Tax rate: Difference between revisions

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{{Short description|Aspect of tax law}}

{{For|a type of taxation system in the United Kingdom and elsewhere|Rates (tax)}}

{{More footnotes|date=April 2009}}

In a [[tax]] system and in [[economics]], the '''tax rate''' describes the burden [[ratio]] (usually expressed as a [[percentage]]) at which a business or person is taxed. There are several methods used to present a tax rate: statutory, average, marginal, effective, effective average, and effective marginal. These rates can also be presented using different definitions applied to a tax base: inclusive and exclusive.

{{Taxation|expanded=Distribution}}

In a [[tax]] system, the '''tax rate''' is the [[ratio]] (usually expressed as a [[percentage]]) at which a business or person is taxed. The tax rate that is applied to an individual's or corporation's income is determined by tax laws of the country and can be influenced by many factors such as income level, type of income, and so on.<ref>{{Cite web |url=https://www.investopedia.com/terms/t/taxrate.asp |title=Tax Rate |website=Investopedia |access-date=2024-04-28}}</ref> There are several methods used to present a tax rate: statutory, average, marginal, flat, 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]] could have multiple statutory rates for different income levels, where a [[sales tax]] may have a flat statutory rate.<ref name="whatisthedif">{{cite web|url=http://www.fairtax.org/PDF/WhatIsTheDifferenceBetweenTaxRates.pdf|title=What is the difference between statutory, average, marginal, and effective tax rates?|publisher=Americans For Fair Taxation|accessdateaccess-date=2007-04-23|url-status=dead|archive-url=https://web.archive.org/web/20070614190648/http://www.fairtax.org/PDF/WhatIsTheDifferenceBetweenTaxRates.pdf|archive-date=2007-06-14}}</ref>

The statutory tax rate is expressed as a percentage and will always be higher than the effective tax rate.<ref>{{Cite news|url=http://deanebarker.net/blog/post/1024|title=Statutory vs. Effective Tax Rate|date=2011-12-31|newspaper=DeaneBarker.net|language=en-US|access-date=2016-12-28}}</ref>

==Average==

An '''average tax rate''' is the ratio of the total amount of taxes paid to the total [[tax base]] (taxable income or spending), expressed as a percentage.<ref name="whatisthedif"/> Average tax rates is used to measure tax burden of individuals and corporations and how taxes affect the individuals and corporations ability to consume.<ref>{{Cite web |url=https://www.taxpolicycenter.org/briefing-book/what-difference-between-marginal-and-average-tax-rates |title=What Is the Difference Between Marginal and Average Tax Rates? |website=Tax Policy Center |access-date=2024-04-28}}</ref>

An ''average tax rate'' is the ratio of the amount of taxes paid to taxable income.<ref name="whatisthedif"/>

* Let <math>t</math> be the total tax liability.

* Let <math>i</math> be the total tax base.

::<math>= \frac{t}{i}.</math>

In a [[proportional tax]], the tax rate is fixed and the average tax rate equals this tax rate. In case of [[tax bracket]]s, commonly used for [[progressive tax]]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.

==Flat==

'''Flat tax rate''' also known as single-rate is one of the simplest taxations. For flat is a single tax rate (same percentage) on the whole taxable amount. A flat tax rate is used because of its simplicity, transparency, neutrality, and stability. Flat tax rates are quite transparent because it makes it easier for taxpayer to estimate their tax liability and for policymakers to estimate how changes would impact tax revenue. <ref name="Flattax">{{Cite web |url=https://taxfoundation.org/taxedu/glossary/flat-tax/ |title=Flat Tax |website=Tax Foundation |access-date=2024-04-28}}</ref>

One simplified example is a flat tax rate in Colorado. There is a flat tax rate determined at 4.4%. Assuming that an annual taxable income is $100,000, then the income tax is equal to $4,400.<ref>{{Cite web |url=https://taxfoundation.org/___location/colorado/ |title=Taxes In Colorado

|website=Tax Foundation |access-date=2024-04-28}}

</ref>

In practice, a flat tax rate on income is used in many [[State income tax| states of the USA]], like Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah, or internationally, for example in many post-Soviet countries like Hungary, Serbia, Estonia or Ukraine, and also in Iceland or Bolivia.<ref name="Flattax">{{Cite web |url=https://taxfoundation.org/taxedu/glossary/flat-tax/ |title=Flat Tax |website=Tax Foundation |access-date=2024-04-28}}</ref><ref>{{Cite web |url=https://treasuryvault.com/currency-resources/countries-with-the-flat-tax/ |title=Countries with the Flat Tax |website=Treasury Vault |date=10 December 2015 |access-date=2024-04-28}}

</ref>

On the other hand, it must be said that, in practice, no state has a perfectly flat income tax rate, and every state makes certain distinctions between types of income and has several discounts and reductions.<ref name="Flattax">{{Cite web |url=https://taxfoundation.org/taxedu/glossary/flat-tax/ |title=Flat Tax |website=Tax Foundation |access-date=2024-04-28}}</ref>

A [[Tax per head|poll tax]], also known as a head tax, is a flat tax of a set dollar amount per person. As an example, in the history of the USA, a poll tax was introduced in 1870, which was a fee paid for the right to vote.<ref>{{Cite web |url=https://www.forbes.com/sites/kellyphillipserb/2018/11/05/just-before-the-elections-a-history-of-the-poll-tax-in-america/?sh=74e015da4e44 |title=Just Before The Elections: A History Of The Poll Tax In America |author=Kelly Phillips Erb |date=2018-11-05 |website=Forbes |access-date=2024-04-28}}</ref>

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.

==Marginal==

A '''marginal tax rate''' is the [[marginal rate]] indicating what percentage of additional income at a certain income level would be paid in taxes. For example, if an individual earning $1,000,001 pays $0.37 more in taxes than the same individual would pay if they earned $1,000,000, then their marginal tax rate at $1,000,000 is 37% because they paid 37% of the additional $1 of earnings in taxes.

A ''marginal tax rate'' is the tax rate that applies to the last dollar of taxable income,<ref name="whatisthedif"/> and often applied to the change in one's tax obligation as taxable income rises:

The marginal tax rate on income can be expressed mathematically as <math>\frac{\Delta t}{\Delta i}</math>, where {{var|t}} is the total tax liability and {{var|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 rate = Δ(tax obligation)/Δ(taxable income)

Many jurisdictions use [[tax brackets]] with [[progressive tax]] rates, meaning the marginal tax rate is designed to be higher for the last unit earned by a high-income taxpayer than the last unit earned by a low-income taxpayer.

For an individual, it can be determined by increasing or decreasing the income earned and calculating the change in taxes payable. An individual's [[tax bracket]] is the range of income for which a given marginal tax rate applies. The marginal tax rate may increase or decrease as income or consumption increases, although in most countries the tax rate is (in principle) [[progressive taxation|progressive]]. In such cases, the average tax rate will be lower than the marginal tax rate: an individual may have a marginal tax rate of 45%, but pay average tax of half this amount. In a jurisdiction with a [[flat tax]], everyone pays the same marginal tax rate. Some fixed amount of earnings (e.g., the first ten thousand dollars) is typically exempt from the flat tax, which means that not everyone pays the same average tax rate.

For example, in 2023, the United States used the following tax brackets:

In economics, marginal tax rates are important because they determine incentives to increase income; at high marginal tax rates, the individual has less incentive to earn more. In theory, if a 100% marginal tax rate existed, the individual would no longer have any incentive to increase earnings, potentially even reducing total tax revenue ''(see [[Laffer curve]])''. Public discussion of "high taxes" may refer to overall tax rates or marginal taxes.

{| class="wikitable"

Marginal tax rates can be measured either by looking at published tax tables (to get the ''official'' marginal tax rate) or by looking at actual practice, i.e., how an increase in income changes tax obligations either within "brackets" or between them, including all types of taxes or just some of them. It may be calculated noting how tax changes with changes in pre-tax income, rather than with taxable income. Marginal tax rates do not fully describe the impact of taxation. A flat rate [[poll tax]] has a marginal rate of zero, while a discontinuity in tax paid can lead to positively or negatively infinite marginal rates at particular points.

|+ 2023 United States federal income tax brackets

|-

! Marginal tax rate

! from...

! up to…

|-

| 10%

| $0

| $11,000

|-

| 12%

| $11,001

| $44,725

|-

| 22%

| $44,726

| $95,375

|-

| 24%

| $95,376

| $182,100

|-

| 32%

| $182,101

| $231,250

|-

| 35%

| $231,251

| $578,125

|-

| 37%

| $578,126

| And up

|}

For an income of $58,000 per year, the first $11,000 of it is taxed at 10%, the next $33,725 at 12%, and last $13,275 at 22%. The marginal tax rate of this individual is 22%, because if they earned an additional $1, it would fall within the 22% tax bracket.<ref>{{Cite web |url=https://www.irs.gov/filing/federal-income-tax-rates-and-brackets |title=Federal Income Tax Rates and Brackets |website=Internal Revenue Service |access-date=2024-04-28}}</ref>

==Specific==

A '''specific tax rate''', or per unit tax rate, is a fixed amount of tax on a specific good or service. It means that the tax rate is not in the form of percentages but in the form of single units which does not depend on the price of goods but on the amount of units. Specific tax is used in tobacco taxation because it has been proved that a high specific tax significantly enlarges the price of cigarettes and it is an effective way to reduce the consumption of goods like cigarettes.<ref>{{Cite journal|last1=Golden|first1=Shelley D.|last2=Smith|first2=Margaret Holt|last3=Feighery|first3=Ellen C.|last4=Roeseler|first4=April|last5=Rogers|first5=Todd|last6=Ribisl|first6=Kurt M.|date=2016-07-01|title=Beyond excise taxes: a systematic review of literature on non-tax policy approaches to raising tobacco product prices|url= |journal=Tobacco Control|language=en|volume=25|issue=4|pages=377–385|doi=10.1136/tobaccocontrol-2015-052294|issn=0964-4563|pmid=26391905|pmc=4941206}}</ref>

For example, we can have a pack of cigarettes containing 20 cigarettes in California. The California tax rate is $0.1435 per cigarette stick and $2.87 per pack of 20 cigarettes. <ref>{{Cite web |url=https://www.cdtfa.ca.gov/taxes-and-fees/cigarette-and-tobacco-products/#cigarettes |title=Cigarette and Tobacco Products |website=California Department of Tax and Fee Administration |access-date=2024-04-28}}

</ref> So if a pack costs $10 or $12, the tax rate for both is $2.87.

==Mixed tax rate==

For some goods exists a combination of two tax rates. The commonly known mixed tax rate is specific and flat at once. Usually, it is used for [[Excise|excise taxation]] or [[sin tax|sin taxation]] used on tobacco, alcohol, or fuel.<ref>{{Cite web |url=https://www.jti.com/europe/austria/tobacco-taxation |title=Tobacco Taxation in Austria |website=Japan Tobacco International |access-date=2024-04-28}}

</ref>

For example, we can again have a pack of cigarettes containing 20 cigarettes but in the United Kingdom. In the United Kingdom, the flat tax rate is at 16.5 % of the retail price and also £ 6.33 per pack of 20.<ref>{{Cite web |url=https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/tobacco-duties/ |title=Tobacco Duties |website=Office for Budget Responsibility |access-date=2024-04-28}}

</ref> Let’s say that the price of the pack of cigarettes before tax is £10.00. Then specific tax is £ 6.33 and flat tax rate is £10.00 * 16.5% = £1.65. Then a pack of 20 cigarettes costs £17.98 and the tax expense is £7.98.

==Effective==

The '''effective tax rate''' is the ''percent of their income'' that an individual or a corporation pays in taxes.<ref>Kagan, Julia. [https://www.investopedia.com/terms/e/effectivetaxrate.asp Effective Tax Rate.] Investopedia. Retrieved: December 10, 2020.</ref>

An ''effective tax rate'' refers to the actual rate, i.e., the rate existing in fact.<ref name="whatisthedif"/> Both average and marginal tax rates can be expressed as effective tax rates.

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]] 12,<ref>[http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias12_en.pdf IAS 12], paragraphs 86.</ref> define it as income tax expense or benefit for accounting purposes divided by accounting profit. In [[Generally Accepted Accounting Principles (United States)]], 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.<ref>[https://asc.fasb.org/section&nav_type=topic_page&analyticsAssetName=topic_page_subsection&trid=2144790#topic-740-270-30-subsect-01-109335 ASC 740-270-30-6 through -9].</ref>

The effective tax rate is the amount of tax an individual or firm pays when all other government tax offsets or payments are included, divided by the individual or firm's total [[income]] or [[taxable income]]. If certain groups have high degrees of tax offsets compared to other groups, their effective tax rate will be lower, even where their official tax rates and marginal tax rates will be equal. The effective rate of tax can often be discussed in terms of the effective marginal rate of tax - namely the amount of effective tax paid as a percentage of the last earned dollar. In this case, the effective marginal rate of tax is often higher than the nominal marginal rate of tax for lower income earners.

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.<ref>See, e.g., [http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&rgn=div8&view=text&node=26:9.0.1.1.1.0.11.204&idno=26 26 CFR 1.904-4(c)].</ref>

===Effective average===

An ''effective average tax rate (or average effective tax rate)'' may differ from an average tax rate because some measure of income other than taxable income is used. For example, the [[Joint Committee on Taxation]] typically calculates the effective average tax rate as the ratio of taxes paid to a constructed measure of "economic income".<ref name="whatisthedif"/>

An interesting phenomenon connected with effective tax rate is its negativity called negative effective tax rate, which occurs when the tax benefits received by an individual or corporation exceed the [[taxable income]]. A negative tax rate can happen because of factors such as tax credits, deductions, or incentives, for example, if a corporation has a pre-tax income of $100k and tax benefits of $110k, then the corporation has a negative effective tax rate.<ref>{{Cite web |url=https://corporatefinanceinstitute.com/resources/accounting/negative-income-tax/ |title=Negative Income Tax |website=Corporate Finance Institute |access-date=2024-04-28}}

===Effective marginal===

</ref>

An ''effective marginal tax rate (or marginal effective tax rate, marginal deduction rate)'' may differ from a marginal tax rate because the taxpayer may be in an income range in which he is subject to a phase-out of some exclusion or deduction.<ref name="whatisthedif"/>

Where [[social security]] and other benefits are related to income, the combined tax and benefit effect can also be taken into account giving a result sometimes described as the marginal effective tax rate or the marginal deduction rate. If the marginal deduction rate exceeds 100%, then an increase in gross income leads to a decrease in disposable income, discouraging attempts to increase income; when this occurs for low income individuals, it is known as the "[[Welfare trap|poverty trap]]".

Some calculations of the effective tax rate of individuals includes [[welfare benefit]]s they receive from the state. This is commonly done when determining [[effective marginal tax rate]]

==Inclusive / 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), while other tax systems do not include taxes owed as part of the base (tax-exclusive).<ref name="beaconhill">{{cite web| url=http://www.beaconhill.org/FairTax2006/TaxingSalesundertheFairTaxWhatRateWorks061005.pdf| last=Bachman| first=Paul| coauthors=Haughton, Jonathan; Kotlikoff, Laurence J.; Sanchez-Penalver, Alfonso; Tuerck, David G.| title=Taxing Sales under the FairTax – What Rate Works?| work=Beacon Hill Institute| publisher=Tax Analysts| date=2006-11| accessdate=2007-04-24}}</ref> In the [[United States]], [[sales tax]]es are quoted exclusively and [[income tax]]es are quoted inclusively. [[Value added tax]] (VAT) countries display this tax inclusively; however, [[Goods and Services Tax]] countries do not.<ref name="OECDtopic">{{cite web|url=http://www3.ietf.org/proceedings/99jul/slides/trade-oecd-99jul/tsld015.htm|title=Consumption Tax Topics that OECD will probably address|date=1999-06|accessdate=2007-04-23}}</ref> 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]], 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 23%, taxes owed equals $23. The income tax is taken "off the top", so the individual is left with $77 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 $77 with a 30% exclusive sales tax rate yields $23 in taxes owed. Since the sales tax is added "on the top", the individual pays $23 of tax on $77 of pre-tax goods for a total cost of $100. In either case, the tax base of $100 can be treated as two parts&mdash;$77 of after-tax spending money and $23 of taxes owed. A 30% exclusive tax rate approximates a 23% inclusive tax rate after adjustment.<ref name="beaconhill" /> 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 anand exclusive sales tax rate:==

[[File:Tax rate example.svg|Mathematically, 25% income tax out of $100 income yields the same as 33% sales tax on a $75 purchase.|thumb|right|200px]] 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).<ref name="beaconhill">{{cite web| url=http://www.beaconhill.org/FairTax2006/TaxingSalesundertheFairTaxWhatRateWorks061005.pdf| last=Bachman| first=Paul| author2=Haughton, Jonathan| author3=Kotlikoff, Laurence J.| author4=Sanchez-Penalver, Alfonso| author5=Tuerck, David G.| title=Taxing Sales under the FairTax – What Rate Works?| work=Beacon Hill Institute| publisher=Tax Analysts| date=November 2006| access-date=2007-04-24| url-status=dead| archive-url=https://web.archive.org/web/20070614190649/http://www.beaconhill.org/FairTax2006/TaxingSalesundertheFairTaxWhatRateWorks061005.pdf| archive-date=2007-06-14}}</ref> In the [[United States]], [[sales tax]]es are usually quoted exclusively and [[income tax]]es are quoted inclusively. The majority of Europe, [[value added tax]] (VAT) countries, include the tax amount when quoting merchandise prices, including Goods and Services Tax (GST) countries, such as [[Australia]] and [[New Zealand]]. However, those countries still define their tax rates on a tax exclusive basis.

*Let <math>t</math> be the income tax rate. For a 23% rate, then <math>t = 0.23</math>

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]], 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.

*Let <math>a</math> be the rate in terms of a sales tax.

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.<ref name="beaconhill"/> By including taxes owed in the tax base, an exclusive tax rate can be directly compared to an inclusive tax rate.

*Let <math>p</math> be the price of the good (including the tax).

:Inclusive income tax rate comparison to an exclusive sales tax rate:

* Let <math>i</math> be the inclusive tax rate (like an income tax). For a 20% rate, then <math>i = 0.20</math>

* Let <math>e</math> be the exclusive rate (like a sales tax).

* Let <math>p</math> be the total price of the good (including the tax).

:The revenue that would go to the government:

::<math>tp \times pi</math>

:The revenue remaining for the seller of the good:

::<math>p - t (p\times pi)</math>

:To convert the taxinclusive rate to the exclusive rate, divide the money going to the government by the money the company nets:

::<math>ae = \frac{tp \times pi}{p - t(p \times i)} =\frac{p \times i}{p \times (1 - i)}= \frac{ti}{1 - ti}</math>

:Therefore, to adjustconvert any inclusive tax rate to that of aan exclusive tax rate, divide the giveninclusive 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

==Tax deductions and tax credits==

==See also==

*[[Progressive tax]]

*[[Proportional tax]]

*[[Regressive tax]]

*[[Tax incidence]]

*[[Tax rates around the world]]

Tax deductions and tax credits are two ways how to decrease taxpayer’s liability. Individuals can claim credits and deductions when they file their tax returns to lower their taxes, which is connected with marginal and average tax rates.<ref>{{Cite web |url=https://www.irs.gov/credits-and-deductions-for-individuals |title=Credits and Deductions for Individuals |website=Internal Revenue Service |access-date=2024-04-28}}

==Notes==

</ref>

<references />

===Deductions===

A [[tax deduction]] is an amount you can subtract from your taxable income, so you do not have to pay tax on it. By lowering individual taxes, taxable income is also lowered, and the average tax rate decreases too. Their value depends highly on the top marginal tax bracket. For example, if we have an individual whose top marginal tax bracket is 10% then the maximum deductions from $2000 is $200. On the other hand, if we have an individual whose top marginal tax rate is 37% then the maximum deduction from $2000 is $740.<ref>{{Cite web |url=https://www.cbpp.org/sites/default/files/atoms/files/policybasics-exempt.pdf |title=Policy Basics: Tax-Exempt Organizations |website=Center on Budget and Policy Priorities |access-date=2024-04-28}}

</ref>

===Credits===

A [[tax credit]] is an amount that can be subtracted directly from an individual tax bill, which means that credits increase an individual's refund or reduce the amount of taxes that an individual owes. Tax credits again lower the average tax rate but tax credits are not influenced by the marginal tax rate. If an individual has $2000 of tax credits then his taxes are directly smaller by $2000. <ref>{{Cite web |url=https://www.cbpp.org/sites/default/files/atoms/files/policybasics-exempt.pdf |title=Policy Basics: Tax-Exempt Organizations |website=Center on Budget and Policy Priorities |access-date=2024-04-28}}

</ref>

==Optimal==

The standard theory of [[optimal tax]] rate aims to design the tax to maximize social welfare while collecting a certain level of revenue.<ref>{{Cite web |url=https://scholar.harvard.edu/files/mankiw/files/optimal_taxation_in_theory.pdf |title=Optimal Taxation in Theory |author=N. Gregory Mankiw, Matthew Weinzierl, Danny Yagan |website=Harvard University |access-date=2024-04-28}}

</ref>

===Laffer curve===

One of the theories on how to find optimal tax rates is called the [[Laffer curve]] (named after economist [[Arthur Laffer]]). Laffer curve is a hump-shaped curve, that compares the relationship between tax rate and tax revenue. The Laffer curve tells us that raising tax rates beyond some level may reduce incentives enough to reduce output and tax revenues. There is, then, a tax rate at which tax revenues are maximized.<ref>{{Cite journal |last1=Trabandt |first1=Mathias |last2=Uhlig |first2=Harald |date=2011-05-01 |title=The Laffer curve revisited |url=https://www.sciencedirect.com/science/article/pii/S030439321100064X |journal=Journal of Monetary Economics |volume=58 |issue=4 |pages=305–327 |doi=10.1016/j.jmoneco.2011.07.003 |issn=0304-3932|url-access=subscription }}</ref>

Economic historian [[Thomas Sowell]] says, "Tax rates and tax revenues can move in opposite directions."<ref>[https://www.aei.org/carpe-diem/thomas-sowell-on-the-relationship-between-tax-rates-and-tax-revenues/ Thomas Sowell on the Relationship Between Tax Rates and Tax Revenues]</ref>

==See also==

* [[Capital flight]]

* [[List of countries by tax rates]]

* [[List of countries by tax revenue as percentage of GDP]]

* [[Progressive tax]]

* [[Proportional tax]]

* [[Regressive tax]]

* [[Tax exporting]]

* [[Tax incidence]]

* [[Tax rates of Europe]]

==References==

{{Reflist}}

*[http://comparativetaxation.treasury.gov.au/content/report/html/05_Chapter_3.asp International Comparison of Australia's Tax Rates: 3. A statistical overview] from The Australian Commonwealth Government, June 7, 2006

*[http://www.answers.com/topic/effective-tax-rate-1 Effective tax rate] page from Answers.com. Accessed October 29, 2006.

== External links ==

*[http://comparativetaxation.treasury.gov.au/content/report/html/06_Chapter_4.asp International Comparison of Australia's Tax Rates: 4. Wage and Salary Taxation] from The Australian Commonwealth Government, June 7, 2006

{{Commons category|Marginal tax rates}}

{{Authority control}}

[[Category:Taxation]]

[[Category:Rates]]

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