest since the 1920s. A top rate of 31% was added in 1991, and additional rates of 36% and 39.6% for the wealthiest individuals were approved in 1993. Under changes enacted in 1997, the tax rate on most long-term capital gains is 20%—10% for people in the 15% tax bracket; the rate is slightly lower for investments held at least five years. Further changes enacted under President George W. Bush in 2001 reduced the rate in the lowest income-tax bracket to 10% and called for the tax rates of all brackets above the 15% rate to be reduced to 25%, 28%, 33%, and 35% by 2006; the changes became permanent, with the exception of the restoration of a 39.6% top rate, in 2013. A tax overhaul signed by President Trump in 2017 altered the income tax brackets somewhat, to 10%, 12%, 22%, 24%, 32%, 35%, and 37%, but also shifted the ranges of income in those brackets and greatly altered exemptions, deductions, and other rules used to determine net income. The most significant changes, however, affected the corporate income tax, including dropping the rate from 35% to 21%. In many states and cities, lowered federal income taxes have been offset by higher state and local income and property taxes. In the 1980s and 90s, the call for a “flat tax”—a single tax rate (around 17%–20%) for individuals and businesses—was a recurring campaign issue among American conservatives. Such an income tax has been adopted by a number of E European countries.
See D. J. Gaffney and D. H. Skadden, Principles of Federal Income Taxation (1982); J. Creedy, The Dynamics of Income Distribution (1985); M. Levi, Of Rule and Revenue (1988).
the chief type of direct tax collected from the wages, profits, and other revenues of natural and legal (artificial) persons.
In capitalist countries. The income tax was instituted in Great Britain in 1842, in Japan in 1887, in Germany in 1891, in the United States in 1913, in France in 1914, and in prerevolutionary Russia in January 1917. In Great Britain, Italy, Sweden, and Switzerland the incomes of natural and legal persons are subject to one general income tax. In the United States, France, the Federal Republic of Germany, and certain other countries, an income tax is collected from individuals, while legal persons are taxed according to a special tax on corporate profits.
Two systems for determining the structure of income taxes are used: the schedule system and the universal system. The schedule system originated in Great Britain and has been preserved in Italy and a few other countries. Under this system, incomes are divided according to their sources, into parts called schedules, each of which is taxed separately. Two taxes are collected: the basic tax at a proportional rate and the surtax at a progressive rate. The universal system first appeared in Prussia and is used in most countries, including the United States, France, the Federal Republic of Germany, and Japan. Under this system, the income tax is collected on the total annual income according to a progressive rate scale. Thus, in the United States, the minimum income tax rate is 14 percent, on incomes up to $500, and the maximum is 70 percent, on incomes of $100,000 or more. In Great Britain the corresponding figures are 30 percent, on incomes up to £5,000, and 75 percent, on incomes of more than £20,000, and in France, 10 percent, on incomes up to 11,500 francs and 60 percent, on incomes of more than 173,000 francs. The highly graduated tax on very large incomes hardly touches the profits of the capitalists, because the capitalists enjoy tax advantages and various deduction allowances. As a result, their incomes are taxed primarily at low and medium rates.
In the period of the general crisis of capitalism, the income tax is becoming more important as a means of increasing the exploitation of the workers by raising the rates for low incomes and reducing the exemptions, or untaxed minimum income. These changes have broadened the range of persons paying income tax. Thus in the United States, the number of taxpayers has grown from 3 million in 1938 to 66 million in 1972, that is, by a factor of 22. As a result of state-monopoly intervention in the economy, the income tax has become one of the chief sources of revenue for the state budgets of the capitalist countries, serving as a tool for redistribution of national income in favor of the monopolies. For example, in the United States, income tax revenues were $1.3 billion in 1937–38, or 22.4 percent of the total federal budget, while the figure for 1973–74 was $129 billion, or about 44 percent of all federal revenues.
In socialist countries. The income tax is one of the sources of state budgetary income and is used to regulate the income and savings of various social groupings and of cooperative enterprises and social and public organizations.
In the USSR, income tax is paid by the population, kolkhozes, consumer cooperatives, and the economic agencies of social and public organizations. A national income tax, in combination with a property tax, was instituted by a Nov. 16, 1922, decree. Known as the income and property tax, this combined tax replaced the previously existing income tax, which had ceased to be collected in early 1921. In 1924 the income and property tax was converted to an income tax. The tax is computed at rates that are differentiated by groups of taxpayers and amount of income. Five main groups of taxpayers are distinguished: production workers, clerical and professional employees, and other persons placed in the same category for tax purposes; writers and those employed in the arts; doctors, teachers, and others with private practices; craftsmen; and persons who receive income from work not done for wages. Income tax rates are progressive. They are lower for the first group of taxpayers and highest for the last. The maximum tax rate on the wages of production workers and clerical and professional employees is 13 percent. This maximum rate is applied to wages of more than 100 rubles a month. Significant concessions have been established for certain categories of income-tax payers. Low-paid workers do not have to pay income taxes. Production workers and clerical and professional employees enjoy tax exemptions on minimum incomes of 60 rubles a month, and in some regions the exemption is 70 rubles. Since 1973, taxes have been cut an average of 35.5 percent for production workers and clerical and professional employees receiving wages of 71–90 rubles a month in regions where the minimum wage is 70 rubles a month.
An income tax on kolkhozes, including a tax on the agricultural incomes of fishing kolkhozes, was instituted in 1936, in place of the previously collected agricultural tax. The tax is paid quarterly. Since 1966, income tax has been imposed as follows: a kolkhoz’s net income that exceeds a rate of profit of 15 percent is taxed at 0.3 percent for each percentage of profitability above 15 percent, to a maximum rate of 25 percent. At kolkhozes where the wages fund exceeds an average of 60 rubles a month per working kolkhoz member the fund is taxed at a rate of 8 percent. Kolkhozes based on the resources of new arrivals and kolkhozes made up of the peoples who populate the frontiers of the USSR do not have to pay income tax.
An income tax on consumer cooperatives and on the economic agencies of social and public organizations was introduced in 1923. It is paid quarterly at a rate of 35 percent of the profit shown in the bookkeeping balance for consumer cooperatives and at 25 percent of the balance profit for the economic agencies of social and public organizations. Newly organized consumer-cooperative enterprises that prepare goods from local raw materials and scrap are exempt from income taxes for two years. Clubs, palaces of culture, and economic organizations that are managed by party and Komsomol organizations are tax-exempt.
In other socialist countries, income tax is paid by the population and by cooperative enterprises. Income tax from the population is collected at progressive rates that are computed according to the form of income and category of the taxpayer. In Bulgaria, for example, wages and other forms of labor payment are taxed at rates of 2 to 12 percent. Higher rates are established for the incomes of artisans, merchants, and others. In the German Democratic Republic, income tax rates for wageworkers range from 0.4 to 20 percent, depending on family and social status.
Income taxes on cooperative enterprises are paid primarily by the economic agencies of consumer and producer cooperatives. Tax rates are usually differentiated according to the form and amount of income and the level of enterprise profitability.
REFERENCESSee references under TAXES.
G. F. EREMEEVA