When the income tax was originally proposed in the United States, opponents tried to include language in the bill preventing the rates from ever going above 9% or so. They were unsuccessful - because people said it was foolish to think tax rates would ever go that high. A good example on how the slippery slope fallacy isn't always a fallacy. Check out the IRS Form 1040, circa 1913.

In order to feed the discussion with facts, here is a quick overview of the income tax rates in three countries (in short, be poor in France or rich and married in the US.)

Note that a marginal tax rate is the tax that you'll pay on your next taxable dollar. For example, if your marginal tax rate is 28% and you receive a $1 raise, you will have to pay $0.28 as taxes on that dollar.

In the USA

Federal income tax rate schedules for 2001, according to the income in US dollars:

                             Taxable Income     Marginal tax rate

Married Filing Jointly:         0 to  45,200      15%
                           45,201 to 109,250      28%
                          109,251 to 166,450      31%
                               above 166,450      39.6%
Head of Household:              0 to  36,250      15%
                           36,251 to  93,600      28%
                           93,601 to 151,600      31%
                               above 151,600      39.6%
Single:                         0 to  27,050      15%
                           27,051 to  65,550      28% 
                           65,551 to 136,750      31%
                               above 136,750      39.6%
Married Filing Separately:      0 to  22,600      15%
                            22,601 to 54,625      28%
                            54,626 to 83,225      31%
                                above 83,225      39.6%

In France

Year: 2001 (in 2003, these numbers are a little lower: the maximal rate is now 49.58%)

            Taxable income
 in French Francs           in US dollars      Marginal tax rate

      0 to  26,600             0 to  3,426         0%       
 26,600 to  52,320         3,426 to  6,739         8.25%
 52,320 to  92,090         6,739 to 11,861        21.75%
 92,090 to 149,110        11,861 to 19,205        31.75%
149,110 to 242,620        19,205 to 31,250        41.75%
242,620 to 299,200        31,250 to 38,538        47.25%
     above 295,070            above 38,538        54%

In the United Kingdom:

Year: 2001

             Taxable income (i.e income minus £4,385)
 in sterling pounds          in US dollars     Marginal tax rate

     0 to  1520                0 to  2,152        10%
  1520 to 28400            2,152 to 40,216        22%
    above 28400               above 40,216        40%


An income tax is a tax levied on individuals in proportion to their income. (There is such a thing as a corporate income tax, but the generic "income tax" usually refers to personal income taxes.) Of course, what is considered "income" (and not, say, capital gains), and how income is calculated may vary, depending on who is doing the taxing. Income taxes are most often levied at the national level, although some states, prefectures, and similar administrative units have their own taxes. Most of the world's leading countries rely on an income tax as a primary source of funds. This tax on wealth highlights the centrality of fluid capital in their advanced industrial economies, in comparison to the property taxes and import and export duties suited to agricultural and resource extraction economies, where land and trade (respectively) are of primary importance.

Many modern income taxes are progressive, meaning that as a taxpayer's income grows, progressively higher marginal tax rates are applied to determine the amount of taxes to be levied. (While widespread, progressive taxes are neither universally employed nor universally accepted, a matter for another node) For example, using thbz's numbers, a single American with an income of $80,000 would pay
($27,050 * .15 + $38,500 * .28 + $14,450 * .31), or $19,317 before deductions.

Between the varying definitions and treatment of income, the desire to maintain progressivity, all the various exemptions, special cases, and deductions instituted to achieve some economic or political goal, and the imperative to apply them to many millions of people of wildly varying financial situations, income tax codes are incredibly complicated. This leads to the major (non-ideological) problems with income tax codes: first, the average taxpayer (or even, for that matter, a dedicated professional tax preparer) has no chance whatsoever of understanding the tax code in its entirety, and even if she limits herself to that portion of it directly necessary to the filing of her taxes, she will likely have significant difficulty understanding it. Individuals with extensive holdings, multiple sources of income, or who are subject to some of the "special cases" are virtually obligated to hire financial advisors and/or accountants to prepare and file their taxes. This brings us to the second major issue, which is that the particularly rich, with the benefit of professional assistance, are often able to manipulate their finances so as to take advantage of the obscure deductions, exemptions, and conditions of the tax code, significantly reducing their tax assessment. (This is not strictly a matter of income tax, as much of this shades into capital gains and various other investment taxes.) Civic duty aside, if you could pay someone $100,000 to save you millions, you probably would too. Finally, if legal "evasion" wasn't a big enough issue, this complexity, combined with the sheer number of taxpayers and the fact that modern tax authority is usually centralized, means that governments must often rely on taxpayers to accurately calculate, report, and pay their income taxes, which practically ensures both innocent miscalculation and intentional underreporting. Semirandom audits can reduce, but not eliminate, these problems.

Between these problems and the fact that people just don't like taxes, any government levying them will find them a major political issue, with calls to alter or reform the system (if not eliminate it altogether) cropping up regularly every election year.

Here's how income tax works from an economist's perspective. In the labor market, like any market, you're selling a product: toil and trouble. The price of labor is the wage, and the quantity of labor is the number of hours worked per week.

Looking at labor in this light, it has supply and demand just like any other good or service. If the wage goes up, people will increasingly want to work, and firms will want to employ less: likewise, if the wage goes down, people will supply less, and firms will demand more. For a skilled job, the supply and demand of labor might look like this:

  |       D         S
  |        \       /
10|         \     /
  |          \   /
  |           \ /
9 |            X
  |           / \
  |          /   \
8 |         /     \
               40     hours
In this case, equilibrium is reached at X, which is $9 an hour, 40 hours a week. If the wage increases, there will be more hours offered than the employers want (unemployment): likewise, if the wage goes down, employers won't be able to get enough people to work in that field.

Now, what happens if you add a 25% income tax? To the employee, it means that their actual wage is going to decrease, so they'll want to work less. The supply of labor decreases, and the new graph looks like this:

  |       D  S(tax) S
  |        \ /     /
10|         O     /
  |        / \   /
  |       /   \ /
9 |      /     X
  |     /     / \
  |    /     /   \
8 |   /     Y     \
           36  40     hours
In this case, O represents what the employer pays: $10 an hour for 36 hours a week. The Y represents what the employee receives: $8 an hour for 36 hours a week. So the firm pays an extra dollar an hour, the employee makes a dollar less, and the total number of hours decreases. That extra $2 an hour is the tax, which goes to the government: economists treat it as a deadweight loss of productivity. Everyone appears to be losing.

Well, not so fast. This is a pretty conservative way of viewing income tax, and you have to keep in mind that depending on how the government is spending the tax fund, the employee and the company will probably get back at least some portion of that two dollar investment as infrastructure or health care or national defense or what have you. Still, if you're priding your society on efficiency, income tax looks like a good way to throw a spanner in the works.

Log in or register to write something here or to contact authors.