This document introduces taxes and discusses their impact on businesses, individuals, and politicians. It defines what constitutes a tax, outlines the general objectives of taxes, and describes how to calculate taxes using tax rates and tax bases. The document also identifies different federal, state, and local taxes and explains proportional, progressive, and regressive tax rate structures.

1. McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 01
An Introduction to Tax

2. 1-2
Learning Objectives
 Demonstrate how taxes influence basic business,
investment, personal, and political decisions
 Discuss what constitutes a tax and the general
objectives of taxes
 Describe the different tax rate structures and
calculate a tax
 Identify the various federal, state and local taxes
 Apply appropriate criteria to evaluate alternate tax
systems

3. 1-3
Who cares about taxes?
 Businesses:
 What organizational form should a business use?
 Where should the business locate?
 How should business acquisitions be structured?
 How should the business compensate employees?
 What is the appropriate mix of debt and equity for the
business?
 Should the business rent or own its equipment and
property?
 How should the business distribute profits to its owners?

4. 1-4
Who cares about taxes?
 Politicians:
 Politicians often distinguish themselves from their
opponents based on their tax rhetoric.
 Voters must have basic knowledge of taxes to
evaluate the merits of alternative tax proposals.

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Who cares about taxes?
 Individuals:
 Would you like to own a home?
 Tax deductions for home mortgage interest and real
estate taxes can reduce the after-tax costs of owning
a home.
 Would you like to retire?
 Understanding the tax-advantaged methods of saving
for retirement can increase the after-tax value of your
retirement nest egg.

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What qualifies as a Tax?
 A Tax is a payment required by a government
agency that is unrelated to any specific benefit or
service received from the government agency.
 Key components of a tax:
 Payment required
 Payment imposed by government agency (federal, state,
local)
 Payment not tied directly to benefit received by the
taxpayer.

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How to calculate a Tax?
 To calculate a tax, a taxpayer must know:
 Tax Rate: level of taxes imposed on the tax base
and is usually expressed as a percentage
 Tax Base: defines what is actually taxed and is
usually expressed in monetary terms
Tax = Tax Base * Tax Rate

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Different ways to measure tax rates
 Marginal Tax Rate: the tax rate that applies to the
next additional increment of a taxpayer’s taxable
income.
 Average Tax Rate: the taxpayer’s average level of
taxation on each dollar of taxable income.
 Effective Tax Rate: the taxpayer’s average rate of
taxation on each dollar of total income (both taxable
and non-taxable)

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Tax Rate Structures
 Proportional Tax Rate (Flat Tax): imposes a
constant tax rate throughout the tax base.
 Progressive Tax Rate: imposes an
increasing marginal tax rate as the tax base
increases.
 Regressive Tax Rate: imposes a decreasing
marginal tax rate as the tax base increases.

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Types of Taxes
 Federal Taxes:
 Income taxes
 Employment and unemployment taxes
 Excise taxes
 Transfer taxes
 State and local taxes:
 Sales and use taxes
 Property taxes
 Income taxes
 Excise taxes
 Implicit taxes