Taxation is the method by which a government gains revenue to spend on things like public services and welfare benefits. There are many methods by which tax revenue can be gained, and different definitions and structures to taxation which are outlined below. Also, conflicts in choosing methods and forms of taxation occur, pitting priorities such as reducing iniquity of income against maximising incentive for economic growth.
Principles of a Good Tax System 
The following were first proposed by the great economist Adam Smith, and are still applicable today:
- Efficient - A tax system should raise enough revenue such that government projects can be adequately sponsored, without burdening the tax payer too much, or disincentivising investment or work
- Understandable - The system should not be incomprehensible to the layperson, nor should it appear unjust or unneedfully complex. This is to minimise discontent, and costs.
- Equitable - Taxation should be governed by people's ability to pay, that is, wealthier individuals or firms with greater incomes should pay more in tax while those with lower incomes should pay comparatively less.
- Benefit Principle - Those that use a publicly provided service (which is funding primarily through taxation) should pay for it! However, conflicts in principle may and often do arise between this and principle 3.
Direct and Indirect Taxation 
- Direct taxes are paid by taxation on the income of the wage earner. This form of taxation is unavoidable, and for simplicity usually collected before the worker collect his/her wages.
- Indirect taxation is often avoidable and is not taken from wages. An example of indirect taxation is VAT (Value Added Tax) or sales tax placed on goods and services. This is tax, but not all people have to pay it, and can choose not to.
The benefits and costs of both forms of taxation are many. Direct taxation reduces the incentive to work, as 'take home' pay is reduced as a result of an increase in income tax compared to unemployment benefits. On the other hand, indirect taxation may result in people with similar incomes and wealth paying different amounts, simply as a result of slightly different circumstance. For example, someone who has to travel 50km to work every day will pay more tax over the year than another who can walk, even though they may earn the same amount and use the same public services etc. Why? The high tax on petrol will add up considerably.
Taxation Structure 
It is worth knowing some termnology to make understanding easier. The marginal rate of tax (MRT) is the percentage taken in tax of the next (insert currency unit here) earned. So, if your MRT is 10%, every next part of your income you earn will be taxed at 10%. However, this doesn't make your average rate of tax (ART) 10%. Consider the following:
- Say your income is §10,000. If the first half of your income is taxed at 5%, and the second half at 15%, your MRT is 15%. However, your ART is
Proportional Taxation 
Proportional taxation means that MRT = ART, so if a low income earner is taxed at 20%, so is a higher income earner. The proportion of tax paid is always the same, though in absolute terms it goes up the higher your income.
Progressive Taxation 
Progressive taxation means that MRT > ART (if you are pedantic, if MRT and ART do not equal zero!). For example, in the UK there are three rates of income tax - 10% 'starting tax', 22% 'standard tax', and 40% high rate of tax. For a low income earner, ART will be around 10-22%, whereas a very high income earner will pay more like 30-40% ART. Thus, higher income earners pay a greater proportion of their income in tax than low earners.
Regressive Taxation 
Essentially, ART > MRT. This is very rarely done intentionally by a government, as it would be extremely unpopular and would be seen as supporting wealthy, high income individuals over more needy households. However, indirect taxation could be said to partly support this. Very high income earners may spend a lower proportion of their income on goods and services, and so pay proportionally a fewer taxes as a percentage of their income.