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Taxes
Entrepreneurship II
1.05 Describe the Nature of Taxes
Objectives
a.Define the following terms: tax, revenue,
expenditure, excise tax, income tax, property tax,
and sales tax.
b.Explain the importance of taxes in a market
economy.
c. List sources of tax monies paid to different levels of
government.
d.Identify ways that tax monies are used by the
different levels of government.
e. Describe tax structures.
f. Explain the Internal Revenue Service's roles.
g.Illustrate the impact of taxation on the circular flow
of income model.
h. Explain how government expenditures are financed.
What Are Taxes?
Taxes are legally mandated payments to the government that are not made
in exchange for goods or services. They are typically used to fund projects that
benefit society. Examples of taxes include:
• Income tax
– Based on the amount of money a person earns or receives
• Sales tax
– Placed on the retail sale of almost every good or service purchased.
– Not always applicable to goods such as food and medicine
• Excise tax
– Placed on specific products
– Commonly used to discourage consumption of a product or to raise
some easy money on products that the government knows people will
continue to purchase, regardless of the tax
– Examples of excise taxes:
• Gasoline tax
• Cigarette tax
• Beer tax
The Importance of Taxes
in a Market Economy
Taxes are important in a market economy because:
• Taxes are the primary source of revenue (income) for the
government sector.
• Some services such as national defense, roads, and
education can be more efficiently produced by the
government than by private individuals.
• The government is responsible for creating the
infrastructure necessary for commerce. The banking
system, national defense, and the transportation system
are all part of this infrastructure. If taxes did not exist,
these services would likely not exist either.
Money in, Money Out
Virtually every level of government collects taxes of some type. And,
each of these levels of government spends tax monies on a variety of
different items. These monies that are paid out or spent are called
expenditures. The term “government expenditures” refers to spending
by the government sector.
Federal Government:
• Sources of tax monies:
– Income taxes
– Excise taxes
• Expenditures:
– National defense
– Education
– Transportation systems
– Judicial system
– Social Security and Medicare, Medicaid, veterans services, etc.
Money in, Money Out
Continued
State Governments:
• Sources of tax monies:
– Income taxes
– Sales taxes
– Excise taxes
• Expenditures:
– State police protection
– Education
– Operation of state government, etc.
Local Governments:
• Sources of tax monies:
– Property taxes
– Sales taxes
– Income taxes
• Expenditures:
– Education
– Public health and safety (local fire and police protection)
– Sanitation, etc.
More About Government
Expenditures
Roads, highways, and bridges are
financed through the gasoline excise tax.
Only those people who purchase gasolinethose who use the transportation systempay the gasoline tax.
The social security system, which provides
income to retired workers, receives its
monies from retirement taxes.
7
Duties of the Internal
Revenue Service
The Internal Revenue Service is responsible for:
• Collecting federal income taxes
• Enforcing federal revenue law
• Helping taxpayers with tax law
• Pursuing taxpayers who are not in compliance with tax
laws
Tax Structures
Different types of tax Structures include:
• Proportional:
– A tax structure in which everyone pays the same percentage in income
taxes regardless of income level
– Few taxes are completely proportional in nature.
• Progressive
– A tax structure in which those who earn more pay a higher percentage
of income in taxes
– As the income increases, the tax rate increases.
– Example: The federal income tax
• Regressive:
– A tax structure in which those who earn more income pay a lower
percentage of income in taxes
– As income increases, the tax rate decreases
– Sales and excise taxes are considered to be regressive taxes because
those people with lower incomes ultimately pay a larger percentage of
their income in sales and excise taxes.
Taxation and the Circular
Flow of Income Model
The circular flow model illustrates the constant movement of production inputs,
goods, services, and money in the economy. For a good introduction on
simple circular flow of income model, watch the flash movie/ tutorial The
Circular Flow of income model by Manfred Gartner at
http://www.eurmacro.unisg.ch/tutor/circularflow_movie.html
Based on
AmosWEB. (2000-2012). Taxes. Retrieved April 20, 2012, from
http://www.amosweb.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=taxes