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. Equilibrium

    The state in which market supply and demand balance each other ...
  2. Income Tax

    A tax that governments impose on financial income generated by ...
  3. Marginal Utility

    The additional satisfaction a consumer gains from consuming one ...
  4. Demand

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

    The costs to society created by market inefficiency. Mainly used ...
  6. Supply

    A fundamental economic concept that describes the total amount ...
RELATED FAQS
  1. What risks does a business owner face under a business structure with unlimited liability?

    The risks that a business owner faces under a business structure with unlimited liability are literally unlimited, but they ... Read Full Answer >>
  2. What is affected by the interest rate risk?

    Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate. Interest rate risk directly ... Read Full Answer >>
  3. How can I lower my effective tax rate without lowering my income?

    There are lots of ways to lower your effective tax rate, although your individual circumstances determine whether you can ... Read Full Answer >>
  4. Do I need to file an income tax return every year?

    Contrary to popular belief, there are indeed situations where a person does not need to file a tax return every year. For ... Read Full Answer >>
  5. Which states are the most expensive for high-income earners?

    The most expensive states for high-income earners are California, Hawaii and New York. The tax rates assessed by these states ... Read Full Answer >>
  6. How does the International Chamber of Commerce define the term 'Free on Board' (FOB)?

    The International Chamber of Commerce (ICC) is one of world's largest business organizations and has published a set of trade ... Read Full Answer >>
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. Economics

    West Coast Vs. East Coast Economy

    The East’s focus on finance and banking contrasts the West’s drive toward technological innovation. But one thing is clear--each knows it needs the other.
  7. Investing Basics

    What is a Nominal Value?

    The nominal value of a security, such as a stock or bond, remains fixed for the duration of its life.
  8. Economics

    Explaining the Human Development Index

    The Human Development Index (HDI) is a metric developed by the United Nations to take the emphasis off economic growth and focus on human wellbeing.
  9. Taxes

    Explaining Progressive Tax

    A progressive tax is a levy in a tax system where the tax rate increases as the taxable base increases.
  10. Investing

    Why Some Investors Are Tilting Toward TIPS

    Last month’s five-year TIPS auction drew nearly $48 billion in interest, a sign of recent renewed demand for this inflation indexed asset among investors.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center