The US Federal government has mandated the need for taxes for a very long time. In fact, the individual income tax that you pay on your earnings accounts for the largest portion of revenue for the federal government. This has been the case since the year 1950.
If you’ve ever asked the question “What do taxes pay for?,” then this should shed some light on the matter for you. The easiest way to look at our motivation for paying taxes is from the perspective of the law.
Maybe if people were given a choice to pay taxes, they wouldn’t. Even if people knew that taxes serve a good purpose, many people would just ignore them. To prevent such an outcome, municipal governments put tax laws in place. These laws speak to the taxes that each person is expected to pay and the conditions under which they become due. There is also a reference to the amount that each person is to pay.
Taxes don’t exist because governments thought that collecting money from people sounded like fun. In fact, many of the government services that people enjoy are either completely or partially paid for by taxes.
One aspect of this that’s easy to point to is the public or state-owned transportation system. How do you think all the expenses of such a system are covered? Your answer to that may be that the fares cover it all, but this is not always the case.
The revenue collected by the buses cannot always cover the various expense sources, such as salaries, vehicle maintenance, vehicle repairs, vehicle replacements, operational overhead, etc. Because of this, tax is collected from all public citizens that use these resources to make up the differences.
There are three types of taxes that all government tax laws cover. All three are covered below.
These taxes apply to counties, school districts, and cities. The bulk of the revenue that falls under this tax type comes from sales taxes, property taxes, miscellaneous taxes, fees, and intergovernmental transfers. These transfers are done from both the state and federal governments.
State taxes are collected from a larger pool of sources, since there is a wider coverage area. As the name suggests, these are taxes that fall under the purview of a state. Intergovernmental transfers are a factor here too, but they only come from the federal government.
Additionally, revenue comes from other areas, such as income taxes, sales taxes, fees and costs associated with universities and public hospitals, toll roads, severance taxes, estate taxes, and severance taxes. Corporate income taxes are also included in the mix, but these taxes are minuscule, so the revenue from them isn’t much.
These corporate taxes are kept low by design, as each state wants to attract businesses and the jobs that are synonymous with them.
The federal government is the largest collector of taxes. In fact, the total income generated from the local and state arms is typically less than that which is generated by the federal government.
Most of this revenue comes from personal income taxes that are paid by the working class. Additionally, there is revenue from payroll taxes, corporate taxes, estate taxes, tariffs, excise taxes, and Federal Reserve holdings.
How Taxes Are Used
You should now have a better understanding of the various tax types and how they benefit each arm of government. Now it is time to review how the revenue is used.
Local governments use their taxes for the improvement and continuation of government programs within their respective areas. For example, pension funds are a big focal area of the revenue generated from taxes.
Apart from this, most of the revenue goes to maintaining services, such as library and educational offerings. In fact, just about 40% of the revenue tends to be put into education. Hospitals get about 10%, the police get about 6%, and about 5% is used for the maintenance of roads and welfare programs.
State governments have different priorities than local ones, so some of the spending areas and some of the allocation percentages are noticeably different.
For example, social services get a 40% allocation. This includes everything from public housing, to welfare and Medicaid. Much of this funding is that which was received from federal government fund transfers. Tertiary education gets about a 20% allocation. Hospitals get around 10%, roads get 10%, 5% goes to corrections, and a similar 5% goes to the state police.
The IRS is the bane of the existence of many people. This is especially true when Tax Day rolls around in April. Tax Day is a day that is selected as the deadline for filing any taxes for income earned in the previous year. For example, April 15 was Tax Day in 2019. That was the final day for income taxes for 2018 to be filed.
Of course, many people just feel as if the IRS takes their money and makes it disappear, but this is not the case.
Social Security is the biggest recipient of federal tax dollars, as just about 25% of earnings are focused there. These funds are used to make the necessary payments to all beneficiaries of Social Security programs. Of course, payroll taxes and the Social Security Trust Fund (which is also 85% driven by worker contributions) are the biggest contributors to these social security programs. The trust fund is known as America’s retirement fund, so it’s the government’s way of helping you to secure your future post-retirement.
After social security, defense accounts for the next heaviest investment. The Department of Veterans Affairs and Homeland Security are beneficiaries of this spending. Additionally, this is where the brave men and women in uniform of the US Military get their funding from. Not only does this area of spending cover salaries for the military, but all the needs that arise during wars or to protect the US from attacks come under this umbrella.
The problem with this kind of spending is that most people can’t measure it. If a country had planned to attack the US but subsequently didn’t because of military technology investment, how do you measure the value of the prevented attack? The truth is that you can’t, which is the same problem with spending that covers needs associated with those who are fighting wars overseas. You may not see it, but that funding doesn’t come out of thin air. Contributions from people like you make this possible.
After defense, Medicare is the next priority. Most of this allocation is also covered by payroll taxes, but you don’t directly benefit from this until you have reached the age of 65. When you do get to that age, though, it is convenient to have the service available to you.
Medicaid follows Medicare, and this is another area that you may never benefit from. Remember that this offering is for preventative care for low-income families. So if you do not fall into that bracket, take solace in the fact that you are one of the reasons that these families can get the medical attention that they need.
There are other areas of spending too, such as funding for government agencies like the Department of Education and Health and Human Services.
This section is dedicated to helping you understand who has the power to establish what kind of taxes are mandated.
There are taxation authorities in the areas that fall under local government. These authorities elect representatives who make decisions where taxes are concerned. City boards and councils are two groupings of these elected representatives.
These are the only persons who are involved in the decision of which taxes to impose. The decision is typically taken based on the needs of the jurisdiction.
Every state has a legislative arm of government. This arm is responsible for legal matters, such as establishing and reviewing laws. This is where the decision of which taxes should be imposed lies. This arm is also responsible for adjusting the rates when necessary.
The basic idea is that the taxes that are collected should be enough to pay for the needs of the state in tandem with the funds provided by the federal government.
Based on the Constitution, Congress has the absolute power to both establish and collect taxes. While Congress has this power, it takes its direction from whatever is laid out in the president’s annual budget.
The president usually makes any recommendations that are deemed fit in the State of the Union Address. Upon doing so, it is drafted by the Treasury Department, who provides it to the president for submission to Congress.
All tax bills start the review process in the United States House of Representatives. If the bill is approved after the deliberation process (which involves the public), it is then passed to the Senate’s Finance Committee.
The committee then provides the bill to the full Senate once there are no issues. Should the Senate and the House agree to the bill, it is sent to the president for a signature. Note that the bill that the president gets back can be completely different, as the Senate is known to adjust the bill to the point of rewriting it completely.
If the House is to disagree with the Senate’s version of the bill, what ensues is a glorified negotiation to get to the point of agreement. The House and Senate have different motivations for the actions they take, which means that they are likely to have disagreements.