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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.

The demand curve or schedule shows the amount of a product that consumers are willing to buy at alternative prices during a specific time period. The law of demand states that the amount of a product bought is inversely related to its price. We have seen how the law of demand can be derived from fundamental principles of consumer behavior. Now, we go further and distinguish two different phenomena underlying a consumer’s response to a price change. First, as the price of a product declines, the lower opportunity cost will induce consumers to buy more of it – even if they have to give up other products. This tendency to substitute a product that has become cheaper for goods that are now relatively more expensive is called the substitution effect of a price change.
Second, if a consumer’s money income is fixed a reduction in the price of a product will increase his or her income – the amount of goods and services he or she is able to buy with that fixed amount of money income. If your rent were to decline by $100 per month, for example, that would allow you to buy more of a number of other goods. This increase in your real income has the same effect as if the rent had remained the same but your income had risen by $100 per month. As a result, this second way in which a price change affects consumption is called the income effect. Typically, consumers will respond to the income effect by buying more of the cheaper product and other products as well because they can better afford to do so. Substitution and income effects generally work in the same direction – in other words, in the same way; they both cause consumers to purchase more of a good as its price falls and less of a good as its price rises.

Many interbank clearing systems take the form of end-of-day clearing (as opposed to continuous). Payments due between each of the clearing house members are calculated on a gross basis but payments are done on a net basis. Netting reduces overall risks arising from the failure of one member. Examples of clearing systems in the US are Fedwire, for payments between US Federal Reserve bank members, and CHIPS, for payments between New York-based banks.
Check clearing poses some practical problems. In more developed countries check details are captured at the branch of the bank where they are deposited, using a combination of different methods. Some data is encoded in magnetic form of the checks and can be scanned. Some data can be captured using optical character recognition (OCR) systems and the rest has to be input manually. Checks are then only retained as part of the process of maintaining a paper audit trail. In less developed countries checks have to be delivered in physical form to a regional or national data entry center where the data is captured.
Some countries also have specialist payment systems used for salary payments, payments to suppliers, standing orders and so on. Members of these systems include non-financial organizations. These systems are a part of what is now more generally referred to as e-commerce and cover settlement of B2B (business-to-business) and B2C (business-to-consumer) transactions. Despite the introduction of the euro no single European clearing and payments systems exists and banks must rely on other means such as sending instructions via SWIFT or their own networks and using national payments systems.
In “continuous” systems net settlement is done on a much more frequent, intra-day basis. These systems are often associated with secondary capital market transactions (bond clearing, for example). Continuous net settlement is generally accepted as further reducing risk.