Taxes - how to measure and compare it?

Taxes Value-Added Tax: Income Tax: Property Tax: A national sales tax collected at each stage of production or consumption of a good. Income Tax: An annual charge levied on income Property Tax: Taxes paid on homes, land or commercial real estate.

Taxes by economic function I. Assumption that each tax may be attributed to a single economic function. There are cases where a tax is related to multiple economic functions and needs to be broken down to a single economic function.

Taxes by economic function II. Taxes on consumption include taxes on transactions between producers and final consumers (mainly VAT and excise duties). Taxes on labour are divided among employed and unemployed labour. Employed labour: mainly personal income tax and compulsory social security contributions. Unemployed labour: part of personal income tax and compulsory social security contributions of self and non-employed are the main components. Taxes on capital include capital and business income taxes, and taxes on stocks of capital. Capital and business income: mainly corporate income tax, personal income tax and social security contributions by self-employed persons. Taxes on stocks of capital: mainly taxes on land, buildings and other structures and taxes on business and professional licenses.

Macroeconomic point of view I. progressivity of the average rate(ratio of the change in average rate to the change in income) PAR = (T1/Y1 – T0/Y0) / (Y1 – Y0) progressivity of the tax liability (elasticity of the tax due to pre-tax income) PTO = [(T1 – T0)/T0] / [(Y1 – Y0)/Y0] progressivity of the income after taxes(elasticity of the income after taxes due to pre-tax income) PEAT = {[(Y1 – T1) – (Y0 – T0)] / (Y0 – T0)} / [(Y1 – Y0)/Y0] T … tax after credits, Y … gross wage Measurement of tax progressivity is important for a complex evaluation of the impacts of changes in tax legislation or for an identification of tax brackets with the highest tax progressivity.

Macroeconomic point of view II. Interpretation of indicators of interval progressivity Nature of the tax PAR PTO PEAT proportional 1 progressive >0 >1 <1 regressive <0

Measurement of tax burden Tax quota Implicit tax rate on labour Effective tax rate

Tax Quota (Total Taxes to GDP) not very telling indicator because of differences in methodology used in EU states calculate the average of tax quota (also as a weighted average) = total tax revenue / GDP x 100 (in %)

Tax Quota - example the Czech Republic 2013 2014 2015 2016 Total receipts from taxes and social contributions (mil. EUR) 54 970,7 53 094,9 57 393,7 61 387,5 GDP (mil. EUR) 157 961,8 156 622,1 168 310 176 400,9 Finland 2013 2014 2015 2016 Total receipts from taxes and social contributions (mil. EUR) 88 958,0 90 304,0 92 377,0 95 462,0 GDP (mil. EUR) 203 565,2 205 703,9 209 471,7 215 489,8 Results 2013 2014 2015 2016 Tax Quota – the Czech Republic 0,348 0,339 0,341 Tax Quota – Finland 0,437 0,439 0,441 0,443

Implicit Tax Rate I. The implicit tax rate on employed labour is defined as the sum of all direct and indirect taxes and employees' and employers' social contributions levied on employed labour income divided by the total compensation of employees working in the economic territory increased by taxes on wage bill and payroll.  The ITR on labour is calculated for employed labour only. Implicit tax rates measure the average effective tax burden of economic income or activities. The term "implicit tax" is also used to describe an indirect cost that results from a government policy. For example, environmental regulations might impose an implicit tax on businesses that have to spend money to comply with them.

Implicit Tax Rate II. They are calculated as the ratio of total revenue from taxes and social contributions by economic function and a potential tax base. It is the ratio of taxes on consumption and final consumption expenditure of household on the economic territory. The term "implicit tax" is also used to describe an indirect cost that results from a government policy. For example, environmental regulations might impose an implicit tax on businesses that have to spend money to comply with them.

Implicit Tax Rate - example the Czech Republic 2013 2014 2015 2016 Total receipts from taxes and social contributions (mil. EUR) 54 970,7 53 094,9 57 393,7 61 387,5 Potential tax base(mil. EUR) 140 756,6 134 707,7 146 368,4 154 088,9 Finland 2013 2014 2015 2016 Total receipts from taxes and social contributions (mil. EUR) 88 958,0 90 304,0 92 377,0 95 462,0 Potential tax base(mil. EUR) 203 565,2 205 703,9 209 471,7 215 489,8 Results (%) 2013 2014 2015 2016 ITR– the Czech Republic 39,1 39,4 39,2 39,8 ITR – Finland 43,7 43,9 44,1 44,3

Effective tax rate The effective tax rate is the average rate at which an individual is taxed on earned income, or the average rate at which a corporation is taxed on pre-tax profits. Individual: Total Tax Expense / Taxable Income Corporation: Total Tax Expense / Earnings Before Taxes Effective tax rates simplify comparisons among companies or taxpayers. This is especially true where a progressive, or tiered tax system is in place. Those subject to progressive taxes will see different levels of income taxed at different rates.

Effective tax rate - example income Tax Rate First $100.000 10% $100.001 - $500.000 15% $500.001 - $1.000.000 25% Over $1.000.001 35% Company A Annual Pre-Tax Earnings = $600,000 Total Taxes Paid = ($100,000 *10% + $400,000 * 15% + 100,000 * 25%) = $95,000 Effective Tax Rate = $95,000 / $600,000 = 15.8% Company B Annual Pre-Tax Earnings = $900,000 Total Taxes Paid = ($100,000 *10% + $400,000 * 15% + $400,000 * 25%) = $170,000 Effective Tax Rate = $170,000 / $900,000 = 18.9% In the example above, note that both Company A and Company B are in the 25% marginal tax bracket. However, this does not provide a fair comparison of their tax exposure. In reality, Company B has much more money taxed at the uppermost rate than Company A, and has to pay nearly twice as much in taxes. Fortunately, the difference is clearly visible in the higher effective tax rate of Company B (18.9% vs. 15.8%). Thus, effective tax rate is typically a more accurate reflection of a company's tax liability than its marginal tax rate. It is important to note that the amount of cash tax payments that an individual or corporation actually pays out may differ materially from the amount of tax expense in a given period. This is because most companies prepare two different sets of financial statements: one for reporting purposes and one for tax purposes.

Microeconomic point of view Income Tax as a part of the salary in the Czech Republic Super-gross wage Gross wage Netto wage Tax reliefs

Microeconomic point of view – example Miss Nováková has a grosss wage 30.000 CZK and 2 children. 1. step: Super-gross wage gross wage + social insurance paid by the employer (25%) + health insurance paid by the employer (9%) 30.000 CZK + 0,25*30.000 CZK + 0,09*30.000 CZK 30.000 CZK + 7.5000 CZK + 2.700 CZK = 40.200 CZK

Microeconomic point of view – example 2. step: Income tax advance before deduction of discounts (15%) 40.200 CZK * 0,15 = 6.030 CZK discounts tax benefit for the taxpayer – 2.070 CZK tax benefit for first child – 1.267 CZK tax benefit for second child – 1.617 CZK 3. step: Income tax advance after deduction of discounts 6.030 – 2.070 – 1.267 – 1.617 = 1.076 CZK

Microeconomic point of view – example 4. step: social insurance paid by the employee (6,5%) + social insurance paid by the employee (4,5%) 30.000 CZK*0,065 + 30.000 CZK*0,045 1.950 CZK + 1.350 CZK = 3.300 CZK 5. step: netto wage gross wage - income tax advance after deduction of discounts – insurance paid by the employee 30.000 CZK – 1.076 – 3.300 = 25.624 CZK

Other discounts on income tax Discount for disability pension I and II. degree 2 520 CZK (monthly 210 CZK) Discount for ZTP / P card holder 16 140 CZK (monthly 1345 CZK) Tax benefit for the third and next child 24 204 CZK (monthly 2017 CZK)

Bibliography Eurostat HILLMAN, Arye L. Public finance and public policy: responsibilities and limitations of government. 2nd ed. New York: Cambridge University Press, 2009. ISBN 978-0-521-73805-7. ROSEN, H. S., T. GAYER a A. CIVAN. Public finance. 10th ed., global ed. Maidenhead: McGraw-Hill Education, c2014. ISBN 978-0-07-715469-1. GRUBER, Jonathan. Public finance and public policy. 3rd ed. New York: Worth Publishers, c2011. ISBN 978-1-4292-1949-5. Hindrinks, J, Myles, D., G. Intermediate Public Economics, MIT, 2006

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