Chapter 1 Taxation of Individuals and Business Entities latest update

Chapter 1 Taxation of Individuals and Business Entities latest update What is the purpose of taxes? - raise revenue to fund government operations other goals: encourage certain behavior (charitable contributions) & discourage undesirable legal behavior (sin taxes) What qualifies as a tax? - tax is a payment required by a government that is unrelated to any specific benefit or service received from the government key components: payment required, payment imposed by government agency (federal, state, local), payment not tired directly to benefits received by the tax payer How do you calculate tax? - must know: tax base and tax rate tax= tax base* tax rate What are the three ways to measure tax rates? - -marginal tax rate -average tax rate -effective tax rate What is marginal tax rate? - the tax rate that applies to the next additional increment of a taxpayer's taxable income (change in tax/ change in taxable income) What is average tax rate? - the taxpayer's average level of taxation on each dollar of taxable income (total tax/ taxable income) What is effective tax rate? - the taxpayer's average rate of taxation on each dollar of total income (both taxable and non-taxable) Which tax rate is most helpful for tax planning? - marginal tax rate Which tax rate tells you more about a person's tax burden? - effective tax rate What are the three tax rate structures? - proportional tax rate (flat tax) progressive tax rate regressive tax rate What is proportional tax rate (flat tax)? - imposes a constant tax rate throughout the tax base (sales tax) What is progressive rate? - imposes an increasing marginal tax rate as the tax base increases