Why Do We Pay Taxes? (2024)

At a Glance: Taxes are mandatory payments made by citizens to the government at the local, state, and federal levels. They fund government workers’ salaries and various public programs. Taxes are divided into three levels: federal, state, and local. The government utilizes tax revenue for programs such as defense, education, healthcare, public assistance, and infrastructure. Taxes are determined based on income, with higher incomes generally resulting in higher tax amounts. The government prepares budgets outlining how tax revenue will be allocated, and legislators at each level of government decide on spending priorities.

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 taxesin 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.

Federal

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.

State

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

Local taxesgo 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.

Federal

The majority of federal taxes goes toward public programsas well as national defense. The major categories include Social Security, the army, medical aid, income security, and the health of citizens.

State

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.

Local

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.

Federal

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.

State

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.

Local

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.

Read More

• 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

Conclusion

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.

Why Do We Pay Taxes FAQ

What is the purpose of paying taxes?

Taxes serve various essential purposes in a society, including:

1. Funding Government Services: Taxes provide the primary source of revenue for governments at all levels (local, state, and federal) to fund essential public services and programs, such as education, healthcare, infrastructure, and public safety.
2. Redistribution of Wealth: Taxes can be used to redistribute wealth, helping to reduce income inequality by funding social welfare programs that provide assistance to those in need, such as welfare, food stamps, and unemployment benefits.
3. Public Goods and Services: Taxes fund the provision of public goods and services that benefit the entire community, such as roads, public schools, parks, and sanitation services.
4. National Defense: Taxes support the defense and security of the country, including the military, law enforcement agencies, and emergency services.
5. Regulation and Oversight: Taxes enable governments to regulate industries, enforce laws, and provide oversight to protect consumers and maintain a fair and orderly society.
6. Environmental Protection: Tax revenue can be allocated to environmental initiatives, such as conservation programs and pollution control efforts.

What types of taxes do individuals typically pay?

Individuals in the United States typically pay several types of taxes, including:

1. Income Tax: A tax on the income individuals earn from various sources, including wages, salaries, investments, and business income.
2. Sales Tax: A tax imposed on the sale of goods and services at the point of purchase.
3. Property Tax: A tax based on the assessed value of real property, typically used to fund local government services.
4. Payroll Tax: Taxes withheld from an individual’s paycheck to fund Social Security and Medicare.
5. Excise Tax: Taxes on specific goods and activities, such as gasoline, alcohol, tobacco, and certain luxury items.
6. Estate Tax: A tax on the transfer of wealth upon an individual’s death.
7. Capital Gains Tax: A tax on the profits earned from the sale of investments or assets.

Are taxes mandatory, or can individuals choose not to pay them?

Taxes are mandatory, and individuals are legally required to pay them based on the tax laws and regulations of their country. Failure to pay taxes can result in penalties, fines, legal action, and in extreme cases, imprisonment.

How are tax rates determined?

Tax rates are determined by governments at various levels based on a combination of factors, including:

1. Tax Laws: Tax laws are established by legislatures and can be modified through the legislative process. Tax rates are set by these laws.
2. Budgetary Needs: Governments assess their budgetary requirements to fund public services and programs, and tax rates are adjusted to meet these financial needs.
3. Economic Conditions: Economic conditions, such as inflation, economic growth, and changes in the labor market, can influence tax rates and tax policy decisions.
4. Public Policy Objectives: Tax rates may be adjusted to achieve specific policy goals, such as encouraging or discouraging certain behaviors (e.g., tax incentives for renewable energy).
5. Political Considerations: Political decisions and negotiations among policymakers can impact tax rates and policies.

Are there benefits to paying taxes?

Yes, there are several benefits to paying taxes, including:

1. Access to Public Services: Taxes fund public services that are essential to society, such as education, healthcare, and transportation, providing citizens with access to these services.
2. Social Safety Nets: Taxes support social safety net programs that help individuals and families in times of need, such as unemployment benefits, food assistance, and healthcare for low-income individuals.
3. Infrastructure Development: Taxes contribute to the development and maintenance of critical infrastructure, including roads, bridges, and public transportation systems.
4. National Security: Taxes fund national defense and security, ensuring the safety and protection of the country.
5. Legal Framework: Taxes support the legal and regulatory framework that upholds the rule of law and enforces contracts, protecting individual rights and property.
6. Environmental Stewardship: Tax revenue can be allocated to environmental protection efforts and conservation programs.

Are there consequences for not paying taxes?

Yes, there are consequences for not paying taxes, including:

1. Penalties and Interest: Failure to pay taxes on time may result in penalties and interest charges, increasing the amount owed.
2. Legal Action: Tax authorities may take legal action to collect unpaid taxes, including wage garnishment, bank account levies, and the seizure of assets.
3. Liens: Tax liens may be placed on property or assets, making it challenging to sell or transfer them.
4. Loss of Benefits: Non-payment of certain taxes, such as payroll taxes, can lead to the loss of Social Security and Medicare benefits.
5. Legal Proceedings: Tax evasion or fraud can lead to criminal charges and legal proceedings, potentially resulting in fines and imprisonment.
6. Credit Score Impact: Unpaid taxes and tax liens can negatively impact an individual’s credit score, making it difficult to obtain credit or loans.

It’s important to meet tax obligations and seek professional advice if facing difficulties to address tax-related issues properly.