MYPF 3.1 Our Tax System 3.2 Filing a Tax Return 11/30/2017 3 Income Tax 3.1 Our Tax System 3.2 Filing a Tax Return © 2016 South-Western, Cengage Learning   Chapter 1

Lesson 3.1 Our Tax System Learning Objectives LO 1-1 List the types of taxes and explain the purpose of each. LO 1-2 Describe the U.S. tax system and explain how it works. Chapter 3 © 2016 South-Western, Cengage Learning  

Types of Taxes In a free enterprise system, the government collects money from citizens and businesses in the form of taxes. These incoming taxes called revenue. The government spends the revenue received according to priorities set by Congress. Chapter 3 © 2016 South-Western, Cengage Learning  

Types of Taxes Progressive taxes Regressive taxes Proportional taxes (continued) Progressive taxes Regressive taxes Proportional taxes Other taxes Chapter 3 © 2016 South-Western, Cengage Learning  

Progressive Taxes Progressive taxes take a larger share of income as the amount of income grows. Federal income tax rates are progressive. The more you make, the higher percentage of income you pay in taxes. Chapter 3 © 2016 South-Western, Cengage Learning  

Regressive Taxes Regressive taxes take a smaller share of income as the amount of income grows. Sales taxes are regressive. Fixed percentage, so the smaller your income the greater percentage of your income it taxes to pay Chapter 3 © 2016 South-Western, Cengage Learning  

Example of Regressive Tax Low income ($10,000 per year) Buy stereo for $2000 Pay $2000(.06) = $120 in sales tax $120/$10,000 = .012 or 1.2% of income High income ($80,000 per year) Still pay $120 in sales tax for stereo $120/$80,000 = .0015 or 0.15% of income Chapter 7

Proportional Taxes Proportional taxes, or flat taxes, are taxes for which the rate stays the same, regardless of one’s income. Property taxes are proportional. Percentage is the same if home is $150,000 or $1.5 million Chapter 3 © 2016 South-Western, Cengage Learning  

Other Taxes A luxury tax is imposed on certain items, such as yachts and private planes. Capital gains taxes, value-added taxes, tariffs, license and registration fees, user fees, and tolls are also collected for purposes of funding government spending. Chapter 3 © 2016 South-Western, Cengage Learning  

How the Tax System Works The IRS Internal Revenue Service Headquarters in Washington, DC 7 regional offices Established to collect taxes and enforce tax laws www.irs.gov The power to tax Paying your fair share Tax rates apply to income ranges, or tax brackets. Our income tax system is based on voluntary compliance, which means that all citizens are expected to prepare and file tax returns of their own accord. Chapter 3 © 2016 South-Western, Cengage Learning  

How the Tax System Works (continued) Failure to pay taxes Failure to pay taxes can result in interest charges on the taxes owed, plus a possible fine. Willful failure to pay taxes is called tax evasion, which is a serious crime punishable by a fine, imprisonment, or both. Chapter 3 © 2016 South-Western, Cengage Learning  

An IRS Audit Every year, the IRS calls millions of taxpayers for an audit, which is an examination of their tax returns. Types of audits Correspondence audit Office audit Field audit Chapter 3 © 2016 South-Western, Cengage Learning