Tax is a mandatory financial charge or levy levied by a government agency to fund public goods and services, such as roads, schools, social safety nets, national defense, law enforcement, and more. The amount of tax you pay depends on a variety of factors, including where you live, what you earn, what you own, your tax bracket, and credits and deductions. Some governments impose flat percentage rates on personal income, while others have progressive tax scales based on brackets of yearly income amounts. Most countries also impose property taxes, sales taxes, environmental taxes, and import duties and tariffs.
All taxes are collected by government agencies, which can be at the federal, state, or local level. In the United States, the Internal Revenue Service (IRS) collects most domestic federal taxes. State and local governments can also levy taxes on their own, but most share a tax collection authority with neighboring localities.
Economists define a tax as a compulsory transfer of resources to the government from individuals and businesses. This resource transfer increases consumer prices and decreases economic efficiency. Ideally, the trade-offs between how much money a tax will raise and who bears the burden of the tax should be balanced to promote growth while providing necessary public goods and services.
A key challenge in developing effective taxes is how to tax goods with negative externalities, such as pollution. When these externalities are not priced into the production of a good, the free market may produce too much of it. By imposing a tax on that good, the government can help to correct this imbalance.