What Is a Tax Base?
A tax base is the total value of all of the assets, income, and economic activity that can be taxed by a taxing authority, usually a government. It is used to calculatetax liabilities.
Tax liabilities are the portion of the tax base that is collected, and they come in many forms, including income, property, capital gains, and sales taxes.
Key Takeaways
- A tax base is the overall value of assets, income, and economic activity that is subject to taxation.
- Individual income taxes are the main source of revenue for the U.S. government.
- Additional revenue comes from business and corporate taxes, excise taxes, customs duties, and even fees paid for entrance to national parks.
- All of those sources combined add up to the tax base of the United States.
- In fiscal year 2023, the federal government collected $4.44 trillion from its tax base.
Understanding the Tax Base
A tax base is the total value of all assets, properties, individual income, and corporate income in a certain area or jurisdiction.
To calculate the total tax liability, you must multiply the tax base by the tax rate:
- Tax Liability = Tax Base x Tax Rate
The rate of tax imposed varies depending on the type of tax and the tax base total. Income tax, gift tax, and estate tax are each calculated using a different tax rate schedule.
Income As a Tax Base
Let's take personal or corporate income as an example. In this case, the tax base is the minimum amount of yearly income that can be taxed. This is taxable income.The Internal Revenue Service (IRS) assesses income tax on both personal income and the net income generated by businesses.
For example, using the formula above, we can calculate a person's tax liability. Say Margaret earned $10,000 last year and the minimum amount of income that was subject to tax was $5,000, at a tax rate of 10%. Her total tax liability would be $500, calculated using her tax base ($5,000) multiplied by her tax rate (10%):
- $5,000 x 10% = $500
To figure tax liabilities for personal income, you use IRS Form 1040, the federal income tax return for individuals.The return starts with total income and then deductions and other expenses are subtracted to arrive at adjusted gross income (AGI). Itemized deductions and expenses reduce AGI to calculate the tax base, and the personal tax rates are based on the total taxable income.
An individual taxpayer’s tax base can change as a result of the alternative minimum tax (AMT) calculation. Under AMT, the taxpayer is required to make adjustments to the initial tax calculation so additional items are added to the return. The tax base and the related tax liability both increase.
As an example, interest on some tax-exempt municipal bonds is added to the AMT calculation as taxable bond income. If AMT generates a higher tax liability than the initial calculation, the taxpayer pays the higher amount.
Factoring in Capital Gains
Taxpayers are taxed on realized gains when assets such as real property or stock investmentsare sold. Say an investor owns an asset, and it rises in value. If they sell the asset for a gain, it is a realized capital gain, and they will owe taxes. If the investor does not sell it, that investor has an unrealized capital gain, and there is no taxable event.
Assume, for example, an investor holds a stock for five years and sells the shares for a $20,000 gain. Since the stock was held for more than one year, the gain is considered long-term. Any capital losses reduce the tax base of the gain. After deducting losses, the tax base of the capital gain is multiplied by capital gain tax rates.
Examples of Tax Jurisdictions
In addition to paying federal taxes, taxpayers are assessed taxes at the state and local levels in several forms.
Most investors are assessed income tax at the state level, and homeowners pay property tax at the local level. The tax base for owning property is the home or building's assessed valuation.
All but five states also assess sales tax, which is imposed on most purchases. The tax base for sales tax in this case is the retail price of goods purchased by the consumer.
What Are the 3 Tax Bases?
Different tax bases include income, assets, and economic activity (such as sales or purchases). In terms of tax systems, the Internal Revenue Service (IRS) defines these three tax types:
- A progressive tax takes a larger percentage of income from high-income groups than from low-income groups.
- A proportional tax takes the same percentage of income from all income groups.
- A regressive tax takes a larger percentage of income from low-income groups than from high-income groups.
By these definitions, the U.S. has a progressive federal income tax system. Its Social Security tax and property tax systems are regressive.
Sales taxes are also regressive, since everyone pays the same percentage of tax for purchases, regardless of income.
What Does It Mean to 'Broaden the Tax Base?'
When a government seeks to "broaden the tax base," it usually means increasing tax revenues by expanding the type or level of income or assets that are subject to taxation, rather than raising the tax rates overall. For example, the federal government might repeal the favorable treatment of long-term capital gains, or eliminate the deduction for interest on student loans. The tax base is broadened, but the tax rates remain the same.
What Is a 'Broad' or 'Narrow' Tax Base?
A tax base may be broad or narrow depending on the number of people within a tax jurisdiction who are subject to a tax. A luxury tax, for example, may be levied only on those who buy yachts or high-end cars, making it a narrow tax base.
Most state sales taxes are a narrow base. They omit necessities like food and medicine to avoid over-taxing the poorest residents, who pay a disproportionately high sales tax on goods as a percentage of their income.
The Bottom Line
There are a variety of tax bases at the local, state, and federal levels. A single individual may have assets or participate in activities in several distinct tax bases. For example, if you work, you pay income taxes, placing you within the tax base of the United States. If you own a home, you're part of the local tax base and are subject to property taxes. If you buy a drink, your purchase is part of the sales tax base, and if that drink is alcoholic, your purchase may be part of a "sin tax" base as well.
