Tax

==Theories==
{{Main|Theory of taxation}}

===Laffer curve===
{{Main|Laffer curve}}

In [[economics]], the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity (that [[taxable income]] will change in response to changes in the rate of taxation). The curve is constructed by [[thought experiment]]. First, the amount of tax revenue raised at the extreme tax rates of 0% and 100% is considered. It is clear that a 0% tax rate raises no revenue, but the Laffer curve hypothesis is that a 100% tax rate will also generate no revenue because at such a rate there is no longer any incentive for a rational taxpayer to earn any income, thus the revenue raised will be 100% of nothing. If both a 0% rate and 100% rate of taxation generate no revenue, it follows from the [[extreme value theorem]] that there must exist at least one rate in between where tax revenue would be a maximum. The Laffer curve is typically represented as a graph that starts at 0% tax, zero revenue, rises to a maximum rate of revenue raised at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate.

One potential result of the Laffer curve is that increasing tax rates beyond a certain point will become counterproductive for raising further tax revenue. A hypothetical Laffer curve for any given economy can only be estimated and such estimates are sometimes controversial. [[The New Palgrave Dictionary of Economics]] reports that estimates of revenue-maximizing tax rates have varied widely, with a mid-range of around 70%.<ref>{{cite book |title=Laffer curve |first=Don |last=Fullerton |series=The New Palgrave Dictionary of Economics, Second Edition |publisher=Palgrave Macmillan |year=2008 |quote=The mid-range for this elasticity is around 0.4, with a revenue peak around 70 percent. |url=http://www.dictionaryofeconomics.com/article?id=pde2008_L000015 |access-date=5 July 2011}}</ref>

===Optimal===
{{Main|Optimal tax}}

Most governments take revenue that exceeds that which can be provided by non-distortionary taxes or through taxes that give a double dividend. Optimal taxation theory is the branch of economics that considers how taxes can be structured to give the least deadweight costs, or to give the best outcomes in terms of [[social welfare]]. The [[Ramsey problem]] deals with minimizing deadweight costs. Because deadweight costs are related to the [[elasticity (economics)|elasticity]] of supply and demand for a good, it follows that putting the highest tax rates on the goods for which there are most inelastic supply and demand will result in the least overall deadweight costs. Some economists sought to integrate optimal tax theory with the [[social welfare function]], which is the economic expression of the idea that equality is valuable to a greater or lesser extent. If individuals experience [[diminishing returns]] from income, then the optimum distribution of income for society involves a progressive income tax. [[James Mirrlees|Mirrlees optimal income tax]] is a detailed theoretical model of the optimum progressive income tax along these lines. Over the last years the validity of the theory of optimal taxation was discussed by many political economists.<ref>{{cite web |url=http://wordsofliberty.net |title=Libertarian & Conservative News |publisher=Words of Liberty |access-date=22 January 2013 |url-status=dead |archive-url=https://web.archive.org/web/20130122183637/http://wordsofliberty.net/ |archive-date=22 January 2013 }}</ref>

===Rates===
{{Unreferenced section|date=June 2023}}
{{Main|Tax rate}}
Taxes are most often levied as a percentage, called the ''tax rate''. An important distinction when talking about tax rates is to distinguish between the [[Tax rate#Marginal|marginal rate]] and the [[Tax rate#Effective|effective tax rate]]. The effective rate is the total tax paid divided by the total amount the tax is paid on, while the marginal rate is the rate paid on the next dollar of income earned. For example, if income is taxed on a formula of 5% from $0 up to $50,000, 10% from $50,000 to $100,000, and 15% over $100,000, a [[wikt:taxpayer|taxpayer]] with income of $175,000 would pay a total of $18,750 in taxes.

:Tax calculation
::(0.05*50,000)&nbsp;+ (0.10*50,000)&nbsp;+ (0.15*75,000) = 18,750

:The "effective rate" would be 10.7%:
::18,750/175,000 = 0.107

: The "marginal rate" would be 15%.