CHAPTER 1 TAXATION OF INDIVIDUALS
AND BUSINESS ENTITIES 2025/2026
CORRECT ANSWERS
, CHAPTER 1 TAXATION OF INDIVIDUALS
AND BUSINESS ENTITIES 2025/2026
CORRECT ANSWERS
What is the purpose of taxes? - CORRECT ANSWERSraise revenue to fund government operations
other goals: encourage certain behavior (charitable contributions) & discourage undesirable legal
behavior (sin taxes)
What qualifies as a tax? - CORRECT ANSWERStax 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? - CORRECT ANSWERSmust know: tax base and tax rate
tax= tax base* tax rate
What are the three ways to measure tax rates? - CORRECT ANSWERS-marginal tax rate
-average tax rate
-effective tax rate
What is marginal tax rate? - CORRECT ANSWERSthe 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? - CORRECT ANSWERSthe taxpayer's average level of taxation on each dollar of
taxable income
(total tax/ taxable income)
AND BUSINESS ENTITIES 2025/2026
CORRECT ANSWERS
, CHAPTER 1 TAXATION OF INDIVIDUALS
AND BUSINESS ENTITIES 2025/2026
CORRECT ANSWERS
What is the purpose of taxes? - CORRECT ANSWERSraise revenue to fund government operations
other goals: encourage certain behavior (charitable contributions) & discourage undesirable legal
behavior (sin taxes)
What qualifies as a tax? - CORRECT ANSWERStax 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? - CORRECT ANSWERSmust know: tax base and tax rate
tax= tax base* tax rate
What are the three ways to measure tax rates? - CORRECT ANSWERS-marginal tax rate
-average tax rate
-effective tax rate
What is marginal tax rate? - CORRECT ANSWERSthe 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? - CORRECT ANSWERSthe taxpayer's average level of taxation on each dollar of
taxable income
(total tax/ taxable income)
