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In a
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
system, the tax rate is the
ratio In mathematics, a ratio shows how many times one number A number is a mathematical object used to count, measure, and label. The original examples are the natural numbers 1, 2, 3, 4, and so forth. Numbers can be represented in lan ...
(usually expressed as a
percentage In mathematics, a percentage (from la, per centum, "by a hundred") is a number or ratio expressed as a fraction of 100. It is often denoted using the percent sign, "%", although the abbreviations "pct.", "pct" and sometimes "pc" are also u ...
) at which a business or person is taxed. There are several methods used to present a tax rate: statutory, average, marginal, and effective. These rates can also be presented using different definitions applied to a tax base: inclusive and exclusive.


Statutory

A statutory tax rate is the legally imposed rate. An
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
could have multiple statutory rates for different income levels, where a
sales tax A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a govern ...
may have a flat statutory rate. The statutory tax rate is expressed as a percentage and will always be higher than the effective tax rate.


Average

An average tax rate is the ratio of the total amount of taxes paid to the total
tax base A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
(taxable income or spending), expressed as a percentage. * Let t be the total tax liability. * Let i be the total tax base. ::= \frac. In a
proportional tax A proportional tax is a tax imposed so that the tax rate is fixed, with no change as the taxable base amount increases or decreases. The amount of the tax is in proportion to the amount subject to taxation. "Proportional" describes a distributio ...
, the tax rate is fixed and the average tax rate equals this tax rate. In case of
tax bracket Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, though that is rarer). Essentially, tax brackets are the cutoff values for taxable income—income past a certain point ...
s, commonly used for
progressive tax A progressive tax is a tax in which the tax rate increases as the taxable amount increases.Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), ''Concepts of Taxation'', Dryden Press: Fort Worth, TX The term ''progre ...
es, the average tax rate increases as taxable income increases through tax brackets, asymptoting to the top tax rate. For example, consider a system with three tax brackets, 10%, 20%, and 30%, where the 10% rate applies to income from $1 to $10,000, the 20% rate applies to income from $10,001 to $20,000, and the 30% rate applies to all income above $20,000. Under this system, someone earning $25,000 would pay $1,000 for the first $10,000 of income (10%); $2,000 for the second $10,000 of income (20%); and $1,500 for the last $5,000 of income (30%). In total, they would pay $4,500, or an 18% average tax rate.


Marginal

A marginal tax rate is the tax rate on income set at a higher rate for incomes above a designated higher bracket, which in 2016 in the United States was $415,050. For annual income that was above the cut-off point in that higher bracket, the marginal tax rate in 2016 was 39.6%. For income below the $415,050 cut off, the lower tax rate was 35% or less. The marginal tax rate on income can be expressed mathematically as follows: ::\frac where ''t'' is the total tax liability and ''i'' is total income, and ∆ refers to a numerical change. In accounting practice, the tax numerator in the above equation usually includes taxes at federal, state, provincial, and municipal levels. Marginal tax rates are applied to income in countries with progressive taxation schemes, with incremental increases in income taxed in progressively higher
tax brackets Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, though that is rarer). Essentially, tax brackets are the cutoff values for taxable income—income past a certain point ...
, resulting in the tax burden being distributed amongst those who can most easily afford it. Marginal taxes are valuable as they allow governments to generate revenue to fund social services in a way that only affects those who will be the least negatively affected. With a
flat tax A flat tax (short for flat-rate tax) is a tax with a single rate on the taxable amount, after accounting for any deductions or exemptions from the tax base. It is not necessarily a fully proportional tax. Implementations are often progressive ...
, by comparison, all income is taxed at the same percentage, regardless of amount. An example is a sales tax where all purchases are taxed equally. A
poll tax A poll tax, also known as head tax or capitation, is a tax levied as a fixed sum on every liable individual (typically every adult), without reference to income or resources. Head taxes were important sources of revenue for many governments fr ...
is a flat tax of a set dollar amount per person. The marginal tax in these scenarios would be constant (in case of a poll tax—zero), however, these are both forms of regressive taxation and place a higher tax burden on those who are least able to cope with it, and often results in an underfunded government leading to increased deficits.


Effective

The effective tax rate is the ''percent of their income'' that an individual or a corporation pays in taxes. The term is used in financial reporting to measure the total tax paid as a percentage of the company's accounting income, instead of as a percentage of the taxable income.
International Accounting Standard International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's fina ...
12, define it as income tax expense or benefit for accounting purposes divided by accounting profit. In
Generally Accepted Accounting Principles (United States) Generally Accepted Accounting Principles (GAAP or U.S. GAAP, pronounced like "gap") is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC) and is the default accounting standard used by companies based in the Unit ...
, the term is used in official guidance only with respect to determining income tax expense for interim (e.g. quarterly) periods by multiplying accounting income by an "estimated annual effective tax rate", the definition of which rate varies depending on the reporting entity's circumstances. In U.S. income tax law, the term can be used in relation to determining whether a foreign income tax on specific types of income exceeds a certain percentage of U.S. tax that would apply on such income if U.S. tax had been applicable to the income.See, e.g.
26 CFR 1.904-4(c)


Inclusive and exclusive

Tax rates can be presented differently due to differing definitions of tax base, which can make comparisons between tax systems confusing. Some tax systems include the taxes owed in the tax base (tax-inclusive, Before Tax), while other tax systems do not include taxes owed as part of the base (tax-exclusive, After Tax). In the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territo ...
,
sales tax A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a govern ...
es are usually quoted exclusively and
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
es are quoted inclusively. The majority of Europe,
value added tax A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end ...
(VAT) countries, include the tax amount when quoting merchandise prices, including Goods and Services Tax (GST) countries, such as Australia and
New Zealand New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 smaller islands. It is the sixth-largest island country ...
. However, those countries still define their tax rates on a tax exclusive basis. For direct rate comparisons between exclusive and inclusive taxes, one rate must be manipulated to look like the other. When a tax system imposes taxes primarily on
income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
, the tax base is a household's pre-tax income. The appropriate income tax rate is applied to the tax base to calculate taxes owed. Under this formula, taxes to be paid are included in the base on which the tax rate is imposed. If an individual's gross income is $100 and income tax rate is 20%, taxes owed equals $20. The income tax is taken "off the top", so the individual is left with $80 in after-tax money. Some tax laws impose taxes on a tax base equal to the pre-tax portion of a good's price. Unlike the income tax example above, these taxes do not include actual taxes owed as part of the base. A good priced at $80 with a 25% exclusive sales tax rate yields $20 in taxes owed. Since the sales tax is added "on the top", the individual pays $20 of tax on $80 of pre-tax goods for a total cost of $100. In either case, the tax base of $100 can be treated as two parts—$80 of after-tax spending money and $20 of taxes owed. A 25% exclusive tax rate approximates a 20% inclusive tax rate after adjustment. By including taxes owed in the tax base, an exclusive tax rate can be directly compared to an inclusive tax rate. :Inclusive income tax rate comparison to an exclusive sales tax rate: * Let i be the inclusive tax rate (like an income tax). For a 20% rate, then i = 0.20 * Let e be the exclusive rate (like a sales tax). * Let p be the total price of the good (including the tax). :The revenue that would go to the government: ::p \times i :The revenue remaining for the seller of the good: ::p - (p\times i) :To convert the inclusive rate to the exclusive rate, divide the money going to the government by the money the company nets: ::e = \frac =\frac= \frac :Therefore, to convert any inclusive tax rate to an exclusive tax rate, divide the inclusive rate by 1 minus that rate. * 15% inclusive = 18% exclusive * 20% inclusive = 25% exclusive * 25% inclusive = 33% exclusive * 33% inclusive = 50% exclusive * 50% inclusive = 100% exclusive


See also

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Capital flight Capital flight, in economics, occurs when assets or money rapidly flow out of a country, due to an event of economic consequence or as the result of a political event such as regime change or economic globalization. Such events could be an increa ...
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List of countries by tax rates A comparison of tax rates by countries is difficult and somewhat subjective, as tax laws in most countries are extremely complex and the tax burden falls differently on different groups in each country and sub-national unit. The list focuses on ...
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List of countries by tax revenue as percentage of GDP This article lists countries alphabetically, with total tax revenue as a percentage of gross domestic product (GDP) for the listed countries. The tax percentage for each country listed in the source has been added to the chart. Tax as ...
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Progressive tax A progressive tax is a tax in which the tax rate increases as the taxable amount increases.Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), ''Concepts of Taxation'', Dryden Press: Fort Worth, TX The term ''progre ...
*
Proportional tax A proportional tax is a tax imposed so that the tax rate is fixed, with no change as the taxable base amount increases or decreases. The amount of the tax is in proportion to the amount subject to taxation. "Proportional" describes a distributio ...
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Regressive tax A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high ...
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Tax exporting Tax exporting occurs when a country (or other jurisdiction) shifts its tax burden (partially) abroad. For example, if residents of country A hold shares of a company in country B, the government in B might want to levy an inefficiently high tax o ...
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Tax incidence In economics, tax incidence or tax burden is the effect of a particular tax on the distribution of economic welfare. Economists distinguish between the entities who ultimately bear the tax burden and those on whom tax is initially imposed. The t ...
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Tax rates of Europe This is a list of the maximum potential tax rates around Europe for certain income brackets. It is focused on three types of taxes: corporate, individual, and value added taxes (VAT). It is not intended to represent the true tax burden to eith ...


References


External links

{{Authority control Rates Tax incidence Tax terms