TaxesTaxesEntrepreneurship II

1.05 Describe the Nature of Taxes

ObjectivesObjectivesa.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?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 The Importance of Taxes in a Market Taxes in a Market

EconomyEconomyTaxes 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 OutMoney in, Money OutVirtually 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 Money in, Money Out ContinuedContinued

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 More About Government Government ExpendituresExpenditures

Roads, highways, and bridges are financed through the gasoline excise tax. Only those people who purchase gasoline-those who use the transportation system-pay the gasoline tax.

The social security system, which provides income to retired workers, receives its monies from retirement taxes.

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Duties of the Internal Duties of the Internal Revenue ServiceRevenue 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 StructuresTax StructuresDifferent 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 Taxation and the Circular Flow of Income Circular Flow of Income

ModelModel

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 onBased onAmosWEB. (2000-2012). Taxes. Retrieved April 20, 2012, from http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=taxes