1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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 = or 0.15% of income
Chapter 7

8. 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

9. 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

10. 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
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

11. 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

12. 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