What is a tax: the state's share hidden in the price of a coffee, and the word «tax» that came from "to assess"

Jasur bought a cup of coffee at a café for 11 200 soum. He thinks all of this money stayed with the café owner. In fact, if the café is a VAT payer, part of this money goes to the state budget. Jasur did not even notice, because the tax was hidden inside the price.

This lesson is the first step of the course on taxes. We will study rates and deadlines later; first we answer the question "what is a tax in the first place".

What is a tax?

A tax is a compulsory, non-refundable payment that the state collects from people and businesses on the basis of the law. Remember its three features:

• Compulsory: there is no choice of "I'll pay if I feel like it"; it is set by law.
• Non-refundable: in return for the tax paid you are not given a specific good or service.
• For common needs: the money collected goes into the budget and is spent on things that serve everyone.

A tax must be told apart from two things. A fine is a punishment for breaking a rule, whereas a tax is levied on lawful activity itself. Charity is voluntary, and a tax is not.

Where does the word come from?

As for the Uzbek word «soliq», we could not find a single, clear account of its oldest root in reliable dictionaries, so we will not guess here.

The history of the English word tax, on the other hand, is well studied. According to the Online Etymology Dictionary, it is recorded in English from the early 14th century and, through French, goes back to the Latin verb taxare. This verb means "to evaluate, estimate, assess".

An interesting connection: before a tax is collected, there always has to be an assessment. How much someone earns, how much a property is worth, how many goods were sold: this is established first, and then the tax is calculated. The root of the word recalls exactly this work.

Why it is needed: its function and purpose

The main purpose of a tax: to provide the budget with money to finance things everyone needs (education, healthcare, roads, security). For an accountant and an entrepreneur, it is a calculation they meet every day:

1. Public services cost money. A teacher's salary, street lights and road repairs are paid from the budget.
2. In many purchases it sits inside the price. The general VAT rate is 12%. If the café is a VAT payer, in Jasur's coffee it is inside the price: 11 200 × 12 / 112 = 1 200 soum of VAT, while the café's own revenue is 10 000 soum.
3. Every accountant must know it. A business calculates its tax itself, files returns and pays. If it makes a mistake, the consequences fall on the business.
4. It affects the business plan. An entrepreneur who ignores tax when setting a price may end up with a loss instead of a profit.

Who it works with and who contributed

Everyone is connected with tax: the buyer (pays it inside the price), the entrepreneur and the accountant (calculate and pay it), the employer (acts as a tax agent for employees) and the tax authority (supervises).

To read how taxes came about, here are the history articles on the site: «How were taxes collected in the ancient world: from Egyptian priests to Roman legionaries», «How did income tax come about: the "temporary" tax of 1799» and «How was VAT invented: from France's 1954 reform to more than 170 countries». The links are at the end of the page.

In the next lesson

In the second lesson we will get to know the components of a tax, that is, which questions you need to answer in order to understand any tax.