Income tax definition

Income tax is a tax charged by a government on the income earned by individuals and businesses. It applies to earnings such as wages, business profits, investment income, and capital gains.

Income tax is usually charged as a percentage of taxable income, the amount left after allowable deductions, exemptions, or credits. It can use progressive rates, where the percentage rises with income, or a flat rate that applies the same percentage to all taxable income. Governments use the proceeds to fund public services, infrastructure, healthcare, and education.

Income tax is charged on what you earn, which sets it apart from other taxes tied to different events. Sales tax applies to what you spend at the point of purchase, and property tax applies to what you own. Because income tax is taken after income is earned but before the rest can be spent, it directly reduces take-home pay and net business profit.