LEGAL
ASPECTS OF
B U S I N E SS
Chapter 6, Section 3
Business Taxes
REASONS FOR
TA X E S
• Governments use taxes to
regulate business activity.
• Governments set revenue
goals that must be
reached in order to provide
the various services
desired by the public.
• Governments also use
taxes to control business
activity.
FA I R N E S S O F TA X AT I O N
• The question of fairness has
caused many debates.
• One problem is determining who
will, in fact, pay the tax.
• Another problem of fairness is
whether those with the most
assets or most income should
pay at a higher rate than those
who own or earn the least.
PROPORTIONAL,
PROGRESSIVE, AND
REGRESSIVE
TA X AT I O N
• A proportional tax – sometimes called
a flat tax – is one in which the tax rate
remains the same regardless of the
amount on which the tax is imposed.
• For example, in a given area the tax rate
on real estate per $1,000 of property
value is always the same, regardless of
the amount of real estate the taxpayers
owns.
• A progressive tax is a tax based on
the ability to pay.
• As income increases, the tax rate
increases.
• The current federal tax law is a
combination of progressive and
proportional taxes.
2 0 2 4 - 2 0 2 5 TA X
R AT E S
PROPORTIONAL,
PROGRESSIVE, AND
REGRESSIVE
TA X AT I O N
• The third type of tax policy is a
regressive tax. With this type of
tax, the actual tax rate decreases
as the taxable amount increases.
• Although general sales taxes are
often thought to be proportional,
they are actually regressive.
• Because the sales tax applies to
purchases rather than to income,
the general sales tax is
regressive.
T Y P E S O F TA X E S
• The four most common
taxes affecting
businesses and
individuals are:
• 1. Income tax
• 2. Sales tax
• 3. Property tax
• 4. FICA tax
I N C O M E TA X
• An income tax is a tax on the
profits of businesses and the
earnings of individuals.
• These are the taxes we pay every
year for “tax season”
• The income tax is the largest
source of revenue for the
federal government.
S A L E S TA X
• A sales tax is a tax levied on the
retail price of goods and services at
the time they are sold.
• When a sales tax applies only to
selected goods or services, such as
cigarettes and gasoline, it is called
an excise tax.
• Sales taxes are the main source of
revenue for most states and some
cities and counties.
P R O P E RT Y TA X
• A property tax is a tax on material goods
owned.
• Whereas the sales tax is the primary source
of revenue for most state governments, the
property tax is the main source of revenue
for most local governments.
• A real property tax is a tax on real
estate, which is land and buildings.
• A personal property tax is a tax on
possessions that are movable, such as
furniture, machinery, and equipment.
• A tax on property – whether it is real
property or personal property – is stated in
terms of dollars per hundred of assessed
valuation.
• Assessed valuation is the value of
property determined by tax officials.
F I C A TA X E S
• Federal Insurance Contributions Act
(FICA) taxes include Social Security and
Medicare.
• Employees and employers share the burden of
these taxes, and employers withhold the
employee portion from wages.
• Both employees and employers pay Social
Security taxes at a 6.2% rate and Medicare taxes
at a 1.45% rate.
• Self-employed workers pay FICA tax at a higher
rate than employed workers because the pay
both the employer and employee portions.
• The self employment tax rate for 2024-2025 is
15.3%.
EFFECT OF
TA X E S O N
BU SI N ESS
DECISIONS
• Taxes may influence the
accounting method a
business selects to calculate
profits and the method used
to pay managers.
• Taxes are used as a basis for
deciding where to locate a
new business or whether to
move a business from one
location to another.
