Personal Income Tax
Personal income tax is a tax levied on the income of individuals, typically covering wages, salaries, investment income, and other sources of personal earnings. It is a direct tax and is one of the most important sources of government revenue in many countries.[1]
Definition
Personal income tax is imposed on the taxable income of individuals and households. Taxable income is typically calculated by subtracting allowable deductions and exemptions from gross income. The resulting income is then taxed according to a schedule of rates.[1]
Rate structures
| Structure | Description |
|---|---|
| Progressive | The tax rate rises as income rises, so higher earners pay a larger share of their income. |
| Proportional (flat) | A single rate applies to all income above the threshold. |
| Regressive | The effective rate falls as income rises; rare in income taxation. |
Most countries use a progressive structure for personal income tax, often combined with a tax-free threshold and a series of marginal rates. A marginal tax rate applies to the last unit of income earned, while the average tax rate is total tax divided by total income.[1]
Economic effects
Personal income tax affects the incentives to work, save, and invest. High marginal rates may reduce work effort and discourage entrepreneurship, while the progressivity of the tax affects the distribution of income. The design of income tax therefore involves a trade-off between equity (redistribution) and efficiency (minimising distortions), a trade-off central to Public Economics.[1]