Implicit, Explicit and Total Tax

Explicit Tax
1. Tax paid directly to the government
2. It's the difference between the assets pre tax and post tax, rate of return
  1. Pre tax rate of return is 10% (Ra)
  2. Post tax rate of return is 7% (ra)
  3. Explicit tax = (Ra-ra)=3%
3. Explicit tax rate is therefore (Ra - ra)/Ra
Implicit Tax
1. 2 assets with identical pre tax flows but cash flows from 1 asset are taxed more favourably, taxpayers will bid for the right to have this
  1. As a result the tax favoured asset price increases, if the price increases the returns decrease
2. The reduction (increase) in an assets pre-tax rate of return resulting from its favorable (unfavorable) tax treatment
3. Calculating
  1. Difference between a benchmark and a tax favoured asset
    1. (Rb - Rf) = 3%
      1. Implicit tax on a tax exempt asset
    2. (Rb - Rb) = 0%
      1. Implicit tax on a benchmark asset
  2. Pre-tax return on a benchmark is 10%=Rb
  3. Pre-tax return on tax exempt asset is 7%=Rf
4. Implicit tax is paid to issuers of tax favoured assets (via increased prices)
5. Implicit Rate
  1. When applied to Benchmark leave a return equal to the before tax rate of return on the alternative investment, the tax free asset
  2. (Rb - Rf)/Rb
    1. (10 - 7)/10 = 30%
  3. Paying a tax rate of 30% on benchmark would result in a turn of 7% as the Rf
Benchmark Asset
1. Fully taxed asset
Tax favoured asset
1. taxed more lightly than a benchmark asset
  1. if highly not favoured asset disfavoured
2. Types
  1. full tax exemption, partial exemption, lower marginal tax rate and tax credits
Total tax
1. In a competitive equilibrium the after tax returns on all assets must be equal and this implies that total tax must be the same
  1. total tax = implicit tax +explicit tax
    1. total tax for both assets is 3%
2. Rate
  1. = implicit rate + explicit rate

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Implicit, Explicit and Total Tax

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	Created by Harley Wickstead about 12 years ago