How to Summarize and Interpret Income Tax Schedules

IMF How To Notes, September 26, 2025

Source details

This note describes how most features of an income tax system (and to some extent social security and welfare) can be described as a combination of lumpsums and marginal tax rates and plotted in a summary chart.
Applying this method consistently can help understand the impact of tax reforms on tax systems, including by identifying any unintentional humps or notches in tax schedules.
The note uses this approach to discuss universal basic incomes, the issue of whether tax allowances should be phased out, and the difference between tax credits and allowances.
The note also points to limitations of the approach, such as conditions that cannot be summarized in such tax schedules.

Represent income tax systems as combinations of:
- lumpsums, and
- marginal tax rates.
Plot these components in a summary chart to visualize the schedule.
Use consistent application of this representation to spot:
- humps in tax schedules, and
- notches in tax schedules.

Universal basic incomes: analyzed through the lumpsum-plus-marginal-rate representation.
Phasing out tax allowances: evaluated by showing how allowances alter lumpsums and marginal rates across incomes.
Tax credits versus allowances: distinctions clarified within the summary-chart framework.

The approach cannot summarize every condition in tax, social security, or welfare systems.
Certain features and behavioral or conditional rules may lie outside what can be captured in a simple lumpsum-plus-marginal-rate schedule.

How to Summarize and Interpret Income Tax Schedules
- How to Summarize and Interpret Income Tax Schedules (Markdown version)
- How to Summarize and Interpret Income Tax Schedules (PDF)