How to Calculate Implicit Tax

While it is not the result of a direct tax, an implicit tax represents money lost to an individual due to certain government policies or financial realities. In one example, Michael F. Cannon, writing for Kaiser Health News, alleges that forcing Americans to buy health insurance would amount to a significant implicit tax, because the policy takes income away from individuals. While calculating the rate of an implicit tax is a simple matter of dividing the amount of money lost by the total amount of money being taxed, defining these amounts can be tricky.

Things You'll Need

• Calculator

Instructions

1. Define the sum of money that is being taxed. It may be annual income, assets or a return on a specific investment. As an example, assume that you earned $50,000 last year.

2. Define the amount of money that is being lost because of a certain policy or financial reality. For example, if last year the government required you to purchase healthcare coverage of $2,000 for yourself, as well as $1,500 for your child, the total amount of income lost would be $3,500.

3. Divide the total amount of lost income by the total sum of money subject to the implicit tax. In this example, $3,500 divided by $50,000 equals 0.07.

4. Convert the decimal to a percentage by moving the decimal point two places to the right. In this example, a government policy that required you to purchase healthcare would impose a 7 percent implicit tax on your income.

References

• Kaiser Health News: Individual Mandate Would Impose High Implicit Taxes on Low-Wage Workers
• Eurostat: Implicit Tax Rate on Labour
• The Tax Foundation: How Much Implicit Tax Revenue Did Lotteries Raise in FY2010?
• Berkely School of Economics: The Implicit Taxes from College Financial Aid
• European Commission: An Implicit Tax Rate for Non-Financial Corporations