I.

Introduction

Income Tax, a tax on the earnings of a person or corporation. Income taxes provide the largest single source of government revenues in most developed countries, including the United States and Canada. The revenues generated pay for a substantial part of government operations and services to the public.

In the United States, the federal government, most states, and a small number of local and municipal governments collect income taxes. In 2000 the U.S. federal government collected about $1 trillion in income taxes from individuals and about $200 billion in income taxes from corporations. Together these two sources accounted for about 60 percent of all federal revenues. State and local governments collect larger shares of their revenues from property taxes and sales taxes than from income taxes.

In Canada, the federal government, the provinces and territories, and a few local governments collect income taxes. In 2001 income taxes from individuals and corporations accounted for more than 56 percent of Canada’s federal revenues. Canadian provincial governments also collect the largest single portion of their revenue from income taxes.

Income taxes, and especially individual income taxes, are smaller sources of revenue in most developing countries, such as many nations of Africa, Asia, and Latin America. Some developing countries, however, generate a large portion of government revenues from corporate income taxes.

Governments levy income taxes on many kinds of earnings, including wages, interest on savings, and dividends from investments. People and corporations must report their income annually using tax forms, called returns. In the United States, the Internal Revenue Service (IRS), a division of the Department of the Treasury, administers the federal income tax.

The taxation of income has often created controversy. Many people oppose their government taking portions of their earnings to fund programs they may not support. Politicians and economists have also long debated how to design fair and simple income tax systems. Although they may agree in principle to tax income, they often disagree on what counts as income or on how much it should be taxed. See also Taxation; Public Finance.