Chapter 1 Taxation of Individuals and Business Entities

What is the purpose of taxes? - ANS-raise revenue to fund government operations other goals: encourage certain behavior (charitable contributions) & discourage undesirable legal behavior (sin taxes) What qualifies as a tax? - ANS-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? - ANS-must know: tax base and tax rate tax= tax base* tax rate What are the three ways to measure tax rates? - ANS--marginal tax rate -average tax rate -effective tax rate What is marginal tax rate? - ANS-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? - ANS-the taxpayer's average level of taxation on each dollar of taxable income