Marginal and effective tax rates

In a recent blog post, corporate finance and valuation guru Aswath Damodaran (of New York University) has put out data of marginal and effective tax rates in different countries. The point of the post is about the “insanity of the US tax system” and the reason Damodaran presents this data is to show that the US has one of the largest differences between marginal and effective tax rates, and the company it keeps in terms of other countries that have  similar differences is not very worthy.

In this post we analyze the same data, but broadly from an Indian perspective. Where does India stand in terms of its marginal and effective tax rates? Figure 1 has a scatter plot of the marginal and effective tax rates. A few prominent countries have been marked.


A few pertinent observations:

  • 25% and 30% seem to be the most popular choices of marginal tax rate across countries. Other round figures such as 10, 15 and 20 also see significant representation
  • The highest theoretical marginal tax rate is in the US, followed by Japan. The lowest marginal tax rates (10%) are seen in three countries – Bulgaria, Gibraltar and Qatar (not marked on plot)
  • The countries with lowest effective tax collection are Kazakhstan (at a paltry 2% – compare that to its official marginal tax rate of 20%), Qatar (2.5%) and Cambodia (4%)
  • The countries with most effective tax collection are Norway (51% – compared to marginal 28%), Argentina, Papua New Guinea and Bangladesh! You can draw your own conclusions
  • India is remarkably close to Brazil and Pakistan in terms of its marginal and effective tax rates
  • India’s marginal income tax rate is on the higher side, but effective rate is much lower.
  • The best tax systems need to be effective and efficient – the closer a country is to the red line, the better its tax administration is IMHO

The entire data set is here. You can play around and draw your own conclusions.

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