Taxes and Government SpendingC H A P T E R

14 WHAT ARE TAXES?SECTION 1

Taxes are payments that people arerequired to pay to a local, state, or nationalgovernment. Taxes supply revenue, or

income, to provide the goodsand services that people expectfrom government.

The Constitution grantsCongress the power to tax andalso limits the kinds of taxesCongress can impose. Federaltaxes must be for the “commondefense and general welfare,”

must be the same in all states, and may notbe placed on exports. The SixteenthAmendment, ratified in 1913, gave Con-gress the power to levy an income tax.

When government creates a tax, itdecides on the type of tax base—theincome, property, good, or service that is

subject to a tax. It also decides how tostructure the tax. The three basic kinds oftax structures are proportional, progres-sive, and regressive. A proportional taxis a tax in which the percentage of incomepaid in taxes remains the same for allincome levels. A progressive tax is onein which the percentage increases at higher income levels. An example is the individual income tax, a tax on a per-son’s income, which requires people with higher incomes to pay a higher per-centage of their incomes in taxes. In aregressive tax, the percentage increasesat lower income levels. A sales tax, a taxon the value of a good or service beingsold, is regressive because higher-incomepeople pay a lower proportion of theirincomes on goods and services.

TEXT SUMMARY

1. What is meant by the term tax base? 2. Chart Skills Does Ron or Mary paymore tax dollars with a sales tax?Which person pays a larger per-centage of income with a sales tax?

REVIEW QUESTIONS

GRAPHIC SUMMARY: Three Types of Tax Structures

Government collectsmoney to run its programs throughdifferent types of taxes.

T H E BIG I D E A

Proportional A constant percentage of income is taken in taxes as income increases

“Flat” tax $7,500, or 15 percent of income

$22,500, or 15 percentof income

Regressive A smaller percentage of income is taken in taxes as income increases

Sales tax $2,000, or 5 percentof total purchases of $40,000; tax bill is4 percent of income

$3,000, or 5 percentof total purchases of $60,000; tax bill is2 percent of income

Type of Tax Description ExampleRon’s taxes on $50,000 income

Mary’s taxes on $150,000 income

Progressive A larger percentage ofincome is taken in taxesas income increases

Income tax $5,000, or 10 percent of income

$45,000, or 30 percent of income

Each type of tax struc-

ture places different

kinds of burdens on

people of different

income levels. This chart

shows how different tax

structures would affect

two taxpayers: Ron,

with an income of

$50,000, and Mary, with

an income of $150,000.

58 CHAPTER 14 Guide to the Essentials © Pearson Education, Inc., publishing as Pearson Prentice Hall. All Rights Reserved.