Taxes provide the revenue for government to fund public goodsGoods or services provided by the government and not restricted by a person’s ability to pay for them. — services that benefit society as a whole.
Public goods are products and services that do not depend on a person’s ability to pay for them such as when you call the fire department in the event of an emergency. At the federal level, money taxed on income is spent primarily on Social Security, Medicare, Medicaid, and defense. At the state level money collected is spent mostly on education and health. Local taxes (city and county) fund a range of services that almost always include a substantial share for police and fire protection.
Some taxes collected by the federal government are returned to state or local governments. This is called revenue sharingA share of tax funds provided by the federal government to state governments, or by state governments to local municipalities. . Federal education money given to states for school support is an example of revenue sharing.
“Privatization” of many public goods is not possible, making taxes necessary to pay for them. Businesses want to make a profit and is it possible, for example, for a profit to be made on court services, federal meat inspection, coast guard protection, or regulation of fisheries?
Where does my money go?
Three levels of government collect taxes: the federal, the state & the local level. Use the arrows below to to learn how your tax money is spent:
Revenue collected through income & property taxes goes towards providing Social Security, Medicare, unemployment benefits and national defense.
Revenue collected through income, employment & sales tax goes towards public schools, state troopers, parks, prisons, highways and roads.
Revenue collected through property & sales tax goes towards police & fire departments, public schools, mass transit and sanitation
What Makes up the Tax Base?
What is taxed by government is called the tax base. The tax base is divided into three categories: taxes on income (what you earn), taxes on wealth/possesions (what you own) and taxes on consumption (what you use). Often an additional tax is also added to the price of imported goods. This tax is called a tariffA tax imposed on a product when it is imported into a country. .
Taxes are collected on…
Mandatory federal and state taxes on income, wages, salaries, tips and commissions; mandatory taxes for Social Security, Medicare, and unemployment benefits.
Wealth & Possessions
Property taxes on homes & real estate, businesses, and inheritance tax on wealth passed on from another person, etc.
Sales tax on purchases of products, hotel rooms, travel tickets, etc. These taxes are levied at the same rate for everyone regardless of income level.
Tax Structure or “Fairness”
Tax structure can be categorized as regressive, progressive, and proportional. Understanding these three types of tax structure can help you understand issues of tax fairness.
progressive tax — A tax that takes a larger percentage of income from high-income groups than from low-income groups. The federal income tax is said to be progressive: on average, households with higher incomes pay a larger share of their income in federal tax than those with lower incomes. The overall average effective tax rate (total tax paid as a percentage of income) rises as income rises. But not all taxes within the federal system are equally progressive. The estate tax is the most progressive federal tax . The individual and corporate income taxes are also progressive.
regressive tax — A tax that takes a relatively larger percentage of income from low-income groups than from high-income groups . For example, payroll taxes for Social SecurityThe comprehensive federal program of benefits providing workers and their dependents with retirement income, disability income, and other payments. The Social Security tax is used to pay for the program. and MedicareA federal program that pays for certain health care expenses for people aged 65 or older. Enrolled individuals must pay deductibles and co-payments, but much of their medical costs are covered by the program. are regressive, claiming a larger share of income from lower-income than from higher-income households.
proportional tax — A tax that takes the same percentage of income from all people, sometimes called a flat tax. (e.g., everyone pays 5% sales tax regardless of income level).
There are trade-offs in taxing. Income is reduced by taxes — leaving less for personal goods, services, savings, and investmentProperty or other possession acquired for future financial return or benefit; also a commitment of time (e.g., to education or training). . However, when you weigh it against the public goods provided, people in a society can decide if benefits of government programs are worth a reduction in income.