Taxation

Taxes are a country's main income. There is no tax slider: the rate is built from the tax laws a country holds, and how much of it the state actually collects depends on how well it can reach its own economy.

How revenue is calculated

Each month a country collects:

GDP of the provinces it holds × (1 + tax efficiency) × tax rate ÷ 12

• GDP held excludes occupied provinces and the share kept by autonomous regions, and already reflects the losses from Unrest, Devastation and war exhaustion (see Economic Output).
• Tax rate is the sum of the tax laws' rates, each as currently funded.
• Tax efficiency is how much of the economy the state manages to tax.

Tax laws

Three policy sets carry most of the rate:

Trade Policy adds tariff revenue: 1% under Autarky, 2% under Moderate Tariffs (the default), 4% under Protectionism and none under Free Trade. Some family policies lower the rate through tax relief.

A poor country, below $1,500 of GDP per resident, starts on Flat Personal Tax and Low Business Taxation unless the scenario sets its laws otherwise. With its corruption, that collects roughly 7-8% of output, about what the poorest states of the period managed.

The tax ceiling

Each country has a tax attitude, the most its society will bear, from 25% to 60% of GDP. The total tax rate can never exceed it, however many tax laws are stacked. When a deficit pushes taxes up through fiscal flex, any tax the ceiling stops is borrowed instead.

Tax efficiency and corruption

Tax efficiency is a sum of modifiers like any other. Corruption counts against it point for point, so 50% corruption costs half the tax take: not half the economy, but half of what the rates would raise. Other laws move it too, for example a professional bureaucracy, a large informal economy or welfare programmes.

Every country carries the corruption its level of development sustains: 40% at $600 of GDP per resident and below, falling to none at $8,000, plus 10% for a colony or other subject state. A country moves 2% of the way towards that level each month, so corruption falls as it develops; laws and national modifiers add to it. A poor country or a colony therefore collects far less than its rates suggest.

On the Budget screen each source of tax efficiency books its share of the take: 10% efficiency at a 25% rate is 2.5% of GDP.

The cost of taxing

Taxes are not free. A higher rate lowers government support and adds Unrest in every province; unrest lowers economic output, and lower output shrinks the tax base. Over-taxing therefore erodes its own base. Some tax laws also carry growth penalties of their own, and when fiscal flex funds a tax above 100%, those penalties grow with it.

Changing taxes

Tax laws change through ordinary policy reforms, which cost political capital and take months to implement. A new rate applies once the reform is complete; in the meantime, fiscal flex is what lets revenue respond to a surplus or deficit.

Related articles

• Money & the Budget: the budget as a whole.
• Debt: what happens when taxes fall short.
• Corruption: how development and policy set corruption.