What Is a Tax Base? Definition, Formula, and Examples

What Is a Tax Base?

A tax base is the total value of all of the assets, income, and economic activity that can be taxed by a taxing authority, usually a government. It is used to calculate tax liabilities.

Tax liabilities come in many forms, including income, property, capital gains, and sales taxes.

Key Takeaways

  • Individual income taxes are the main source of revenue for the U.S. government.
  • Additional revenue comes from business and corporate taxes, excise taxes, customs duties, and even fees paid for entrance to national parks.
  • All of those sources combined add up to the tax base of the United States.
  • In 2022, the federal government collected $4.90 trillion from its tax base.

Tax Base

Understanding the Tax Base

A tax base is the total value of all assets, properties, individual income, and corporate income in a certain area or jurisdiction. 

To calculate the total tax liability, you must multiply the tax base by the tax rate: 

  • Tax Liability = Tax Base x Tax Rate

The rate of tax imposed varies depending on the type of tax and the tax base total. Income tax, gift tax, and estate tax are each calculated using a different tax rate schedule.

Income As a Tax Base

Let's take personal or corporate income as an example. In this case, the tax base is the minimum amount of yearly income that can be taxed. This is taxable income. Income tax is assessed on both personal income and the net income generated by businesses. 

For example, using the formula above, we can calculate a person's tax liability. Say Margaret earned $10,000 last year and the minimum amount of income that was subject to tax was $5,000 at a tax rate of 10%. Her total tax liability would be $500—calculated using her tax base multiplied by her tax rate:

  • $5,000 x 10% = $500

In real life, you would use federal Form 1040 for personal income. The return starts with total income and then deductions and other expenses are subtracted to arrive at adjusted gross income (AGI). Itemized deductions and expenses reduce AGI to calculate the tax base, and the personal tax rates are based on the total taxable income.

An individual taxpayer’s tax base can change as a result of the alternative minimum tax (AMT) calculation. Under AMT, the taxpayer is required to make adjustments to the initial tax calculation so additional items are added to the return. The tax base and the related tax liability both increase.

As an example, interest on some tax-exempt municipal bonds is added to the AMT calculation as taxable bond income. If AMT generates a higher tax liability than the initial calculation, the taxpayer pays the higher amount.

Factoring in Capital Gains

Taxpayers are taxed on realized gains when assets such as real property or stock investments are sold. If an investor owns an asset and does not sell it, that investor has an unrealized capital gain, and there is no taxable event.

Assume, for example, an investor holds a stock for five years and sells the shares for a $20,000 gain. Since the stock was held for more than one year, the gain is considered long term and any capital losses reduce the tax base of the gain. After deducting losses, the tax base of the capital gain is multiplied by capital gain tax rates.

Examples of Tax Jurisdictions

In addition to paying federal taxes, taxpayers are assessed taxes at the state and local levels in several forms.

Most investors are assessed income tax at the state level, and homeowners pay property tax at the local level. The tax base for owning property is the home or building's assessed valuation.

All but five states also assess sales tax, which is imposed on most purchases. The tax base for sales tax in this case is the retail price of goods purchased by the consumer.

What Are the 3 Tax Bases?

The Internal Revenue Service defines these 3 tax bases:

  • A progressive tax takes a larger percentage of income from high-income groups than from low-income groups.
  • A proportional tax takes the same percentage of income from all income groups.
  • A regressive tax takes a larger percentage of income from low-income groups than from high-income groups.

By these definitions, the U.S. has a progressive federal income tax system. Its Social Security tax and property tax systems are regressive.

Sales taxes are also regressive, since everyone pays the same percentage of tax for purchases, regardless of income.

What Does It Mean to 'Broaden the Tax Base?'

When a government seeks to "broaden the tax base," it usually means increasing tax revenues by expanding the type or level of income or assets that are subject to taxation, rather than raising the tax rates overall. For example, the federal government might repeal the favorable treatment of long-term capital gains, or eliminate the deduction for interest on student loans. The tax base is broadened, but the tax rates remain the same.

What Is a 'Broad' or 'Narrow' Tax Base?

A tax base may be broad or narrow depending on the number of people within a tax jurisdiction who are subject to a tax. A luxury tax, for example, may be levied only on those who buy yachts or high-end cars.

Most state sales taxes are narrow base. They omit necessities like food and medicine in order to avoid over-taxing the poorest residents, who pay a disproportionately high sales tax on other goods as a percentage of income.

The Bottom Line

A single individual may have assets or participate in activities in several distinct tax bases. For example, all workers pay income taxes, placing them within the tax base of the United States. Homeowners land in the local tax base as well, and are subject to property taxes. A person who smokes or drinks may be in a narrower tax base of people who pay a "sin tax" on top of regular state sales taxes.

Article Sources
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  1. U.S. Treasury Department. "How much money has the U.S. government collected and spent in fiscal year 2023?"

  2. Internal Revenue Service. "Topic No. 556: Alternative Minimum Tax."

  3. Internal Revenue Service. "Topic No. 409: Capital Gains and Losses."

  4. Internal Revenue Service. "Worksheet Solutions."

  5. Economic Policy Institute. "Broadening the tax base and raising top rates are complements, not substitutes."

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