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Tax is the membership cost, levied by the government, for being part of a society. The money is taken from you and spent on a number of services which are considered to be in your interest - and every few years you can choose what colour rosettes the people who take this money from you will be wearing. There are a number of different forms of tax, with each country (and in some cases each state) having its own rules. In the UK, tax is mainly in 3 forms:

Income Tax

Income tax is where the government takes a certain percentage of your income as you earn it. To minimise the pain of this, they usually take the money out of your pay before you get to see it by the Pay As You Earn (PAYE) System. In the UK, the lower rate is 20% and the higher rate is 40%. This is a fairly simple and equitable system... but tax is not about being simple and equitable so you have to throw in a few modifiers such as the fact that no-one pays personal income tax on the first £4,385 of income per annum (or the first £6,050 if you are over 75). You also have an additional income tax called National Insurance which is supposed to pay for the health service and your state pension which the employee pays at 10% of their gross income and the employer pays a further 12.2%1.

Income tax is favoured by left-wing governments as what you pay is broadly proportional to what you earn, whereas more right-wing governments see it as a tax on jobs.

Corporation Tax

Just like individuals, companies are taxed as their part of the whole 'being a member of society' deal. However, whereas an individual is taxed on the money they earn before they have a chance to spend any of it, companies only get taxed on whatever loose change they have lying around at the end of the year. Thus, if a company makes sales of a million pounds but due to some ineptitude manages to spend it all, it won't pay any tax. In the UK the rate of company tax is 20% for a company that makes less than £300,000 and 30% for all the others.

Company tax is usually preferred by left-wing governments, although increased globalisation means that governments cannot charge too high a corporate tax or the companies will all move out.

Sales Tax (VAT)

Sales tax (also confusingly known as 'Value Added Tax') is a tax levied on a sales transaction as a percentage of the value of that transaction. In the UK, the VAT rate is 17.5% for most sales, although books, razor blades and children's shoes have zero VAT, fuel and electricity and feminine hygiene products have a 5% VAT rate.2 and other oddities exist.

Sales taxes are generally favoured by right-wing governments as they cosset the wealthy who spend a lower percentage of their income on VAT rated goods.

Tax Avoidance

People don't really like paying for anything and taxes are certainly no exception. There are a large number of ways people will attempt to reduce the amount of money they pay to the government, some legal and some not. There are even a large number of people whose sole purpose in life is to reduce other people's tax bills; though most stop short of suggesting that you blind yourself to claim the blind person's allowance of £1,400 or killing your spouse for the £1,970 extra tax free.

If you want to be sure that you're paying your taxes legally, you want to go for tax avoidance, rather than tax evasion (which is a crime). This doesn't actually tell you how to go about it - instead we have to have vastly overpaid tax lawyers who are the only people on earth who can actually understand the myriad of charges and exceptions to deal with this for you (presuming your making enough money to make this worthwhile, and so that you aren't bankrupted simply by paying the tax lawyers).

1Of course, you only pay national insurance on earnings between £76 and £500 a week to make the whole thing slightly more confusing.2Which may show you who writes these rules.

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