Tax Rate vs. Tax Base
Transcript
How high are my taxes?
When people ask this question, they’re usually asking about the tax rate – or what percentage of something is taxed.
But there’s another piece of the puzzle, called the tax base, that’s just as important. The tax base is what gets taxed – like income, property, or the stuff you buy.
If the tax base is not designed properly, like when some things are taxed at a high rate while other things are not taxed at all, the tax code can cause people and businesses to make decisions for tax reasons that they might not make otherwise, like saving less money or hiring fewer workers.
Tax distortions like these hurt individuals, businesses, and the economy. Let’s take a closer look at how the tax base works using sales taxes.
The sales tax base contains all the stuff we buy that’s subject to a sales tax. The more consumer goods and services that are taxable, the broader the base.
But many states exempt things like groceries, streaming services, and even haircuts, which narrows the base.
If a state’s base is too narrow, it needs a higher tax rate to raise the same amount of revenue, making those purchases more expensive.
If a state broadens the sales tax base by eliminating exemptions, then it can lower the tax rate and still collect the revenue it needs.
A broad tax base coupled with a low rate is a neutral and stable way for the government to raise revenue, while minimizing harm to the economy.
