Final answer:
The incorrect statement is that both common and collective funds are designed to be exempt from income tax. Common funds may have tax advantages but are not inherently tax-exempt, while collective funds for employee benefits are often tax-exempt.
Step-by-step explanation:
The question concerns taxation policies for investment funds, such as common funds and collective funds. It is a common misconception that both types of funds are designed to be exempt from income tax. In reality, this statement is incorrect. While common funds, like mutual funds, are investment vehicles that may have certain tax advantages, they are not inherently tax-exempt. Collective funds, on the other hand, are used for employee benefits like pensions and are often designed to be tax-exempt because they are set up under specific tax-favored sections of the tax code.
The purpose of taxes is multifaceted, serving to collect revenue for public goods, regulate trade, and more. Regarding the government's right to tax, the Constitution outlines the criteria and limitations for federal tax collection, managed by the Internal Revenue Service (IRS). Taxes collected are meant to serve the 'general welfare' of the country and must be applied fairly across all states.