Computation of Tax: Individuals

• Author: Vern Krishna
• Profession: Professor of Common Law, University of Ottawa Barrister at Law
• Pages: 371-384

371

CHA PTER 13

COMPUTATION OF TAX:

INDIV IDUALS

A. INT RODUCT ION

We turn now to the f‌irst step in determini ng how much tax is payable.

The formula is simple:

Tax Payable = Tax Income × Tax Rate

To this point, we have focused on calculating income and taxable in-

come; that is, the tax able base upon which we calcul ate the tax p ayable.

The next step is to apply tax rates to the ta xable base and, f‌inally, adjust

for tax credits.

Setting an appropriate tax rate is a complex matter involving eco-

nomic models as well as political and international considerations. First,

and most obvious, we must set the rate at a level that generates suff‌icient

government revenues. There is no consensus, however, on the ultimate

impact of tax rates on the total re venue collected. One’s intuitive respons e

is that raisi ng tax rates increase s overall revenues. There is, however, a

countervailing force: high ta x rates promote tax avoidance and aggres-

sive tax planning. They can also reduce incentives to earn income. High

tax rates may someti mes actually reduce total government revenues.

A taxpayer who can retain only 15 cents of every dollar of income is not

as motivated to work as one who can keep 85 cents of each dollar.

Second, we must harmonize individual, trust, and corporate rates

to keep the tax system rea sonably neutral among different forms of or-

ganization. For example, if the corporate tax rate is substantially lower