average tax rate

Examples of average tax rate in the following topics:

• Comparing Marginal and Average Tax Rates

  • An average tax rate is the ratio of the total amount of taxes paid, T, to the total tax base, P, (taxable income or spending), expressed as a percentage.
  • If a company pays different rates on the first $100,000 in earning than the next $100,000, it will sum up the total tax paid and divide it by $200,000 to calculate the average tax rate.
  • The term "progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate.
  • A regressive tax is a tax imposed in such a manner that the average 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 to low, where the average tax rate exceeds the marginal tax rate.

• Corporate and Payroll Taxes

  • Many countries impose a corporate tax, also called corporation tax or company tax, on the income or capital of some types of legal entities.
  • The taxes may also be referred to as income tax or capital tax.
  • The rate of tax varies by jurisdiction; however, most companies provide or make public the effective tax rate on the income earned.
  • The effective tax rate is the average corporate tax rate on the company's income and this takes into consideration tax benefits included in a current tax year.
  • Corporations are also subject to a variety of other taxes including: property tax, payroll tax, excise tax, customs tax and value-added tax along with other common taxes, generally in the same manner as other taxpayers.

• Taxes

  • Understandable: A tax system should be easily understandable by the average citizen who has to pay the tax.
  • Proportional Tax: Otherwise known as a flat tax, a flat tax rate is applied to all earned income regardless of how much the taxpayer earns.
  • So a person making $20,000 would pay the same rate as a person making $120,000, but would pay significantly less in real dollars.
  • Progressive Tax: The more a person earns, the higher the tax rate.
  • Regressive Tax:In a regressive tax system, poorer families pay a higher tax rate.

• Trading off Equity and Efficiency

  • Income taxes are a laddered progressive tax where income tax rates are set in income bands or ranges.
  • Each tax rate corresponds to a particular income range; income above a tax range is subject to a higher tax rate that corresponds to a higher income range and income below a specific range is subject to a lower tax rate, similarly identified with a lower income range.
  • Within any given income range, the tax rate is the same.
  • At the highest income tax rate, income taxes can become regressive, since high earners are only subject to a constant albeit highest rate on their income.
  • Income tax is a progressive tax that assumes a regressive nature at the highest tax rate.

• Financing State and Local Government

  • Taxes are the primary source of revenue for state and local governments; income, property, and sales taxes are common examples of state and local taxes.
  • State and local income tax rates vary widely by jurisdiction and many are graduated, or increase progressively as income levels increase.
  • Sales tax rates also vary widely among jurisdictions, from 0% to 16%, and may vary within a jurisdiction based on the particular goods or services taxed.
  • Sales tax is collected by the seller at the time of sale, or remitted as use tax by buyers of taxable items who did not pay sales tax.
  • Property tax rules and rates vary widely.

• Cost of capital

  • The cost of capital is the rate companies must pay to finance a project.
  • Moreover, if a project contains a similar risk to a company's average business activities, then it is reasonable to use the company's average cost of capital as a basis for evaluating the success of investment .
  • The cost of debt is composed of the interest rate paid on the bonds or loans.
  • One way of combining the cost of debt and equity to generate a single cost of capital number is through the weighted-average cost of capital (WACC).
  • where D is the value of debt in the company, E is the value of equity, rd is the cost of debt, t is the tax rate, and re is the cost of equity.

• What Taxes Do

  • Taxes are the primary source of revenue for most governments.
  • Taxes are most readily understood from the perspective of income taxes or sales tax, although there are many other types of taxes levied on both individuals and firms.
  • Congress enacts these tax laws, and the IRS enforces them.
  • Governments use different kinds of taxes and vary the tax rates.
  • As a result, individuals earning a relatively lower income will pay a higher proportion of income in the form of sales tax, defining the regressive nature of the tax.

• Financing the US Government

  • For example, income taxes due to their progressive nature are used to equitably derive revenue by differentiating tax rates by income strata.
  • The following is a list of taxes in common use by governmental authorities:
  • Excise tax: tax levied on production for sale, or sale, of a certain good.
  • Sales tax: tax on business transactions, especially the sale of goods and services.
  • Capital gains tax: tax on increases in the value of owned assets.

• Fiscal Policy -- Budget and Taxes

  • From the outset, the income tax has been a progressive levy, meaning that rates are higher for people with more income.
  • Accordingly, many Republicans argue for a more uniform rate structure.
  • Some even suggest a uniform, or "flat," tax rate for everybody.
  • The Tax Reform Act of 1986, perhaps the most substantial reform of the U.S. tax system since the beginning of the income tax, reduced income tax rates while cutting back many popular income tax deductions (the home mortgage deduction and IRA deductions were preserved, however).
  • The Tax Reform Act replaced the previous law's 15 tax brackets, which had a top tax rate of 50 percent, with a system that had only two tax brackets -- 15 percent and 28 percent.

• Fiscal Levers: Spending and Taxation

  • The tax multiplier is the magnification effect of a change in taxes on aggregate demand.
  • In contrast, the tax multiplier is always negative.
  • When taxes decrease, aggregate demand increases.
  • The crowding out effect occurs when higher income leads to an increased demand for money, causing interest rates to rise.
  • Analyze the use of changes in the tax rate as a form of fiscal policy