It’s Inevitable…
TAXES!
Principles of Taxation
Benefit principle – those who use a good or
service provided by the government should
pay for it.
Ability-to-pay principle – those who have
larger incomes should pay a larger share of
what they receive.
Taxes and Income
Taxes are classified in three ways depending
on the share of income they take.
Progressive taxes
Regressive taxes
Proportional taxes
Progressive Taxes
Take a larger share of higher incomes
Federal income taxes are progressive for
most taxpayers.
Jane’s income tax rate increased from 15 to
25 percent when her earnings went from
$28,000 to $45,000 a year
Regressive Taxes
Take a smaller share of higher incomes than
of lower incomes.
Many state and local taxes are regressive.
Suppose that Louise earns $16,000 a year
compared to Ray’s $45,000. Both buy a used
car for $10,000 and pay an 8% sales tax.
The $800 tax is 5% of Louise’s income but
only 1.8% percent of Ray’s.
Proportional Taxes
Take the same share of all incomes.
If all people were taxed 10% of all their
income, this would be a proportional tax.
No perfect examples of proportional taxes
exist in our economy.
Income Taxes
Most states and some cities impose income
taxes patterned after the federal system.
Income taxes are the main sources of funding
for various social insurance programs, such
as those that provide benefits to the poor,
elderly, unemployed, and disabled.
Sales Taxes
Taxes added to the price of goods and
services at the time of purchase.
These taxes are a percentage of the cost of
each purchase.
Some products, such as food and
medications/prescriptions, are not subject to
sales tax in many states.
Property Taxes
A tax on the value of real property.
In the United States, state and local
governments levy property taxes on
buildings—such as homes, office buildings,
and factories—and on land.
There is no federal property tax.
The property tax is by far the largest source
of revenue for local governments.
Property Taxes
The property tax is often unpopular with
homeowners.
One reason is that, because homes are not
sold very often, governments must levy the
tax on the estimated value of the dwelling.
Some citizens believe that the local
government overvalues their homes, leading
to unfairly high property tax burdens.
Excise Taxes
Sales taxes on specific goods or services.
Goods subject to excise taxes in the United
States include tobacco products, alcoholic
beverages, gasoline, and some luxury items.
Unlike sales taxes, excise taxes are included
in the price charged to customers.
Excise Taxes
Governments sometimes levy excise taxes to
pay for specific projects.
Some national governments impose an
excise tax on airline tickets to help pay for
airport improvements or airline security.
Revenues from gasoline taxes typically pay
for highway construction and improvements.
Some excise taxes are designed to limit
consumption of a product, such as taxes on
cigarettes and alcoholic beverages.
Estate, Inheritance, and Gift Taxes
 When a person dies, the property that he or she leaves
for others may be subject to tax. An estate tax is a tax
on the deceased person’s estate. Most governments
levy estate taxes before the deceased person’s
property passes to heirs.
 An inheritance tax also taxes the value of the
deceased person’s estate, but after the estate passes
to heirs. The inheritors pay the tax.
 A gift tax is a tax on the transfer of property between
living people.
Corporate Income Tax
All corporations in the United States and
must pay tax on their net income (profits) to
the federal government and also to most
state governments.
The corporate income tax is one of the most
controversial types of taxes.
the corporate income tax leads to double
taxation of corporate income. Income is taxed
once when it is earned by the corporation,
and a second time when it is paid out to
shareholders in the form of dividends.
Tariffs
Also called duties or customs duties, are
taxes levied on imported or exported goods.
Import duties are considered consumption
taxes because they are levied on goods to be
consumed.
They protect domestic industries from foreign
competition by making imported goods more
expensive than their domestic counterparts.
Test Your Knowledge of Taxation
The federal income tax in the United
States is administered by
The U. S Government
State Government
The Internal
Revenue Service (IRS)
Companies must pay tax on their
net income called
Business Taxes
State Income Taxes
Corporate Taxes
This tax is a percentage of the
cost of each purchase.
Sales Tax
Income Tax
Excise Tax
Federal income taxes are ________
for most taxpayers.
Progressive
Regressive
Proportional
Basic groceries and prescription
drugs are usually exempted from
Consumption Tax
Sales Tax
Excise Tax
Tobacco products, alcoholic
beverages, gasoline, and some luxury
items are subject to:
Consumption Tax
Tariffs
Excise Tax
________ is an example of
the ability-to-pay principle.
Sales Tax
Federal Income Tax
Tariff
Which tax is the main source of
funding for social programs?
Income Tax
Sales Tax
Excise Tax
Taxes levied on imported or
exported goods are:
Consumption Tax
Tariffs
Excise Tax
This is a tax on the transfer of
property between living people.
Property Tax
Gift Tax
Estate Tax