Basically the Tax inclusive rate (23%) is specified in the Fair Tax Act to enable comparison with the tax systems (income and payroll) it replaces which use tax inclusive rates and is the rate a seller would apply to his sales receipts in a federal tax only situatation to calculate the tax to be remitted to tax agencies.
The two different rates are for the same amount of tax, but different methods of calculation based on price or total payment.
Tax-exclusive rate: means the rate of tax expressed as a ratio of the tax paid to the price of the item, exclusive of tax. Given base price of a product or service it is used to calculate the amount of tax to add onto price to obtain the required payment for product or service.(i.e. tax to be added)
Te = T / P
Tax-inclusive rate: Means the rate of tax expressed as a ratio of the tax paid to the price of the item including the tax. Given the required payment necessary to purchase a product or service, it is used to calculate the amount of tax taken out of the total payment received,(i.e. tax burden) to be remitted to government by a seller.
Ti = T / (P + T)
Te= Ti/ (1 - Ti)
For example, the proposed 17% (tax-inclusive) flat tax has a tax-exclusive rate of 20.48%.
(0.1700 / (1.0000 - 0.1700) = 0.2048)
For the NRST as proposed by HR 2525, the 23% inclusive rate comes out to 29.87%.
(0.2300 / (1.0000 - 0.2300) = 0.2987)
Ti= Te/ (1 + Te)
For example, a 5% state sales tax (tax-exclusive) is actually 4.76% tax-inclusive.
(0.0500 / (1.0000 + 0.0050) = 0.0476)
For the NRST as proposed by HR 2525, the 29.87% exclusive rate comes out to an inclusive rate of 23.00%.
(0.2987 / (1.0000 + 0.2987) = 0.2300)
| Inclusive Rate | Description | Exclusive Rate |
|---|---|---|
| 4.76% | Sample State Sales Tax --> | 5.00% |
| 10.00% | <-- Penalty for IRA/401k Early Withdrawal | 11.11% |
| 15.00% | <-- Marginal Income Tax | 17.65% |
| 15.00% | <-- NRST (not including SS/Medicare) | 17.65% |
| 15.30% | <-- Social Security/Medicare Payroll Tax | 18.06% |
| 17.00% | <-- Flat Tax (not including SS/Medicare) | 20.48% |
| 20.00% | <-- Capital Gains Tax | 25.00% |
| 23.00% | <-- NRST (including SS/Medicare) | 29.87% |
| 28.00% | <-- Marginal Income Tax | 38.89% |
| 32.30% | <-- Flat Tax (including SS/Medicare) | 47.71% |
| 39.00% | <-- Marginal Income Tax | 63.93% |
| 54.30% | <-- Max Margin Income/Payroll tax rate | 118.81% |
Note that any tax-inclusive rate larger than 50% would have a tax-exclusive rate of over 100%.
Is it 23% ? Or -- 29.86% ?
807 jones
The appropriate rate depends on what you intend to accomplish.
It is either one or the other, on a sales receipt. The line would read:
Federal Tax - 23%
or
Federal Tax - 29.86%
Basically the Tax inclusive rate (23%) is specified in the Fair Tax Act to enable comparison with the tax systems (income and payroll) it replaces which use tax inclusive rates and is the rate a seller would apply to his sales receipts in a federal tax only situatation to calculate the tax to be remitted to tax agencies.
I don't care. All that matters is if the tax is 23% or 29.86% .
The two different rates are for the same amount of tax, but different methods of calculation based on price or total payment.
Same amount? That cannot be.
On a $100 purchase the tax paid would vary by $6.86 --- Can you explain further?