Tax Base

Every tax has two key parts: the rate and the base. The rate is the percentage charged, and the base is what it is charged on. Revenue is roughly the rate multiplied by the base.

For example, if a 20% sales tax applies to 500 billion of taxable spending, it raises about 100 billion. If many goods are exempt, the base is smaller, and the same rate raises less.

A broad tax base, with few exemptions and deductions, allows a government to raise the same revenue at lower rates. A narrow base, full of exemptions and special reliefs, requires higher rates and can distort decisions, as people shift activity towards untaxed areas.

The tax base can also shrink or grow over time. Economic growth expands it. Tax avoidance, a growing informal economy or people and businesses moving abroad can erode it. International efforts against profit shifting, known as base erosion, aim to protect countries' tax bases. Many economists recommend broadening the base rather than raising rates when governments need more revenue.