Why Do We Pay Taxes?
Posted by Frank Gogol in Taxes | Updated on June 20, 2023
No matter the political, social, or economic status, every year around April 15th, adults all around America universally mourn Tax Day. This is the day federal and state income taxes have to be paid. But are you aware of how many levels you are paying taxes on and how they are being spent? In this article, we will do a thorough breakdown of your taxes.
What Are Taxes?
The government of the United States is divided into local, state, and national levels. Each of these levels of government has different functions. This includes having different legislators who write new laws and different executives who implement them. They also have separate justice systems. All these workers are government workers, and a part of your tax dollars goes toward paying their salaries.
It is considered a civic duty of citizens to pay taxes and is required by law. In America, the Internal Revenue Service is in charge of verifying your tax amount. If you are not paying your taxes in accordance with your income, they also issue penalties such as fines or even jail time.
Kinds of Taxes
The amount you pay in taxes is divided into three levels of government, federal, state, and local.
This year, the federal government will collect over $3.86 trillion in tax revenue. Half of the tax amount in this bracket comes from personal taxes paid by average people. Over one-third of this comes from taxes paid by the payroll of employees of various corporations, which is also known as income tax. Corporate taxes account for about 7%. The rest of the money comes from taxation on estate, earnings, tariffs, etc.
States had a combined income of over $1.8 trillion in 2018. One-third of this amount comes from the taxes paid to the state government. A considerable part of this tax goes toward Medicare for low-income families. State taxes are also applied to the sales of goods and services. Income tax is around 18% of the combined total. Various charges and fees for other state-run organizations account for 19%.
Local taxes go towards paying for the schooling system, city costs, and county. Even this amounts in the trillions of dollars. Almost 44% of the local government tax revenue comes from intergovernmental transfers. Property tax is another major contributor, followed by utility fees. Sales tax goes towards 7% of the tax revenue. There are some cities charging license fees and fees for stadiums and businesses. Some cities also tax income along with the federal government.
How the Government Uses Our Taxes
Now that you know how your tax dollars are divided between the three government levels, you should also understand how they are spent. Take a close look at the budget announced by the government every year to know where this money is going.
The majority of federal taxes goes toward public programs as well as national defense. The major categories include Social Security, the army, medical aid, income security, and the health of citizens.
The majority of a state’s income from taxes goes towards education, Medicare, public housing, and transportation. Some public assistance programs are also included in the tax spending.
You should have a much better understanding of tax dollars on the local level. The local government is in charge of water, the sewage system, school transportation, and waste removal. These are all public programs funded by the local government alongside other community needs such as firefighters, police, correctional facilities, public parks, and libraries.
How Are Taxes Determined?
Taxes are defined based on income. On a simple principle, the more you earn, the higher your taxes. However, taxpayers have ways to reduce the amount of taxes they pay by utilizing various credits, deductions, and exclusions on their income, which reduces the taxable income.
The tax rate is variable and has been changing over the years. In 1913, the tax rate was only 7%, compared to 91% in the 1960s. Currently, there are tax brackets that are dedicated to income levels. Almost 80% of households in the United States fall within a 15% tax bracket or lower. This also includes people who have no taxable income and people who do not file for tax returns.
As your income grows, you fall into the marginal tax rate system where not all of your income is taxed at the same rate. When you move from one tax bracket to another, only the extra income is taxed at the next bracket level. The higher tax bracket rate is not applied to all of your income.
Every year, the presidential administration works on preparing a budget that dedicates tax amounts toward various programs.
On the federal level, various agencies and departments prepare proposals for spending tax money and send them for the president’s approval during budget negotiations. The budget is usually discussed in an address and then given to Congress. After this, House and Senate members work together to create a resolution and finalize the budget which considers how the budget will impact various industries.
Once the budget has been drafted into a bill, it is shared with the House for approval, followed by the Senate. Both chambers have to approve the same bill, and only then is it sent to the president to sign. If the president approves the bill, it becomes the law. If the budget is not agreed upon by the president, the government may shut down, and various federal departments may have to halt their work.
The citizens of a state can vote for their state legislature. These are the legislators who will ultimately decide what happens with the tax revenue paid by the people. These lawmakers also determine how this amount will be spent — whether it will be dedicated toward various public health programs, assistance, or education. The state legislatures’ duties are drafted in policy and determine how they can utilize the taxable revenue for various social programs.
At the city or local level, there is a group of representatives who decide what happens with the tax revenue. These elected representatives work for the city commissions, boards, and various city councils. They determine whether tax revenue will be spent on local programs like parks and libraries or the schooling system. They can also supplement anything the city might need direly with this amount.
- Why Was No Federal Income Tax Withheld From My Paycheck?
- Why Do I Owe Taxes?
- Why Do I Owe State Taxes?
- Are You Exempt from Federal Withholding?
- How to File Taxes With No Income
- Can You File Taxes Without a W2?
- H1B Taxes: Everything You Need to Know
It can be disheartening to see that a considerable portion of your hard-earned income is deducted every month for taxes. But there is a greater purpose for this. Taxed income funds public services like police and firefighting, roads, waste disposal, schools, and national security.
Learning about your local legislature and federal-level politics will help you understand how representatives decide where your money goes and what changes they implement. In the grand scheme of things, your taxed money should make your life better.