Before discussing Islamic taxation system, we must discuss capitalist American taxation system. There can be no doubt that capitalist American taxation system is unfair and unjust. It is designed to support social Darwinism and empower corporatism and politicians. Even though US capitalist taxation system called progressive taxation where those who make more money pay a higher tax rate but in reality, there are actually dozens of legal ways to bypass this. Anything which is a "business expense" is not taxed at all. Individual citizens aren't allowed to "write off" their expenses in this fashion, but businesses and big corporations are. And there are thousands of ways businesses can claim that the money they make isn't really profit at all. Every single year there are stories about companies which make tens of billions of dollars but pay zero in taxes. Every single year. There is another form of tax called social security tax. This is a "regressive tax" because the more money you make, the less you pay. Those who make very little money must pay the full percentage. Those who make decent money also pay the full percentage. But when you make enough money, then you get to stop paying the tax after a certain point. This means that someone making a million dollars a year pays a tiny, tiny fraction of the percentage that almost everybody else has to pay.
Islamic taxation system however is designed in complete contrast to the capitalist American system. Islamic taxation is designed to support a welfare system for all. It prohibits hoarding of wealth unlike capitalist system. Islamic taxation is a form of charity. There are three levels of charity in Islam.
First level of charity
They ask you (O Muhammad) as to what they should spend (in way of charity). Say, "Whatever can be spared (from your wealth after your own expenses)." (Quran 2:219)
Second level of charity
...The pious (are) those who...spend (in charity) from whatever We have given to them. (Quran 2:3)
Third level of charity
The pious people (are) those who spend (benevolently) in good and bad days. (Quran 3:134)
In all these levels, one must remember to follow the path of moderation:
“neither keep your hand shackled to your neck (out of greed), nor outspread it completely open -- otherwise you will sit reproached and denuded”. (Quran 17:29)
Someone asked Imam Ja`far as-Sadiq about a group of people who are prosperous while their Muslim brothers are in severe need. Is it right for the rich people to eat and drink satisfactorily while their brothers are hungry, specially during the difficult days? The Imam said, "Surely a Muslim is brother of a Muslim; he does not oppress his brother, neither abandons him nor deprives him. The Muslims are obliged to work hard for their brother, to relate to him, to help him, and to be charitable towards the needy people."
We will discuss the first. Islamic taxation targets monetary items and natural resources divided in three broad categories: a) Zakat b) Khumus and 3) Jizya. These categories have been deduced from Quranic texts and Hadith of Imams of Ahl Bayt (holy progeny and successors of Prophet (s))
Khumus is an amount paid from certain kinds of wealth. The wealth which is eligible for khumus are: 1. the profit or the surplus of income from business, wage or salary, dividend income, or by other means of possession recognized by the Islamic law 2. the legitimate wealth which is mixed with the illegitimate wealth 3. mines and minerals 4. the precious stones obtained from sea by diving 5. treasures 6. the land which a non-Muslim citizen buys from a Muslim citizen 7. the spoils of war.
Zakat is also an amount paid from certain kinds of wealth and is limited to the following nine items I. Coins: 1. Gold Coins. 2. Silver Coins. II. Cattle: 3. Goats and sheep. 4. Cows. 5. Camels. III. Crops: 6. Wheat. 7. Dates. 8. Barley. 9. Raisins.
Non-Muslims are exempted from paying Zakat and Khumus except the circumstance mentioned in point 6 of Khumus items. Zakat and Khumus are demanded from people of faith even though people who are not of faith are eligible to be its recipients. Jizya is thus applied for non-Muslims who are not people of faith. Historically Jizya has been used as a security tax. It was necessary for those who had not accepted Islam, to take a justified tax from them and spend it on their life and safety of their wealth. To protect the life and wealth of people, the Islamic government was forced to keep the army on strategic points, which accrued huge expenses. To meet this expense the only way was to acquire money from the people and spend it for their own welfare. Especially when there was war against the enemies, the non-Muslims under Islamic state/government did not send their men to fight. You need to understand that wars of conquests were the norms of old world even though Islam only allows defensive war, but other nations did not believe only in defensive wars. Unfortunately, still today these nations continue to aggress.
Following recipients are eligible for Islamic taxations
God, His messenger and Imams of Ahl Bayt: These constitute the Islamic government. The twelfth imam of Ahl Bayt is in occultation now. Whether we should store his rightful share or spend on his behalf need addressing.
Orphans, poor and the travelers of Banu Hasim: This is the tribe of Prophet Muhammad (s)
The destitute: This can be the lower and lower middle class.
The needy or poor: This can be the homeless, those in poverty etc.
The tax collectors: Those who are in the administration of taxation system.
In the path of God: All charitable work. Some examples include public services and research
People burdened with debt: Those who are unable to pay debt.
The wayfarers'/travelers: Those who are stranded on their journeys
People in bondage or slavery: In modern world these can include prostitutes, child labors, child soldiers etc.
Those who have inclined towards Islam: This is basically for those who are inclined to Islam but have not yet accepted Islam.
Muslims have come to believe that Islamic taxation is a personal action and it’s your choice who you give this to. This may have been true in old times when we did not have data science or statistics to analyze needs and people’s economic conditions. Today we have these tools to study individuals, businesses and economic activities. Therefore, it is absolutely irrational to still continue to give Islamic tax by yourselves in presence of Islamic government. The Islamic government must distribute taxes efficiently and properly. It also makes sense if taxes are used to build public services because poor and needy people are in need of this more than the rich. So it may make sense, instead of giving all the taxes directly to their hands or bank accounts some portion of it is instead invested in building efficient public services as well.
There should an efficient census of the labor market so that effective tax distribution is achieved.
There are some other taxes not discussed here such as Ushr, Rkaz, Khraj