Tax Wedge

  

Categories: Tax

You’re tired of working for the man. Almost all of your wages go to taxes, so you’re thinking of chucking it all, moving to Peru, and running a llama farm.

A tax wedge puts a mathematical description to that feeling. In economic terms, it represents the deadweight loss caused by taxes. It’s gets its name from the fact that, on an economic graph, the area representing the deadweight looks like a triangle, or a wedge.

To calculate the tax wedge, take the amount of taxes paid by an average single worker and divide it by the total labor cost for the employer who pays for that laborer. It's basically the ratio of taxes taken out of wages and the amount the employer is paying to get that work done.

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Finance: What is Tax Loss Carry-Forward?328 Views

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finance a la shmoop what is a tax loss carry forward

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all right well feel bad about losing money in your business last year

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well this law will help make you feel a whole lot better you had been going [guy sinking in bath]

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along swimmingly making ten million bucks a year in your hot tub pimp out

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biz where you are the premier provider of turbo Jets neon lights spa caddies [fancy hot tub]

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massaging floor inserts and literal wet bars but then Kanye launched a competing [alcoholic beverages]

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business called hot and wet by Kanye and the next year well you lost six million [Hot and Wet by Kanye building]

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bucks well on your 10 million of taxable profits in a year you had been paying 30

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percent tax or 3 million bucks in taxes to show net income or earnings of 7

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million dollars well you lost 6 million dollars last year so you paid no tax and

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no the government doesn't rebate you 30% in taxes like they don't write you a

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check for 30% of 6 million or 1.8 million years that you lose money

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running your business but they do allow you to carry forward that loss into the

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next year or the next or the next usually up to 7 years total in most

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cases so that tax loss of 6 million bucks then comes in handy the following

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year when Kanye's hot tubs are found to be administering second-degree burns to [Hot and Wet news paper]

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its buyers and you once again make 10 million dollars in taxable profits only

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this time you have 6 million dollars of tax loss carry forward that gets first

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subtracted from the 10 million before you have to even think about taxes so in

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this case you pay taxes on just 4 million dollars or 30% of 4 million or

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just 1.2 million in taxes to net 2.8 million in net income essentially the

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government splits your losses and lets you take the taxable part of losses into

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the future so that the lows are not so low and well as far as Kanye is

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concerned the highs are not so high [Kanye in court]

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