1. Entrepreneurship II 1.05 Describe the Nature of Taxes
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2. Objectives
Define the following terms: tax, revenue, expenditure, excise tax, income tax, property tax, and sales tax.
Explain the importance of taxes in a market economy.
List sources of tax monies paid to different levels of government.
Identify ways that tax monies are used by the different levels of government.
Describe tax structures.
Explain the Internal Revenue Service's roles.
Illustrate the impact of taxation on the circular flow of income model.
Explain how government expenditures are financed.
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3. What Are Taxes?
Taxes are legally mandated payments to the government that are not made in exchange for goods or services. They are typically used to fund projects that benefit society. Examples of taxes include:
Income tax
Based on the amount of money a person earns or receives
Sales tax
Placed on the retail sale of almost every good or service purchased.
Not always applicable to goods such as food and medicine
Excise tax
Placed on specific products
Commonly used to discourage consumption of a product or to raise some easy money on products that the government knows people will continue to purchase, regardless of the tax
Examples of excise taxes:
Gasoline tax
Cigarette tax
Beer tax
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4. The Importance of Taxes in a Market Economy
Taxes are important in a market economy because:
Taxes are the primary source of revenue (income) for the government sector.
Some services such as national defense, roads, and education can be more efficiently produced by the government than by private individuals.
The government is responsible for creating the infrastructure necessary for commerce. The banking system, national defense, and the transportation system are all part of this infrastructure. If taxes did not exist, these services would likely not exist either.
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5. Money in, Money Out
Virtually every level of government collects taxes of some type. And, each of these levels of government spends tax monies on a variety of different items. These monies that are paid out or spent are called expenditures. The term “government expenditures” refers to spending by the government sector.
Federal Government:
Sources of tax monies:
Income taxes
Excise taxes
Expenditures:
National defense
Education
Transportation systems
Judicial system
Social Security and Medicare, Medicaid, veterans services, etc.

6. Money in, Money Out Continued
State Governments:
Sources of tax monies:
Income taxes
Sales taxes
Excise taxes
Expenditures:
State police protection
Education
Operation of state government, etc.
Local Governments:
Property taxes
Public health and safety (local fire and police protection)
Sanitation, etc.

7. More About Government Expenditures
Roads, highways, and bridges are financed through the gasoline excise tax. Only those people who purchase gasoline-those who use the transportation system-pay the gasoline tax. The social security system, which provides income to retired workers, receives its monies from retirement taxes.

8. Duties of the Internal Revenue Service
The Internal Revenue Service is responsible for:
Collecting federal income taxes
Enforcing federal revenue law
Helping taxpayers with tax law
Pursuing taxpayers who are not in compliance with tax laws

9. Tax Structures Different types of tax Structures include:
Proportional:
A tax structure in which everyone pays the same percentage in income taxes regardless of income level
Few taxes are completely proportional in nature.
Progressive
A tax structure in which those who earn more pay a higher percentage of income in taxes
As the income increases, the tax rate increases.
Example: The federal income tax
Regressive:
A tax structure in which those who earn more income pay a lower percentage of income in taxes
As income increases, the tax rate decreases
Sales and excise taxes are considered to be regressive taxes because those people with lower incomes ultimately pay a larger percentage of their income in sales and excise taxes.

10. Taxation and the Circular Flow of Income Model
The circular flow model illustrates the constant movement of production inputs, goods, services, and money in the economy. For a good introduction on simple circular flow of income model, watch the flash movie/ tutorial The Circular Flow of income model by Manfred Gartner at

11. Based on
AmosWEB. ( ). Taxes. Retrieved April 20, 2012, from