Why We Pay Taxes: An Overview
Why do we pay taxes? The simplest reason is that the municipal, state, and national governments implement tax laws, and taxpayers’ money pays for government services of all kinds. These governments are comprised of a few parts: the legislators (those who make laws), executives (those who enforce laws), judges (those who decipher laws), and many others. The money received from taxes pays individuals who work for the government, as well as for public programs like education and infrastructure like roads. Although a legal requirement, paying taxes is also considered a civic duty. If you neglect to pay, the mediating body that oversees taxes (the Internal Revenue Service, or IRS) will require that you do so — otherwise, you might face penalties such as hefty fines or jail time. Taxes come in a number of forms. Income tax is the amount you pay when working at a job. Depending on your income, a percentage of that money is withheld, meaning it’s removed from your paycheck and sent to the government. When you purchase items at a store, a sales tax is typically added to the price. Sales tax is a percentage of the cost of the good charged at the store. Owning property also requires you to pay property taxes on its assessed value.Types of Taxes: Federal, State and Local
When it comes to taxes, there are three types: federal, state, and local. Why do we have to pay taxes to each level of government? Each level uses these taxes in different ways to fund governmental operations. Below, we’ll go over each level of government and how they collect taxes.Federal
The 16th Amendment was ratified on February 3rd, 1903, and gave Congress the power to impose a federal income tax. However, tax collection isn’t a new concept. Taxes have been collected for thousands of years by ancient civilizations, such as the Romans and Egyptians. Today, taxes serve as the largest source of revenue for the United States government and are used to fund social programs, our nation’s security, and more. In the fiscal year of 2017, the Tax Policy Center found the U.S. government collected roughly $3.3 trillion in taxes, with:- 9 percent of those taxes coming from individual income taxes
- 35 percent coming from social insurance (payroll) taxes
- 9 percent coming from corporate income taxes
- 5 percent coming from excise taxes, and
- 6 percent coming from other sources, such as estate taxes, tariffs, and earnings from the Federal Reserve’s holdings
State
States also collect their own taxes. Some reasons why we pay taxes at the state level is to fund programs and projects such as schools and roads. For fiscal year 2016, the Urban-Brookings Tax Policy Center found the following breakdown for state government general revenue:- 4 percent of revenue came from intergovernmental transfers
- 1 percent of revenue came from sales taxes
- 3 percent of revenue came from charges and miscellaneous sources
- 18 percent of revenue came from individual income taxes
- 8 percent of revenue came from other taxes
- 4 percent of revenue came from corporate income taxes.
Local
Finally, municipal governments collect their own taxes, such as the town, city, county, township, or school district you live in. Most local government revenue is collected from property, sales, and income taxes, whereas most federal revenue comes directly from personal income taxes. Here is the breakdown of local government general revenue in fiscal year 2016, founded by the Urban-Brookings Tax Policy Center:- 1 percent of revenue comes from intergovernmental transfers
- 8 percent of revenue comes from property taxes
- 6 percent of revenue comes from charges and miscellaneous sources
- 2 percent of revenue comes from sales taxes
- 4 percent of revenue comes from other taxes
- 0 percent of revenue comes from income taxes
How Does the Government Use Our Taxes?
A major reason why many Americans asked themselves, “Why do we pay taxes?” is because they don’t know where their hard-earned money goes. Once the government takes money out of your paycheck, you may see it in a few public works projects such as paved roads and your Social Security check when you retire. But where does the rest of your money really go? Take a look below to find out!Federal
Each year, the federal government uses your money to go to major public works programs and national defense to keep our country safe and citizens healthy. On USAspending.gov, you can find a complete breakdown of where your tax dollars go. In fiscal year 2018, here are the top five areas of spending by the federal government:- Medicare: $1,059,508,772,650
- Social Security: $1,039,099,908,077
- National Defense: $995,628,286,613
- Health: $696,462,832,407
- Income Security: $548,423,716,755
State
While the federal government uses your tax dollars to take care of large national programs, state governments use tax dollars for elementary, secondary, and higher education, transportation, Medicaid, public housing, and more. The National Associate of State Budget Officers released a State Expenditure Report for fiscal years 2016-2018. Here’s what their report found:- For the first time in history, state spending exceeded $2 trillion
- Elementary and secondary education spending remains the largest category of general fund spending
- Medicaid spending in 2018 jumped $41 billion from 2017 to $603.2 billion
- Public assistance grew 0.7 percent, and includes spending on cash assistance programs like the Temporary Assistance for Needy Families program and Supplemental Security Income (SSI) and General Assistance