How to Calculate Implicit Tax

A government policy that costs you money, even when called a reform, operates as an implicit tax.
Image Credit: gunnar3000/iStock/Getty Images

The phrase "implicit tax" refers to money wage earners lose because of a governmental policy, even though the government does not call the lost money a tax. The implicit tax rate changes based on individual earnings and costs, but you can use a basic method to determine your rate.


Calculating the Tax

Start with the amount subject to the tax, typically your income for a given period of time. For example, assume the taxable amount refers to an annual income of $27,000. You also need the amount you spend to fulfill the governmental policy. For example, you spend $750 to bring your car's exhaust system into compliance with your city's new emissions regulations. To calculate the implicit tax rate, divide the total amount subject to the tax into the amount spent. In this example, $27,000 divided into $750 is about 0.028. Move the decimal two places to the right to convert the result into a percentage. The implicit tax rate is 2.8 percent for the city emissions regulations.

Video of the Day