What Is Taxation?

Taxation is a term for when a taxing authority, usually a government, levies or imposes a financial
obligation on its citizens or residents. Paying taxes to governments or officials has been a mainstay of
civilization since ancient times.

The term "taxation" applies to all types of involuntary levies, from income to capital gains to estate
taxes. Though taxation can be a noun or verb, it is usually referred to as an act; the resulting revenue
is usually called "taxes."

Understanding Taxation
Taxation is differentiated from other forms of payment, such as market exchanges, in that taxation
does not require consent and is not directly tied to any services rendered. The government compels
taxation through an implicit or explicit threat of force. Taxation is legally different than extortion or a
protection racket because the imposing institution is a government, not private actors.

TABLE OF CONTENTS
FISCAL POLICY TAX LAWS
Taxation Defined, With Justifications and Types of Taxes
By JULIA KAGAN Updated April 05, 2022
Reviewed by GORDON SCOTT
Fact checked by SUZANNE KVILHAUG
Taxation
Investopedia / Julie Bang

What Is Taxation?
Taxation is a term for when a taxing authority, usually a government, levies or imposes a financial
obligation on its citizens or residents. Paying taxes to governments or officials has been a mainstay of
civilization since ancient times.

The term "taxation" applies to all types of involuntary levies, from income to capital gains to estate
taxes. Though taxation can be a noun or verb, it is usually referred to as an act; the resulting revenue
is usually called "taxes."

KEY TAKEAWAYS
Taxation occurs when a government or other authority requires that a fee be paid by citizens and
corporations, to that authority.
The fee is involuntary, and as opposed to other payments, not linked to any specific services that have
been or will be provided.
Tax occurs on physical assets, including property and transactions, such as a sale of stock, or a home.
Types of taxes include income, corporate, capital gains, property, inheritance, and sales.
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Taxation

Understanding Taxation
Taxation is differentiated from other forms of payment, such as market exchanges, in that taxation
does not require consent and is not directly tied to any services rendered. The government compels
taxation through an implicit or explicit threat of force. Taxation is legally different than extortion or a
protection racket because the imposing institution is a government, not private actors.

Tax systems have varied considerably across jurisdictions and time. In most modern systems, taxation
occurs on both physical assets, such as property and specific events, such as a sales transaction. The
formulation of tax policies is one of the most critical and contentious issues in modern politics.

Taxation in the United States

The U.S. government was originally funded on very little direct taxation. Instead, federal agencies
assessed user fees for ports and other government property. In times of need, the government would
decide to sell government assets and bonds or issue an assessment to the states for services
rendered. In fact, Thomas Jefferson abolished direct taxation in 1802 after winning the presidency;
only excise taxes remained, which Congress repealed in 1817. Between 1817 and 1861, the federal
government collected no internal revenue.
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