Income tax is a levy on earnings and other taxable income. Governments use it both to raise revenue and to influence after-tax income distribution.
Core Mechanics
In a progressive system, income is split into brackets with higher marginal rates at higher income ranges.
A stylized liability expression is:
[ T(y) = \sum_i \tau_i \cdot \max{0, \min(y, b_i^{\text{top}}) - b_i^{\text{bottom}}} ]
where (\tau_i) is the marginal rate in bracket (i).
Economic Effects
Income tax affects:
- labor supply decisions,
- savings and portfolio choices,
- tax planning behavior,
- measured inequality after transfers and taxes.
The policy challenge is balancing equity (redistribution) and efficiency (distortions to work and investment incentives).
Policy Context
Design choices include deductions, credits, filing units, inflation indexation, and treatment of capital income versus wage income. Broad tax bases with transparent rates often reduce avoidance and improve stability of public revenue.