Tax rate

 ( Rates ) 

• Let $t$ be the total tax liability.
• Let $i$ be the total tax base.

:$=\; \backslash frac\{t\}\{i\}.$

In a proportional tax, the tax rate is fixed and the average tax rate equals this tax rate. In case of , commonly used for , 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.

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.

In practice, a flat tax rate on income is used in many 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.

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.

A 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.

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.

The marginal tax rate on income can be expressed mathematically as $\backslash frac\{\backslash Delta\; t\}\{\backslash Delta\; i\}$, where is the total tax liability and 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.

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

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.

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

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. 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.

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, IAS 12, paragraphs 86. 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. ASC 740-270-30-6 through -9.

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).

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.

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

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, are usually quoted exclusively and 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.

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.

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:

:$p\; \backslash times\; i$

The revenue remaining for the seller of the good:

:$p\; -\; (p\backslash times\; i)$

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

:$e\; =\; \backslash frac\{p\; \backslash times\; i\}\{p\; -\; (p\; \backslash times\; i)\}\; =\backslash frac\{p\; \backslash times\; i\}\{p\; \backslash times\; (1\; -\; i)\}=\; \backslash frac\{i\}\{1\; -\; i\}$

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

Economic historian Thomas Sowell says, "Tax rates and tax revenues can move in opposite directions." Thomas Sowell on the Relationship Between Tax Rates and Tax Revenues

• 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