3.4.10 (HL)—Taxation calculations

Indirect tax paid equals the tax rate multiplied by taxable expenditure. Total tax is the sum of the stated tax liabilities, and $\text{average tax rate}=\text{total tax}/\text{income}\times100$.

Convert percentage rates to decimals, apply each rate only to its stated base, add tax amounts, then divide total tax by total income—not by expenditure—to find the average tax rate.

Label every rate and base before calculating; distinguish an indirect tax on spending from direct tax on income and from a marginal rate on an additional income band.

Example

A household spends $12,000 on goods subject to a 5$12,000\times0.05=$600. If it also pays$3,400 direct tax, total tax is $4,000. With income of$40,000, its average tax rate is $4,000/$40,000\times100=10%$.

Use the convention stated in the data: if expenditure is tax-inclusive rather than pre-tax, multiplying it by the quoted rate may not recover the embedded tax. Do not apply a marginal rate to all income.