Tax rate is the percentage or fixed value applied when calculating the value of a tax band. The rate is a percentage implemented when the calculation is based on an economic value, and forms a base value for non-monetary unit.
The rates in percentage are more common in taxes and tax rates in value occur more as compulsory loans, fees and improvement fees.
The tax rate is one element of taxes in general, thus, there is a requirement that its value or percentage is established by law.
According to its characteristics, the rate can be classified into: fixed – amount determined for all taxpayers, variable – imposed according to the stipulated base. It is usually progressive (ie, rate is positively proportional to the basis of calculation).
A statutory tax rate constitutes the lawfully enforced rate, and an income tax can feature multiple statutory rates in respect of various income grades, whereas a sales tax can feature a flat statutory rate.
On the other hand, an average tax rate relates to the ratio of the sum of taxes remitted to the tax base. To compute the average tax rate as regards income tax, you can simply divide total tax liability by taxable income.
The marginal tax rate shows the rate with which each unit of the tax base will be charged. Income tax based on the marginal tax rate must not be confused with the effective tax rate (average rate). Practical significance of the marginal tax rate is associated with progressive rates. The marginal tax rate rises more or less continuously with the increase in the tax base.
When the rate is zero (usually under variable tax rate), it means that there is total relief. According to the principle of progressive tax, the higher the basis, the higher the rate. This implies that a charge falls into one of the following cases: the progressive tax value has a variable rate. Progressive extra fiscal tax rates have higher thresholds on the basis of calculation with higher values, and/or lower rates as an incentive based on smaller values calculations.
The purpose of progressive taxation is beyond influencing taxpayer behavior. For example, in water consumption and energy after a certain amount of monthly consumption, the rate shifts to a higher threshold, leading consumers to avoid this limit.
In economics, marginal tax rates are vital due to the fact that they form part of the elements which influence incentives to boost income. Essentially, the foundation of the Laffer curve is established as such, by indicating taxable income declining as a part of the marginal tax rate, and hence tax revenue falls on reaching a given level.