Home » Taxes » Broadening The Tax Base And Raising Top Rates Are Complements, Not Substitutes

Broadening The Tax Base And Raising Top Rates Are Complements, Not Substitutes

September 7, 2023
Bill Kimball

Most taxes have side effects that reduce economic welfare, either by mandating unproductive labor or by creating distortions to economic incentives . The opposite of a progressive tax is a regressive tax, where the effective tax rate decreases as the amount to which the rate is applied increases. This effect is commonly produced where means testing is used to withdraw tax allowances or state benefits. An import or export tariff is a charge for the movement of goods through a political border.

Tax Base

The idea is to aim taxes at people that cause an above-average amount of societal harm so the free market incorporates all costs as opposed to only personal costs, with the benefit of lowering the overall tax burden for people who cause less societal harm. The purpose of taxation is to provide for government spending without inflation. The provision of public goods such as roads and other infrastructure, schools, a social safety net, public health systems, national defense, law enforcement, and a courts system increases the economic welfare of society if the benefit outweighs the costs involved. To show this relationship, suppose that the market price of a product is $1.00 and that a $0.50 tax is imposed on the product that, by law, is to be collected from the seller.

State Sales Tax

Taxes cause a substitution effect when taxation causes a substitution between taxed goods and untaxed goods. These example sentences are selected automatically from various online news sources to reflect current usage of the word ‘tax base.’ Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. The spokesperson estimated any such change in the tax base would not come until 2023; Allstate has indicated employees will remain at the campus at least until mid-2022, according to WGN. Income is money received in return for working, providing a product or service, or investing capital. Please complete this reCAPTCHA to demonstrate that it’s you making the requests and not a robot. If you are having trouble seeing or completing this challenge, this page may help.

Tax Base

Finance ministers often dislike this practice, since it reduces their freedom of action. Some economic theorists regard hypothecation as intellectually dishonest since, in reality, money is fungible. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general fund. In some cases, such taxes are collected in fundamentally inefficient ways, for example, through highway tolls. The drive for increased property tax revenue, and in some cases sales tax revenue, can lead local governments to make land use decisions that conflict with other planning and economic development goals.

Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. Some observers worry that cityhood for Buckhead could be devastating, removing access to revenue from a critical tax base and even deepening racial tensions. With manufacturing and tourism in decline, the city’s tax base was shrinking, prompting cuts to services like policing and garbage collection. Prior governors installed emergency managers with broad decision-making authority that reduced staffing, and the city’s population has declined, shrinking its tax base. Jacqueline DeMarco has 7+ years of experience researching and writing dozens of articles. She covers investing, taxes, credit cards and scores, loans, banking, budgeting, and more for The Balance.

Tax Base Of Assets: Definition & Examples

Recent research on behavioral responses to taxation, as well as historical and cross-country regression analyses of top tax rates and macroeconomic performance, strongly suggest that these growth effects are substantially overstated. In addition to paying federal taxes, taxpayers are assessed tax at the state and local level in several different forms. Most investors are assessed income tax at the state level, and homeowners pay property tax at the local level. The tax base for owning property is the home or building’s assessed valuation. States also assess sales tax, which is imposed on commercial transactions.

  • A hypothetical Laffer curve for any given economy can only be estimated and such estimates are sometimes controversial.
  • Consumption tax refers to any tax on non-investment spending and can be implemented by means of a sales tax, consumer value-added tax, or by modifying an income tax to allow for unlimited deductions for investment or savings.
  • The estate tax and step-up basis of capital gains were reinstated in 2011.
  • If the absolute value of the point elasticity of taxable income with respect to the marginal tax rate is greater than 1, then top tax rates arehigherthan the revenue-maximizing rate—that is, the tax structure is “on the wrong side” of the Laffer curve.

The fundamental conception of the term is that of a tax on articles produced or manufactured in a country. In the taxation of such articles of luxury as spirits, beer, tobacco, and cigars, it has been the practice to place a certain duty on the importation of these articles . In many jurisdictions , there is a general tax levied periodically on residents who own personal property within the jurisdiction. The tax is often designed with blanket coverage and large exceptions for things like food and clothing. Household goods are often exempt when kept or used within the household. Any otherwise non-exempt object can lose its exemption if regularly kept outside the household. Thus, tax collectors often monitor newspaper articles for stories about wealthy people who have lent art to museums for public display, because the artworks have then become subject to personal property tax.

Goods And Services

This is because in most jurisdictions tax standards allow more bad debt than accounting standards. When the carrying amount is lower than the tax base, thus, the difference is called a deductible difference. Inversely, when the carrying amount is higher than the tax base, we call this a taxable difference. In other words, the difference between taxes due and accounting taxes is $3,000 ($147,000 – $144,000). Since we are paying more taxes than we record via the accounting method, we record the difference as an asset. The statutory preferential rate on long-term capital gains was 20 percent prior to reform, which repeal effectively raised to 28 percent. In the case of income taxes, a key question is to what degree the state in question has adopted federal consolidated rules.

What are the 4 most used tax bases?

The four most used tax bases are individual income, corporate income, sales, and property.

The income effect shows the variation of y good quantity given by the change of real income. The substitution effect shows the variation of y good determined by relative prices’ variation. Taxes cause an income effect because they reduce purchasing power to taxpayers. Shadow EconomyShadow pricing refers to the process of anticipating the value of the money market fund securities based on financial analysis constraints like cost-benefit analysis.

English Language Learners Definition Of Tax Base

A foreign person domiciled in a subnational jurisdiction of a NAFTA member country that does not impose a business tax on a similarly situated taxpayer domiciled in Michigan is also exempt from the CIT. Development costs usually consist of salaries that need to be capitalized.

This is opposed to traditional property taxes which reward land abandonment and disincentivize construction, maintenance, and repair. Another example of a tax with few deadweight costs is a lump sum tax such as a poll tax which is paid by all adults regardless of their choices. Arguably a windfall profits tax which is entirely unanticipated can also fall into this category. EGTRRA repealed the estate tax for 2010, and in that year replaced the step-up basis of capital gains at death with a modified carryover basis for capital gains bequests. The estate tax and step-up basis of capital gains were reinstated in 2011.

  • Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent.
  • The charge for the stamp is either a fixed amount or a percentage of the value of the transaction.
  • An excise duty is an indirect tax imposed upon goods during the process of their manufacture, production or distribution, and is usually proportionate to their quantity or value.
  • Budget’s constraint shift after an introduction of a lump sum tax or a general tax on consumption or a proportional income tax.
  • The introduction of income tax in Britain was due to the Napoleonic War in 1798.
  • To create a system of taxation, a state must make choices regarding the distribution of the tax burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent.

In the same regard, many public officials are not elected for their project management skills, so the projects can be mishandled. In the United States, President George W. Bush proposed in his 2009 budget “to terminate or reduce 151 discretionary programs” which were inefficient or ineffective. In between is a proportional tax, where the effective tax rate is fixed, while the amount to which the rate is applied increases. This includes natural resources consumption tax, greenhouse gas tax , “sulfuric tax”, and others. As early as 1920, Arthur Pigou suggested a tax to deal with externalities . The proper implementation of environmental taxes has been the subject of a long-lasting debate. Occupational taxes or license fees may be imposed on businesses or individuals engaged in certain businesses.

Factoring In Capital Gains

Some of these include expenditures on economic infrastructure , military, scientific research & development, culture and the arts, public works, distribution, data collection and dissemination, public insurance, and the operation of government itself. A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to fund government spending and various public expenditures . A failure to pay in a timely manner, along with evasion of or resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent.

A small number of U.S. states rely entirely on sales taxes for state revenue, as those states do not levy a state income tax. Such states tend to have a moderate to a large amount of tourism or inter-state travel that occurs within their borders, allowing the state to benefit from taxes from people the state would otherwise not tax. In this way, the state is able to reduce the tax burden on its citizens. The U.S. states that do not levy a state income tax are Alaska, Tennessee, Florida, Nevada, South Dakota, Texas, Washington state, and Wyoming. Additionally, New Hampshire and Tennessee levy state income taxes only on dividends and interest income.

Indirect taxes are imposed on events, rights, privileges, and activities. Thus, a tax on the sale of the property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax. An excise duty is an indirect tax imposed upon goods during the process of their manufacture, production or distribution, and is usually proportionate to their quantity or value.

Tax Base

Developing countries have an informal sector representing an average of around 40%, perhaps up to 60% in some. Informal sectors feature many small informal traders who may not be efficient in bringing into the tax net since the cost of collection is high and revenue potential limited . There is also an issue of non-compliant companies who are ‘hard to tax’, evading taxes and should be brought into the tax net. Trade liberalisation has led to a decline in trade taxes as a share of total revenues and GDP. Tax farming, the principle of assigning the responsibility for tax revenue collection to private citizens or groups. Aids, a type of tax or due that was paid by a vassal to his lord during feudal times.

Top Features Of Tax Base

The most extreme anti-tax view, anarcho-capitalism, holds that all social services should be voluntarily bought by the people using them. The Laffer curve depicts the amount of government revenue as a function of the rate of taxation. It shows that for a tax rate above a certain critical rate, government revenue starts decreasing as the tax rate rises, as a consequence of a decline in labor supply.

Tariffs discourage trade, and they may be used by governments to protect domestic industries. A proportion of tariff revenues is often hypothecated to pay the government to maintain a navy or border police. The classic ways of cheating a tariff are smuggling or declaring a false value of goods. Tax, tariff and trade rules in modern times are usually set together because of their common impact on industrial policy, investment policy, and agricultural policy. A trade bloc is a group of allied countries agreeing to minimize or eliminate tariffs against trade with each other, and possibly to impose protective tariffs on imports from outside the bloc. A customs union has a common external tariff, and the participating countries share the revenues from tariffs on goods entering the customs union.

When was the last tax year?

HM Revenue and Customs ( HMRC ) must receive your tax return and any money you owe by the deadline. The last tax year started on 6 April 2020 and ended on 5 April 2021. There’s usually a second payment deadline of 31 July if you make advance payments towards your bill (known as ‘payments on account’).

Other capital income preferences, notably the tax exclusion for interest on municipal bonds, allow households to shift income or wealth into assets whose returns are excluded from taxable income. Most jurisdictions imposing an income tax treat capital gains as part of income subject to tax. Capital gain is generally a gain on sale of capital assets—that is, those assets not held for sale in the ordinary course of business. Some jurisdictions provide preferential rates of tax or only partial taxation for capital gains. Some jurisdictions impose different rates or levels of capital-gains taxation based on the length of time the asset was held. Because tax rates are often much lower for capital gains than for ordinary income, there is widespread controversy and dispute about the proper definition of capital.

An individual taxpayer’s tax base can change as a result of the alternative minimum tax calculation. Under AMT, the taxpayer is required to make adjustments to his initial tax calculation so additional items are added to the return and the tax base and the related tax liability both increase. Janet Berry-Johnson is a CPA with 10 years of experience in public accounting and writes about income taxes and small business accounting. Although Texas has no individual income tax, the state does impose a franchise tax—soon to be replaced by a margin tax—on business activity that, while not denominated as an income tax, is in substance a kind of income tax.

In the United States, there is a growing movement for the replacement of all federal payroll and income taxes with a national retail sales tax and monthly tax rebate to households of citizens and legal resident aliens. In Canada, the federal sales tax is called the Goods and Services Tax and now stands at 5%. The provinces of British Columbia, Saskatchewan, Manitoba, and Prince Edward Island also have a provincial sales tax . The provinces of Nova Scotia, New Brunswick, Newfoundland & Labrador, and Ontario have harmonized their provincial sales taxes with the GST—Harmonized Sales Tax , and thus is a full VAT. The province of Quebec collects the Quebec Sales Tax which is based on the GST with certain differences.

  • Tax farming, the principle of assigning the responsibility for tax revenue collection to private citizens or groups.
  • Supporters argue that allowing taxpayers to demonstrate their preferences would help ensure that the government succeeds at efficiently producing the public goods that taxpayers truly value.
  • Targeting these objectives today would imprudently disregard economic and budgetary shifts over the past quarter century.
  • Many systems allow individuals certain personal allowances and other non-business reductions to taxable income, although business deductions tend to be favored over personal deductions.
  • People with higher incomes spend a lower proportion of them, so a flat-rate sales tax will tend to be regressive.
  • Many countries provide publicly funded retirement or healthcare systems.

Under accounting standards, HighTech Inc. depreciates the asset by $20,000 per year over 5 years. However, tax authorities only allow 10% depreciation of big machine assets each year.


For traditional conservatives, the payment of taxation is justified as part of the general obligations of citizens to obey the law and support established institutions. The conservative position is encapsulated in perhaps the most famous adage of public finance, “An old tax is a good tax”.

A well-designed tax system can minimize efficiency loss and boost economic growth. With better compliance and better support to financial institutions and individual property, the government will be able to collect more tax. Although wealthier countries have higher tax revenue, economic growth does not always translate to higher tax revenue. For example, in India, increases in exemptions lead to the stagnation of income tax revenue at around 0.5% of GDP since 1986. Most countries have a tax system in place, in order to pay for public, common, or agreed national needs and for the functions of government.