A day does not go by where taxes are not in the news. Whether it is a proposed property tax hike at the local level or an across-the-board cut in federal taxes, this public policy remains a crucial issue. But to grasp this subject, it is important to understand what taxes are, the various types, and how we got to this point where everything costs more.
Taxes: A Primer
So, what exactly is taxation?
Taxes are involuntary charges implemented by federal, state, and local governments and applied to individuals, businesses, and organizations to cover the cost of public activities. The money collected is used to spend on roads, education, transit, libraries, military, and other goods and services available to the public.
Taxes are collected by the Internal Revenue Service (IRS). If citizens refuse to pay their taxes, then it is punishable by law through a fine or imprisonment – or both.
Common Forms of Taxation
Across the United States, there are hundreds, if not thousands, of different types of taxes. These levies can cover everything from your income to your trip to the movie theater. While it would be extremely difficult to list every tax in the US today, here are the seven most common types:
- Income Tax: a percentage of your earnings is taken away by the federal or state government.
- Sales Tax: a percentage of certain goods and services are subjected to a tax.
- Corporate tax: a percentage of corporate profits is confiscated by the government.
- Property Tax: a percentage of your home value is taken.
- Estate Tax: a percentage of your estate is taxed at the time of your death.
- Excise Tax: a duty on manufactured goods at the source rather than at the sale.
- Tariff: a levy on imports or exports.
Taxes are also applied at various rates. So, in the US, you may have a different tax bill depending on your income. For example, a single person earning between $9,701 and $39,475 will be taxed at a 12% rate. But a married couple filing separately earning $160,726 to $204,100 will pay a rate of 32%.
It should be noted that every jurisdiction in the US has its own tax structure. When you are moving to another state, it is important to study what the tax situation is like.
A Brief History of Taxation in America
Following the American Revolution, the United States needed to fund the government. The federal government imposed tariffs and placed levies on glass windows and other items. States and municipalities instituted property taxes on land and commercial buildings, as well as excise taxes.
At the turn of the 20th century, the country started experiencing a progressive change in the tax code. States implemented sales and inheritance taxes. In 1913, everything changed with the 16th Amendment and the introduction of income tax:
“The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
The Tax System
Everyone has their own opinion on the tax system. On the left, to quote Supreme Court Justice Oliver Wendell Holmes, “Taxes are what we pay for a civilized society.” On the right, taxes should be as low as possible. For libertarians, the tax code should be scrapped, and the IRS should be abolished. Where do you stand on the issue? High, low, or none at all?