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Although the average tax rate is useful in determining whether a tax is progressive, proportional, or regressive, it is the marginal tax rate that concerns individuals when they are making decisions. It is the marginal tax rate that determines how much of an additional dollar of income must be paid in taxes (and thus, also, how much one gets to keep). An individual’s marginal tax rate can be very different from his or her average tax rate. The marginal~tax rate (MTR) can be expressed as follows: MTR = Change in tax liability / Change in taxable income. The MTR reveals both how much of one’s additional income must be turned over to the tax collector and how much is retained by the individual taxpayer. For example, when the MTR is 25 percent, $25 of every $100 of additional earnings must be paid in taxes. The individual is permitted to keep only $75 of his or her additional income, in other words. The marginal tax rate is vitally important because it affects the incentive to earn additional income. The higher the marginal tax rate, the less incentive individuals have to earn more income. At high marginal rates, for example, many spouses will choose to stay home rather than take a job, and others will choose not to take on second jobs or extra work. Clearly, at some rate greater than zero but less than 100 percent, tax revenue will be maximized. This is not to imply that the tax rate that maximizes revenue is the ideal, or optimal, tax rate from the standpoint of the economy as a whole. Although it might be the tax rate that generates the most revenue for government, we must also consider the welfare reductions imposed on individuals by the deadweight loss created by the tax. As rates are increased and the maximum revenue point (B)is approached, relatively large tax rate increases will be necessary to expand tax revenue by even a small amount. In this range, the deadweight loss of taxation in the form of reductions in gains from trade will be exceedingly large relative to the additional tax revenue. Thus, the ideal tax rate will be well below the rate that maximizes revenue.
The Laffer curve shows that it is important to distinguish between changes in tax rates and changes in tax revenues. Higher rates will not always lead to more revenue f o r the government. Similarly, lower rates will not always lead to less revenue. When tax rates are already high, a rate reduction may increase tax revenues. Correspondingly, increasing high tax rates may lead to less tax revenue.
Evidence from the sharp reduction in marginal tax rates imposed on those with high incomes during the 1980s supports the Laffer curve. The top marginal rate was reduced from 70 percent at the beginning of the decade to 33 percent by the end of the decade. A person in this tax bracket who used to bring home 30 cents for each additional dollar earned now was able to bring home 67 cents for each dollar earned. Focusing on this sharp seduction in the top marginal rate, critics charged that the tax cuts of the 1980s were a bonanza for the rich. When considering the validity of this charge, however, it is important to distinguish between tax rates and tax revenues. Even though the top sates were cut sharply, tax revenues and the share of the personal income tax paid by high-income earners actually rose as a result. During the decade, revenue collected from the top 1 percent of earners rose a whopping 51.4 percent (after adjusting for inflation). In 1980, 19 percent of the personal income tax was collected from the top 1 percent of earners. By 1990 at the lower tax rates, the top 1 percent of earners accounted for more than 25 percent of income tax revenues. The top 10 percent of earners paid just over 49 percent of total income taxes in 1980, but by 1990 the share paid by these earners had risen to 55 percent. Thus, the reduction in the exceedingly high rates increased the revenue collected from high-income taxpayers.

In a modern economy transactions between parties usually involve the exchange of items such as capital goods, labor, manufactured goods, services and legal claims for a “cash” consideration. The exchange may involve more than one currency and may involve a time difference between delivery of goods and actual payment. Such exchange transactions carry with them a number of risks including settlement failure and fraud. Financial organizations cooperate with one another to establish the infrastructure and procedures necessary to minimize these risks and transaction costs. These include formal markets such as stock exchanges, and automated systems to enable payments to be made both within individual countries and also cross-border.
The provision of clearing and payment systems is one of the most important operational services that banks provide. Payment systems may be either national or cross-border.
The most important international system is provided by the Society for Worldwide Interbank Financial Telecommunications (SWIFT). This is a cooperative owned by 7000 members operating in approximately 200 countries. SWIFT was established in 1973 and is based in Brussels, Belgium, but has operational centers around the world.
SWIFT provides two key services. First it provides a global telecommunications network to enable banks and other financial institutions to exchange electronic messages to instruct transfers of funds in a secure manner. Second it coordinates the standardization of the format of these messages. The latter is vital to allow banks to send, receive and interpret electronic payment instructions in an automated way.
SWIFT has three principal challenges. It must ensure it provides a secure service, maintains an extremely high level of reliability and has a well-managed implementation of changes in message formats or communications protocols. Most countries have their own clearing systems for payments made between banks, and on behalf of customers with accounts at these banks. The vast majority of these systems concern electronic transfers of funds but other means have to be used for payments involving paper checks.