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Tax
Tax Rates
Taxes
are usually levied as a percentage, more popularly known as the tax rate,
of a certain value known as the tax base (calculated as the total income
and assets one
has, earns, spends, inherits, etc).
Another term one comes across in this connection is the ad valorem tax
which is one where the tax base is the value of some goods, a service, or
a real estate property.
Examples of different types of ad valorem
taxes are sales taxes, inheritance taxes, tariffs, property taxes, and
value added taxes. An ad valorem tax is generally imposed at the time of a
transaction (for example, sales tax or value added tax (VAT)) or it may be
imposed on an annual basis (for example, property tax) or else in
connection with another significant event (for example, inheritance tax or
tariffs). An alternative to ad valorem taxation is the levy of an excise
tax, where in the tax base is the quantity of something, regardless of its
price: this is exemplified in the United Kingdom, where a tax is collected
on the sale of alcoholic drinks and this tax is calculated based on the
volume and beverage type rather than the price of the drink.
An important distinction one needs to make
while referring to tax rates is to be able to distinguish between the
marginal rate and the average rate. While the average rate is the total
tax paid divided by the total amount the tax is paid on, the marginal rate
is the rate paid on the next dollar of income earned. Though they might
pass off as very similar to one another at one glance, in a progressive
tax system, these can be very different.
In order to explain this further, we shall
consider the following example; if income is taxed based on a grid of 5%
for an income of $0 up to $49,999, 10% for $50,000 to $99,999 earned, and
15% for over $100,000 of income, a taxpayer with an income of $150,000
would pay a total of $18,750; calculated as follows:
{(0.05*50,000) +
(0.10*50,000) + (0.15*50,000)}
=15,000
His average rate would hence
be 10%; calculated as follows:
(15,000/150,000)
=
0.1
His
marginal rate would, however, remain at 15%.
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