For a more complete presentation of the essence of the tax rate used as an instrument of tax policy at the state level, it is necessary to define some terms.
So, taxes are mandatory payments of individuals and legal entities to the state budget at all levels with the deadlines established by applicable law. The totality of all taxes in the country forms the tax system, which is based on legislative state acts. It is these regulatory documents that establish the components of the tax: object of taxation, subject and tax rate.
In turn, the tax rate is divided into the average, marginal, effective, preferential and zero. The average tax rate is the ratio of total tax to taxable income. The marginal tax rate shows the ratio of the increase in taxes paid to the increase in income. The effective tax rate equals the quotient of dividing the additional income payable in the course of economic activity by the amount of income received as a result of the same activity.
Comparing the average tax rate with income, it is possible to determine the following tax assessment methods: progressive, in which there is a rate increase with increasing income; regressive, providing for a decrease in the rate with increasing income; proportional, ensuring the invariability of the rate regardless of the income received in a certain period.
When comparing the application of these methods, you can see that a progressive taxation system can lead to tax evasion, and the payers will do everything possible to reduce their income. This is achieved by regulating the volume of expenses, and in this case, often everything happens within the framework of the current legislation due to its imperfection.
A vivid example of the application of the effective tax rate is donation transactions, after which tax authorities recalculate the tax paid. And then the tax rate will be slightly different from the original.
The question of the magnitude of the tax rate is constantly the subject of debate among scientists, politicians and economists. So, quite a long time ago, followers of Keynes's theory argued that a decrease in aggregate demand would occur at a high level of taxes. As a result, the state has lower prices and attenuation of inflation.
The other side of these disputes, supporting the theory of “supply economics,” proves the exact opposite. High taxes can increase the costs of business entities, which, in turn, shift them to the final consumer in the form of inflated prices and higher inflation. In support of what A. Laffer said, the relationship between the tax rate and budget revenues was formulated in the form of a curve, which was named after the author. The economic meaning of this schedule is the ability to increase tax revenues, due to the increase in the amount of tax to be paid to the budget. At the same time, this process should continue to a certain level, above which there is a sharp decrease in the activity of business entities, and their further activity becomes simply unprofitable. At significantly lower rates, favorable conditions are created for work, stimulation of entrepreneurial activity, savings, investments, and national production is expanding. As a result of this process, the tax base is expanding , which contributes to an increase in tax revenues, despite the fact that the tax rate will be low.