Tax Wedge

AAA

DEFINITION of 'Tax Wedge'

1. The difference between before-tax and after-tax wages. The tax wedge measures how much the government receives as a result of taxing the labor force.

2. A measure of the market inefficiency that is created when a tax is imposed on a product or service. The tax causes the supply and demand equilibrium to shift, creating a wedge of dead weight losses.

INVESTOPEDIA EXPLAINS 'Tax Wedge'

1. The tax wedge is the difference between what employees take home in earnings and what it costs to employ them, or the dollar measure of the income tax rate. In some countries, the tax wedge increases as employee income increases. This reduces the marginal benefit of working therefore employees will often work less hours than they would if no tax was imposed. Some argue that the tax wedge on investment income will also reduce savings, create less innovation, and ultimately lowers living standards.

2. By having a tax wedge the inefficiency will cause the consumer to pay more and the producer to receive less. This is due to higher equilibrium prices paid by consumers and lower equilibrium quantities sold by producers.

RELATED TERMS
  1. Income Tax

    A tax that governments impose on financial income generated by ...
  2. Equilibrium

    The state in which market supply and demand balance each other ...
  3. Deadweight Loss

    The costs to society created by market inefficiency. Mainly used ...
  4. Demand

    An economic principle that describes a consumer's desire and ...
  5. Supply

    A fundamental economic concept that describes the total amount ...
  6. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
Related Articles
  1. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  2. Active Trading

    What Is Market Efficiency?

    The efficient market hypothesis (EMH) suggests that stock prices fully reflect all available information in the market. Is this possible?
  3. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  4. Investing Basics

    The Roles Of Traders And Investors In The Marketplace

    Discover how these two groups work together to keep the market functioning properly.
  5. Taxes

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  6. Stock Analysis

    Why Should Investors Read The Annual Reports?

    All investors should read each year the annual report from their top stocks, which contains valuable information and facts they weren't probably aware of.
  7. Economics

    Does A Junk Rating Reflect Russia's Fundamentals?

    Moody’s, like other credit rating agencies, has downgraded Russia’s sovereign debt rating to non-investment grade, but does this reflect Russia's economy?
  8. Investing

    What Has Been Groupon’s Growth Strategy?

    Groupon established a strategy with efforts to become a broader force in the e-commerce world and to expand more strongly into international markets.
  9. Economics

    The Impact Of Ending The US Embargo On Cuba

    Many argue that ending the US embargo on Cuba will not only make US consumers happy, but also help the US economy and bring more freedoms to Cuba.
  10. Economics

    Is The US Dependence On Foreign Oil Necessarily A Bad Thing?

    We examine the myths and facts about US dependence upon foreign oil.

You May Also Like

Hot Definitions
  1. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  2. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  3. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  4. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  5. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  6. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
Trading Center