Income tax

5 viewed last edited 1 year ago
Ananya Juluri

What is income tax? How much percentage of income is paid?

Vivekanand Vellanki

All of us want our government to do more and more things for us. Things like:

  • Good schools
  • Good roads
  • Good hospitals
  • Help people during natural disasters
  • Help the poor and unemployed by giving them stuff
  • Repair stuff damaged (roads, schools, equipment in hospitals) every year
  • Maintain an army to protect the nation
  • etc.

The government has lots of expenses - I listed out very few.

The question is: where does the government get money from to do this?

If you think the government can just print money and give it away for this, you are terribly wrong. Printing more and more money will just make the money useless and less valuable (not answering this as it is a different question).

The government gets money from several sources:

  • Collect income tax from individuals on income earned by then. For e.g. the government takes a portion of a software engineer's salary as income tax
  • Collect tax from businesses (hospitals, barber shops, soap factories) on their profits
  • Collect property tax on property one owns - e.g., We pay property tax every year on the house that we own.
  • etc

Coming to income tax, as I mentioned this is a portion of the individual's income that is taken by the government so that it can provide all the services that citizens expect from the government.

Income is usually taxed differently for different people. The people who earn less, pay less income tax; the people who earn a lot pay more taxes, etc.

Most governments follow something like this:

  • For income below X, there is no tax
  • For income > X and < Y, the tax is 10%
  • For income > Y and < Z, the tax is 25%
  • For income > Z, the tax is 33%

This is called a tax table; and the above is fictional just to illustrate a point. The percentage of tax (the 10%, 25%, 33% above) are also different for different countries.

Some European countries tax at a higher rate and use that money to provide more services like free University education and better health services.

Countries like the US tax lower than European countries, but cannot provide free University education, etc.