Tax Rate - Inclusive/exclusive

Inclusive/exclusive

Tax rates can be presented differently due to differing definitions of tax base, which can make comparisons between tax systems confusing.

Some tax systems include the taxes owed in the tax base (tax-inclusive), while other tax systems do not include taxes owed as part of the base (tax-exclusive). In the United States, sales taxes are usually quoted exclusively and income taxes are quoted inclusively. The majority of Europe, value added tax (VAT) countries, include the tax amount when quoting merchandise prices, including Goods and Services Tax (GST) countries, such as Australia and New Zealand. However, those countries still define their tax rates on a tax exclusive basis.

For direct rate comparisons between exclusive and inclusive taxes, one rate must be manipulated to look like the other. When a tax system imposes taxes primarily on income, the tax base is a household's pre-tax income. The appropriate income tax rate is applied to the tax base to calculate taxes owed. Under this formula, taxes to be paid are included in the base on which the tax rate is imposed. If an individual's gross income is $100 and income tax rate is 20%, taxes owed equals $20.

The income tax is taken "off the top", so the individual is left with $80 in after-tax money. Some tax laws impose taxes on a tax base equal to the pre-tax portion of a good's price. Unlike the income tax example above, these taxes do not include actual taxes owed as part of the base. A good priced at $80 with a 25% exclusive sales tax rate yields $20 in taxes owed. Since the sales tax is added "on the top", the individual pays $20 of tax on $80 of pre-tax goods for a total cost of $100. In either case, the tax base of $100 can be treated as two parts—$80 of after-tax spending money and $20 of taxes owed. A 25% exclusive tax rate approximates a 20% inclusive tax rate after adjustment. By including taxes owed in the tax base, an exclusive tax rate can be directly compared to an inclusive tax rate.

Inclusive income tax rate comparison to an exclusive sales tax rate:

• Let be the income tax rate. For a 20% rate, then
• Let be the rate in terms of a sales tax.
• Let be the price of the good (including the tax).

The revenue that would go to the government:

The revenue remaining for the seller of the good:

To convert the tax, divide the money going to the government by the money the company nets:

Therefore, to adjust any inclusive tax rate to that of an exclusive tax rate, divide the given rate by 1 minus that rate.

• 15% inclusive = 18% exclusive
• 20% inclusive = 25% exclusive
• 25% inclusive = 33% exclusive
• 33% inclusive = 50% exclusive
• 50% inclusive = 100% exclusive