Tax base and tax rate

Date posted: November 23, 2011

Tax plans are flying-off the presses from the various presidential candidates. These plans can be complicated with many details, but two concepts common to all are the tax base and tax rate. What are these, and why are they important? N.C. State University economist Mike Walden responds.

“We’ve got all kinds of plans out there. We’ve got the 9-9-9 plan. We’ve got the flat tax plan from another candidate. And … it is perhaps complicated for people who don’t deal with this all the time to … understand these plans. But (what) I would argue is, use as couple of simple concepts and sort of use that as … your fundamental starting point when you’re trying to understand the differences.

“And one of those concepts is tax base. And what tax base simply is, is what is the plan going to tax? Some plans tax income. Some plans tax the sales spending. Some plans tax profits. Some plans tax something called value-added. So that’s one question. What are the plans going to tax?

“And then second fundamental concept is tax rate — simply, what is the percentage applied to the tax base that is what’s taxed in order to calculate how much taxes are owed?

“And if I can … I might throw in another concept here, and it’s deductions. You hear some plans say, well, we’re going to limit the amount of deductions. A deduction is spending that you and I do or that a corporation does that Congress in its wisdom has said this spending is special and we want to promote it. Therefore you spend your money in this way, you’re going to be able to deduct that amount of spending from your taxable income — essentially not be taxed on it. And some of the plans change those deductions. Some of the plans get rid of all deductions. Some of the plans preserve some deductions. So, that’s another concept to keep in mind, along with tax base and tax rate.

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