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Income tax is a direct tax which is levied on the income of private individuals. Various income tax systems exist, ranging from a flat tax to an extensive progressive tax system.
Tax levied on the income of companies is often called corporate income tax or corporation tax, although some jurisdictions impose income tax on companies.
Income tax was first introduced in Britain by William Pitt the Younger in his budget of December 1798. The revenue was intended to help finance the war against France. Pitt's new graduated tax began at a levy of 2d in the pound (0.8333%) on incomes over £60 and increased up to a maximum of 2s (10%) on incomes of over £200. Pitt hoped that the new income tax would raise £10 million but actual receipts for 1799 totalled just over £6 million.
Income tax was levied under 5 schedules - income not falling within those schedules was not taxed. The schedules were:
Schedule A (tax on income from UK land) Schedule B (tax on commercial occupation of land) Schedule C (tax on income from public securities) Schedule D (tax on trading income, income from professions and vocations, interest, overseas income and casual income) Schedule E (tax on employment income)
Later a sixth Schedule, Schedule F (tax on UK dividend income) was added.
Pitt's income tax was levied from 1799 to 1802, when it was abolished by Henry Addington during the Peace of Amiens. Addington had taken over as prime minister in 1801, after Pitt's resignation over Catholic Emancipation. Income tax was reintroduced by Addington in 1803 when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo.
Finally, income tax was reintroduced in 1842 by Sir Robert Peel. Peel, as a Conservative, had opposed income tax in the 1841 general election, but a growing budget deficit required a new source of funds. The new income tax, based on Addington's model, was imposed on incomes above £150.
Income tax has changed over the years - it used to be a tax on income regardless of who was beneficially entitled to it. A person is now levied only on income to which they are beneficially entitled. Also, most companies were taken out of the income tax net in 1965 when corporation tax was introduced.
Also the Schedules under which tax is levied have changed. Schedule B was abolished in 1988, Schedule C in 1996 and Schedule E in 2003, though the Schedular system and Schedules A, D and F still remain.
Rates peaked in the late 1970s at 99%.
Income tax remains an annual tax, and is reimposed each year in the annual Finance Act.
Income tax has a number of bands: 10% (lower rate), 20% (basic rate for interest), 22% (basic rate), 32.5% (higher rate for UK dividends) & 40% (higher rate for other income).
In order to help pay for its war effort in the American Civil War, the United States government issued its first personal income tax, on August 5, 1861 as part of the Revenue Act of 1861 (3% of all incomes over US $800; rescinded in 1872).
Income tax was again introduced by the federal government in 1913, following ratification of the Sixteenth Amendment to the United States Constitution. The rate was 1 percent on taxable net income above $3,000 ($4,000 for married couples), less deductions and exemptions. It rose to a rate of 7 percent on incomes above $500,000.
During World War I the top rate rose to 77 percent.
Following the war the top rate was scaled down (to a low of 25 percent).
During the Great Depression and World War II, the top income tax rate rose again, reaching 91% during the war; this top rate remained in effect until 1964.
In 1964 the top rate was decreased to 70%, and then to 50% in 1981.
The Tax Reform Act of 1986 reduced the top rate to 28%, at the same time raising the bottom rate from 11% to 15% (in fact 15% and 28% became the only two tax brackets).
During the 1990s the top rate rose again, standing at 39.6% by the end of the decade.
In 2001 the top rate was cut to 35% and the bottom rate to 10%.
Some challenge the constitutionality of US Income Tax, on the basis that Ohio was not officially a state at the time when it voted to ratify the Sixteenth Amendment to the United States Constitution, thus invalidating the amendment.
In Australia the states relinquished all income tax powers to the federal government during World War II. The powers were never returned and there are no state income taxes in Australia.
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