What is Tax Base?

Tax Base Formula

The tax liability is determined by multiplying the tax base by the tax rate. Therefore, it would thus be the tax liability divided by the tax rate.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor 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 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 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

The official statistics collected from numerous sources help the government assess the total revenue 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 economy’s tax base 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 to 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, tariffs, etc., its base would now widen. The enhanced base would be a source of further revenue for the government. The government can now channel this towards productive purposes such as developing infrastructure 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 be fed into statistical data combined by various agencies. Thus this data serves as a reliable source to gauge the amount of taxes a country collects to enable it to compare 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 mediators 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 taxing 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 for the government. Because of the loss of such revenue, the income of the government will be reduced, 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 relieve the ones relying on such occupations and, 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 save or invest 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 the various sources of income it would like to tax or, rather, not 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

The tax base is an important source of reliable information to gauge the total income earned by a country’s government through 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 to have efficient taxation, thereby ensuring people are neither overtaxed nor undertaxed.

This has been a guide to What the tax base is and its Definition. Here we discuss the formula to calculate the tax base, the example, advantages, and disadvantages. You can learn more about excel modeling from the following articles –

  • Use Tax DefinitionCombined RatioCalculate Marginal Tax RateCalculate Pretax Income