Taxes are essential for economic growth and development, and amount to trillions of dollars a year in the US, paying for everything from Social Security to trash removal. This article looks at why we pay taxes and the consequences of not paying them.
What Are Taxes?
Taxes are required payments by individuals or businesses made to the government, whether local, regional, or federal. Public services like roads and schools, as well as government programs like security and healthcare, are paid for with tax dollars.
Additionally, taxes are imposed on both the entity being taxed and the end consumers of the business’s goods, including payroll taxes, income taxes, and sales taxes.
Note that:
- Governments must collect mandatory contributions in the form of taxes.
- In the United States, federal income taxes are collected by the Internal Revenue Service (IRS).
- There are numerous types of taxes, and the majority are levied as a percentage of a financial transaction (for example, when income is earned ).
- Other taxes, like property taxes, are levied under the asset’s assessed value.
- Taxpayers can manage their finances to lessen the effects of taxes by having a clear understanding of what causes a tax situation.
How Does Tax Work
Governments collect taxes from individuals and corporations to fund public works and services. Income taxes are applied to money received by taxpayers, such as salary, capital gains, dividends, interest, and payments for goods and services. These taxes are used to improve the economy and all who live in it.
Note that tax revenues are used for public services and government operations, as well as Social Security and Medicare, and tax policy has been a source of political debate throughout history.
Furthermore, taxes require a percentage of the taxpayer’s earnings or money to be taken and remitted to the government. Tax evasion is punishable by law, while tax avoidance is legal. Most governments use an agency or department to collect taxes, such as the IRS in the US.
Types of Taxes
We will examine several tax scenarios in the US below:
#1. Income Tax:
The United States has a progressive income tax system, where higher taxes are collected from high-income individuals or corporations than from low-income individuals. Taxes are applied through marginal tax rates, which can be affected by filing status, source of income, and terminology. Furthermore, capital gains taxes are particularly relevant for investors, as they are taxes on the profit generated when selling an asset that’s increased in value.
Note that taxation on capital gains depends on the length of time held. Short-term gains are taxed at the owner’s ordinary income tax rate, while long-term gains are taxed at a lower rate. Tax records should be maintained to substantiate the length of ownership.
#2. Payroll Taxes:
Payroll taxes are withheld from an employee’s paycheck by an employer, who remits the amount to the federal government to fund health and security programs. In 2023, employees will pay 1.45% into Medicare on all wages and 6.2% into Social Security on the first $160,200 earned. Anyone earning more than $200,000 pays an additional 0.9% into Medicare. Employer rates are the same: 6.2% for Social Security up to the wage base limit and 1.45% for Medicare on all wages. The total remitted is 15.3%.
Note that payroll taxes and income taxes are withheld from an employee’s paycheck and remitted to the government, while self-employment taxes also fund Social Security and Medicare.
#3. Corporate Taxes:
Corporate taxes are paid on a company’s taxable income, which is calculated using sales revenue, COGS, gross profit, operating expenses, EBIT, and interest expense. The corporate tax rate in the US is currently 21%, compared to 35% before the Tax Cuts and Jobs Act (TCJA).
Finally, the Inflation Reduction Act of 2022 passed a 15% corporate minimum tax, which affects U.S. and foreign corporations with three-year average book values of $1 billion or more.
#4. Sales Taxes:
Sales taxes are charged at the point of sale and remitted to the government. Furthermore, each state has its own sales tax, and cities and counties can use their rates if they abide by the taxing rules of their condition.
Interestingly, Tennessee had the highest average state and local sales tax rate in 2022, while five states did not have a state sales tax.
#5. Property Taxes:
The real estate ad valorem tax is a common property tax in the US, with a millage rate used to calculate it. Reassessments are typically performed every one to five years, and many states also tax tangible personal property.
Note that New Jersey had the highest property tax collection per capita, while Alabama had the lowest, with $598 per capita.
#6. Tariffs:
A tariff is a tax imposed by one country on goods and services imported from another, with two main types: fixed fee tariffs and ad valorem tariffs. Note that fixed fee tariffs are levied as a fixed cost, while ad valorem tariffs are assessed as a percentage of the item’s value.
#7. Estate Taxes:
Estate taxes are levied on estates that exceed the exclusion limit set by law, which is $13 million in 2023. Surviving spouses are exempt from taxes. The estate tax due is the taxable estate minus the exclusion limit, and the rate is a progressive marginal rate that increases from 18% to 40%.
Note that states may have lower exclusion limits than the federal government, but no state taxes estates worth less than $1 million. Additionally, state rates are different from the federal rate, and some states levy their own additional estate or inheritance tax with different exclusion limits.
Lastly, estate taxes are applied before assets are disbursed to beneficiaries, while inheritance taxes are paid by the beneficiary. Only six states have an inheritance tax as of 2022.
Do We Really Need to Pay Taxes?
Now let’s look at the importance of paying taxes:
#1. It Helps Build To The Nation:
Taxes are essential for the government to run a large and populated country. Income tax is one of the most significant sources of income for the US government, and if people don’t pay it, it will harm the nation’s growth and cause social collapse.
#2. It Is Beneficial To Contribute To Welfare Schemes:
The government has launched several schemes to help millions of Americans, which require a lot of money to run. By paying income tax, people can contribute to the success of these schemes and help the government work on more welfare programs.
#3. It Helps To Improve Healthcare And Education:
Taxes are used to improve healthcare, provide government schools with a negligible fee, and fund defense and infrastructure developments. This helps to make the country more powerful and prosperous. Therefore, taxpayers should understand the importance of income tax and use it to contribute to the development of the nation.
Due to timely tax payments, the country can keep up and continue to expand. Therefore, as a responsible citizen, you should always pay your income taxes on time.
What Happens if We Don’t Pay Taxes?
Not paying your taxes is against the law. On top of that, you owe penalties and interest on the sum you failed to pay. Consequently, you may be charged by the IRS and sentenced to up to five years in prison in certain circumstances.
The following are the consequences of not paying your taxes:
#1. You Might Have a Lien Against Your Property:
If you owe the IRS $5,000 or more and own or are paying down a mortgage on the property, the federal government could put a lien on it. The IRS files these documents with the county government, so if you sell your home, the government will take what you owe before you see any profits. Consequently, it can be difficult to refinance your home if you have a lien on it.
#2. Your financial situation could become more uncomfortable:
The IRS will eventually enforce collections against you if you don’t pay taxes. This could include a bank levy, wages garnished, and seizing property. It’s unlikely to go to jail for evading taxes, but it’s possible if you’re broke and struggling to pay taxes.
Who Invented Paying Taxes?
The earliest evidence of taxation dates back to ancient Egypt, where the Pharaoh levied a tax equal to 20% of all grain harvests around 5,000 years ago.
How Did the US Make Money Before Income Tax?
Before 1913, the majority of the federal government’s income came from taxes on goods, specifically tariffs on imported goods and excise taxes on goods like whiskey. Therefore, working Americans bore the brunt of these taxes because they spent a much higher proportion of their income on goods.
When Did America Start Taxing?
The Revenue Act, which President Lincoln signed on August 5, 1861, established the first federal income tax. Lincoln and Congress decided to impose a 3% tax on annual incomes over $800 to raise money for the Civil War.
Who paid the Most Taxes?
According to the Tax Foundation, the top Americans pay the highest amount of combined federal, state, and local taxes. The top quintile, or those making $130,000 or more annually, paid $3 trillion in taxes as a group, while those making less than $25,000 paid $140 billion.
Why Do I Have to Pay Taxes Instead of Getting a Refund?
When you’re used to receiving a refund, having to write an IRS check can be very confusing. A tax bill, however, ultimately comes down to some basic math: You owe more in taxes than you were able to pay for the entire year. Typically, this indicates that insufficient money was withdrawn from your salary to cover taxes.
The retirement and survivorship benefits that the Social Security Administration provides to millions of Americans each year are paid for by Social Security taxes. Note that 38 states do not tax Social Security benefits in any way. The other 12 impose taxes on specific recipients in specific situations.
Why Do We Pay Taxes to the Government?
Income tax is the most important tax in the USA, as it is used to provide subsidies to farmers, healthcare, education, infrastructure, and other government welfare schemes.
Why Do We Pay Taxes on Food?
Taxes on food can be used to generate revenue, redistribute wealth, and promote public health. Note that not all countries impose taxes on food, and exemptions or reduced rates may be available for certain types of food. Therefore, some countries exempt food altogether if it is considered a basic necessity.
Why Do We Pay Income Tax?
Income tax is a tax levied on income earned by individuals and businesses. It is used to generate revenue, promote fairness and equity, encourage economic growth, and reduce inequality. Note that income tax policies can vary greatly depending on the economic, social, and political context of each country.
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