Introducing Supply and Demand

Taxes

Governments use its tax systems to raise funds for its programs and influence its citizens' economic actions.

LEARNING OBJECTIVES

Categorize types of taxes into ad valorem taxes and excise taxes

KEY TAKEAWAYS

Key Points

A good tax system should be efficient, understandable and equitable. It should also allocate the costs of public services to those who use it, although that principle is hard to execute in practice.
A direct tax is assessed on a person's income. Indirect taxes are assessed on an individual's participation in certain activities, such as making a purchase.
The three types of tax systems are proportional, progressive, and regressive.
Ad valorem and excise taxes are two types of indirect taxes.

Key Terms

progressive: Increasing in rate as the taxable amount increases
regressive: Whose rate decreases as the amount increases.

Taxes are the primary means for governments to raise funds for its programs and to pay off its debts. It can also be used to influence its citizens' financial behavior.. Choosing the right set of rules that have all of the elements of a good tax system can be a challenge for any government.

Tax: Taxes are a tool used by governments to raise money and influence their citizens' economic choices.