What is Tax Base?
Tax base refers to the total income (including salary, income from investments, asset, etc.) that can be taxed by a taxing authority and is thus used to calculate tax liabilities owed by the individual or the corporation. It serves as a total base on which the tax can be charged.
Tax Base Formula
The tax liability is arrived at by multiplying the tax base into the tax rate. Therefore, it would thus be the tax liability divided by the tax rate.
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For eg:
Source: Tax Base (wallstreetmojo.com)
Example of Tax Base
Mrs. Lucia, a businesswoman, happened to earn $20000 last year. Out of this amount, $15000 was subject to tax.
Let us now consider the tax liability assuming a tax rate of 10%.
Tax Liability = Tax Base * Tax Rate
The details are listed down as follows
Hence we can back-calculate to arrive at the tax base as tax liability/tax rate which would now be 15000 (1500/0.1)
Top Features of Tax Base
#1 – Simplicity
It is simple to arrive at. All one would ever have to do is consider the net total of all the assets or revenuesRevenuesRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more that are subject to tax. This will thus help the government ascertain the total number of taxpayersTaxpayersA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws.read more and then consider the income that is subject to tax. It would help one understand the total tax that the government will tend to earn through this simple method.
#2 – Gauge of Taxable Income
Through the official statistics collected from numerous sources, it helps the government assess the total revenue that it tends to gain, usually from taxable incomeTaxable IncomeThe taxable income formula calculates the total income taxable under the income tax. It differs based on whether you are calculating the taxable income for an individual or a business corporation.read more, by looking at the tax base of the economy as a whole. This helps the country’s government to ascertain the total income that it can thus generate for the previous assessment year
#3 – Wide Base Increases Revenue
When a government goes on tax various other items on an indirect basis such as VATVATValue-added tax (VAT) refers to the charges imposed whenever there is an accretion to a product's usefulness or value throughout its supply chain, i.e., from its manufacturing to its final selling point. It is an indirect tax levied on the product consumption.read more, Central duty, excise duty, imports, and tariffs, etc., its base would now widen. The enhanced base would serve as a source of further revenue for the government. The government can now channel this towards productive purposes such as the development of infrastructural projects, social and welfare spending, etc. Such activities would further the development of the nation.
#4 – Acts as an Accountable Source
When a government goes on to establish its tax base, this would now serve as an accountable source of revenue. This information can now very well be fed into statistical data that will be combined by various agencies. Thus this data serves as a reliable source to gauge the amount of taxes that a country collects to enable it to have a comparison with various other countries to ascertain the total amount collected from taxes.
Limitations
#1 – Does not Consider the Shadow Economy
There are many in the illicit business, such as drugs. These are usually unreported, and thus there is no tax on them, yet the middlemen tend to make a fortune. It tends to miss out on such income and is not inclusive of the shadow economyShadow 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. It also determines the price of those items which are not ordinarily bought or sold in the market.read more.
#2 – Narrow Base may Impede Growth
If a country tends to stick to tax only one source such as income tax and does not go on to consider the taxation of other indirect sources such as VAT, the base now narrows. This narrowing is a loss of revenue to the government. Because of the loss of such revenue, the income of the government reduces, and it may not be able to undertake developmental activities for the welfare of the economy, and this will impede Growth
#3 – Excludes Exemptions and Tax Relief
The government may give certain incentives for certain sectors, which relieves the ones relying on such occupations, exempt from paying any taxesExempt From Paying Any TaxesTax-exempt refers to excluding an individual's or corporation's income, property or transaction from the tax liability imposed by the federal, local or state government. These exemptions either allow total relief from the taxes or provide reduced rates or charge tax on some items only.read more. Furthermore, various incentives and exemptions introduced by the government help the public in saving or investing in those avenues to take advantage of tax exemptions. However, this seems to be a disadvantage for the government as it will have the tax base reduced to such an extent, which further reduces the revenue to the government.
Important Points
The government, usually in its budgetary session, will decide on the tax slabs and also the various sources of income on which it would like to tax or rather not a tax. It becomes important that one stays updated in this regard to understand what comes under the total taxable income basket of the government to determine the base.
Conclusion
Tax Base serves as an important source of reliable information to gauge in the total income earned by a government of a country through the route of taxation. It stands as a reliable accounting source to generate statistics in this regard. It becomes imperative for the government to properly determine the base so as to have efficient taxation and thereby ensure people are neither overtaxed nor undertaxed.
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