The Tax Structure
Tax base - amount to which tax rate is applied - also known as taxable income (federal income tax)
Taxable income - gross income reduced by certain deductions (business and personal)

Figure 1.2 Formula for Federal Income Tax on Individuals

Tax rates - applied to tax base to determine taxpayer's liability - may be proportional or progressive 1. proportional - rate of tax remains constant (e.g. most excise, general sales, employment including FICA and FUTA) 2. progressive - higher rate of tax applies as tax base increases (e.g. federal income, federal gift and estate taxes, state income)

Major Types of Taxes
Property Taxes (Ad Valorem Taxes) - based on value; tax on wealth or capital - doesn't tax income but income derived from property may affect tax - two categories: realty and personalty - Realty: used by states; major source of revenue for local governments; includes real estate and any capital improvements that are classified as fixtures; difficult to avoid - Personalty: assets that are not realty; can be tangible or intangible; includes stocks, bonds, and securities

Transaction Taxes - imposed at manufacturer's, wholesaler's, or retailer's level
Federal Excise Tax - tax on manufacturer, sale or use of good such as alcohol, fuel, cigarettes, etc.
General Sales Tax - state or local level tax on retail sale of specified property
Use tax - ad valorem tax and usually at same rate as sales tax; tax on use, consumption, or storage of tangible property purchased outside of state but consumed in state; purpose is to prevent avoidance of sales tax
Severance Tax - transaction taxes that are based on notion that state has interest in natural resources (e.g. oil, gas, iron ore, coal); imposed when natural resource is extracted
Estate Tax - when tax is imposed on right to pass property at death
Inheritance Tax - when