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 the tax base would thus be the tax liability divided by the tax rate.
Example of Tax Base
Let us consider the following tax base example of Mrs. Lucia a businesswoman who happened to earn $20000 last year. Of the same $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)
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Top Features of Tax Base
#1 – Simplicity
It is simple to arrive at the tax base of a country or even a person for that matter. All one would ever have to do is consider the net total of all the assets or revenues that are subject to tax. This will thus help the government ascertain the total number of taxpayers 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 income 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 VAT, Central duty, excise duty, imports, and tariffs, etc., its tax base would now widen. The enhanced base would serve as a source of further revenue to 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 as 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.
Disadvantages
#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 economy.
#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 tax 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 taxes. Furthermore, various incentives and exemptions introduced by the government help the public in saving or investing in those avenues to take advantages 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.
Limitations
- A manner in which the tax base lags is that it does not go on to consider the exemptions and also the income earned through the shadow economy, thereby reducing the total revenue that would have accrued to the government.
- Furthermore depending on the government’s decision and discretion on what is to be included in the tax base, would determine the total taxable income that would be generated. Hence the base would be limited to the inclusion decision that rests with the government with regard to the items to be considered for taxation.
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 tax base so as to have efficient taxation and thereby ensure people are neither overtaxed nor undertaxed.
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