What is a 'Tax Wedge'

A tax wedge is 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.

BREAKING DOWN '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. Wedge

    In technical analysis, a security price pattern where trend lines ...
  2. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
  3. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  4. Direct Tax

    A tax that is paid directly by an individual or organization ...
  5. Tax Base

    The assessed value of a set of assets, investments or income ...
  6. Taxes

    An involuntary fee levied on corporations or individuals that ...
Related Articles
  1. Trading

    Look to Buy These Broken Wedge Patterns (CNI, MYL)

    These stocks are breaking out of downward wedge formations, or close to it, which indicates the stock price could be heading higher.
  2. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  3. Taxes

    5 States Without Sales Tax

    Learn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
  4. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  5. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  6. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  7. Taxes

    Understanding Taxes

    Taxes are mandatory fees that individuals and corporations must pay to their governments.
  8. Taxes

    Calculating Net of Tax

    Net of tax is a figure that has been adjusted for taxes.
  9. Investing

    Tales From The Trenches: The Rising Wedge Breakdown

    Learn how to short this reversal pattern with a favorable risk/reward ratio.
RELATED FAQS
  1. How effective is creating trade entries after spotting a wedge-shaped pattern?

    Find out how to create entries in wedge shaped patterns, and learn how traders use rising and falling wedges to identify ... Read Answer >>
  2. How are wedge-shaped patterns interpreted by analysts and traders?

    See how traders and analysts spot and interpret wedge-shaped patterns on a technical price chart and prepare themselves for ... Read Answer >>
  3. How do I build a profitable strategy when spotting wedge-shaped patterns?

    Learn how to trade wedge shaped patterns and when to buy or sell wedge breakouts with support and resistance levels to create ... Read Answer >>
  4. How does the marginal tax rate system work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. As the marginal tax ... Read Answer >>
Hot Definitions
  1. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  2. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  3. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  4. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the ...
Trading Center