Why do we have taxes and why do I have to pay?
IdeaEconomics YouTube video: Why do we have taxes and why do I have to pay?
HISTORY
If there is one word usually associated with being an adult, that word would be TAXES! Benjamin Franklin once said this in a letter to French scientist Jean-Baptiste Leroy, “Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes.”
Taxes are constantly thrown around at work, on the news, when you go out to buy groceries for the week, and ultimately what affects your monthly income. Your income statement may say $4,100 per month, but it is really $3,200 when it hits your bank account.
I am probably similar to many of you. I didn’t really have people educating me on the importance of taxes, especially not my middle school or high school years! Most of us never learned financial literacy when we were young. Instead, we just discovered it on the spot when we became legal adults over 18+ years old and either got with the program or fell far behind everyone else.
I wanted to create this article to help people better understand why we have taxes and why we pay them, especially in America. I can’t tell you the numerous times I became frustrated when trying to understand why we pay taxes and how to properly file them before April 15th. Nor could I have told you which tax bracket I should select when accepting a new job to fill out start-up paperwork.
So, if you would like to better understand these things, you have come to the right place! I will do my best to keep things simple and easy to understand so you know why things are the way they are in the United States. Also, ways you can better prepare and protect yourself, especially if you desire to be more financially free for yourself and/or loved ones! Before jumping in, I will give you a quick rundown of how taxes came to be in our country and why our economy continues to increase taxes on us.
Three years before America was founded (July 4th, 1776), American citizens were heavily fined with new tax policies from the British. Most of us remember learning about the Boston Tea Party in history class. This occurred due to heavily fined tax policies on tea imported into the United States. Americans dumped over 340 chests of tea into the harbor to protest the countless taxes the British were enforcing on Americans.
This was an important lesson learned from the founders of America, as they decided that once the Revolutionary War was finished (1775 to 1783), they would implement new taxes on the citizens. During the Civil War was when Americans were first introduced to income tax. This would be monitored and controlled by the IRS (the organization that administers the federal tax laws with approval from Congress).
Around 1909, we began to see the IRS officially lay the hammer down and enact tax policies across all states and tax citizens on things such as tea, tobacco, alcohol, gunpowder, income, and sales & gift purchases. Suppose you are not the most educated person in American history like myself. In that case, you will find it very noteworthy to know that it was in that same year 1909 where Congress passed the 16th amendment. This amendment allows the federal government access to tax individuals regardless of the state population.
Another lesson I don’t remember learning in history class ( so thank you, Internet!) is during the Civil War, which occurred around 1861 to 1865. Americans saw the government decide to implement a tax policy to help fund the war. After the war, this tax policy was repealed. Still, it made a comeback during the Spanish American War (1898) and was enacted in telephone tax for the wealthy. What is shocking, I later found out, was that this policy was only discounted in AUGUST 2006! Over 100 years AFTER the war had ended, which definitely makes you think about why the government kept this going for so long, but that is an entirely different discussion.
The next time we saw the IRS hit us with tax policies was during WWI (1914 – 1918). After that, taxes are official as we entered into multiple wars that lasted for many years during the 20th century. You have probably seen all those war posters from history class that show Americans from the 1900s being happy & cheery.
Other signs include asking their fellow patriots to donate to the war, invest in war bonds, and consider taxes an American right. It was important for the government to pay for their fight and the resources needed to win. It was financially beneficial for the government to push the economy forward by taxing its citizens. There is no turning the clock back to when America had little to no taxes we needed to pay to the government. The standard tax policies are estate taxes, sin taxes, sales tax, the marginal tax rate, investment taxes, federal & state income taxes, and gas taxes.
Why Do I Have To Pay?
So now that you know all that, you’re probably thinking, yeah, tell me something I don’t know. Of course, the government is taking my hard-earned money. Why are they doing this to me, and how is it still benefiting the government today? Unfortunately, the government cannot run for free to answer your question.
Their primary purpose is to fund themselves to do these three things: provide security and defense for the citizens, maintain order and control, and provide public services (health, education, transportation, etc.) for the people. All of this requires money, and since we live in this country and the government is “providing” these services for us, that money has to come from somewhere to pump up our economy, so aka YOU!
According to the International Monetary Fund, governments typically use our money to promote solid and sustainable growth to help reduce poverty. Think about it. Let’s say that we did not have taxes or a body figure implementing rules for security, defense, stability, order, or public goods & services.
What would America look like? This question opens up a slew of worms, and I am not here to debate right or wrong. I am simply here to help educate you on why we have taxes and what they do. But do take a moment to think about what that would mean if fewer taxes were implemented. Some comparisons to give you an idea would be looking at The Bahamas, Maldives, or the Cayman Islands, just to name a few.
Are paying higher taxes benefiting the government in the US? This question is more complicated to answer as there is no perfect answer. However, I will provide a response that many educated economists believe to be true for our economy. According to Hoover Institution, they explain that if we increase tax rates in critical areas such as corporate business income tax, personal income tax & payroll taxes. This can significantly damage our economy and give people fewer opportunities to take care of themselves financially.
To summarize, if corporate taxes increase, a business has less profit they can earn because they are paying higher tax fees. If the company makes less money, they are less productive, which ultimately slows down their growth, so they must do layoffs and lower the income for employees. Another example is if our personal income tax increases, that means our marginal tax rate will significantly increase.
A marginal tax rate means that you will be taxed more if you make $50,000 vs. $30,000. You enter into a new income tax rate bracket because you make more money. Based on 2022, the second bracket is 12%, so if you file taxes as single, that means $10,275+ will be taxed at 12%. The next bracket is 22%, so your income from $41,775 to $89,075 will be hit by 22%. Learn about the marginal tax rate and how the rich avoid paying marginal tax rates.
The big concern, as we all know, is COVID-19. This has negatively impacted the economy of most countries across the world and has forced many citizens to suffer significantly, especially financially. Tax Foundation explains how back in 2012, they published reviews of evidence over a 40+ year time span that found negative impacts that taxes has on America’s economic growth.
Again, we understand that the government uses our tax money to provide public services, security & order. Still, it makes you think about exactly where that tax money goes and what is being done with the money being taken from you through taxes. Learn more about where does my tax money go and 10 reasons why.
Solutions!
It is always vital for me to point you in different directions to solve these problems that I address in my article. I could not stand reading a post online or listening to an educator speak on their chosen field and only present the problem. I’d be like are you kidding me?! What am I supposed to do with that? Give me some freaking solutions so I can overcome the issue!
I don’t come close to even trying to pretend that I am all-knowing, nor do I have the exact answers. However, I will discuss below some ideas that might help at least get you on the right path to overcoming some of the problems addressed above in this article. As we already understand, we have to pay taxes in America unless we want to incur the wrath of the IRS or online commenters.
One of my number one recommendations is to work with a CPA or tax professional to understand how to lower your income tax. You need to explain your goal and have them walk you through what things you can deduct or itemize when filing taxes. Also, many tax professionals have free initial consultations. You can research a few and set up the initial free consultations to see if they are worth your money. As well as discussing a payment plan if you are on a tighter budget.
There is also a free site called cpadirectory.com, which allows you to connect with thousands of certified CPAs and accountants in their database. I will recommend a few other tools I’ve used and found great success with to receive a few thousand dollars on my tax refunds every year.
You can always contribute to a retirement account. This can then be deducted from your taxable income, which ultimately helps reduce the federal tax you may owe for that year. I also have had my own business for the past 3 years, so I get significant deductions as I contribute to the economy. If you have a side hustle or even a side business, I would highly recommend you figure out how much you have spent funding that business. Then you can add that to your tax filing paperwork.
Any business traveling or expenses that occurred through your work is a write-off. Working from home on your business can be a write-off as your home office. As well as charities or churches that you donate to, even if it was just one time that year, it can be marked down as a deduction.
Another big one that many people forget to add as a deduction when filing taxes is that they are going back to school to earn a higher education. You absolutely deserve to get a tax break for that, so definitely let your CPA or accountant know that! I could go on and on, but I wanted to give you at least a few ideas as to how you can start attacking your taxes to decrease the amount that you contribute and keep more of your hard-earned money.
This concludes today’s article, and I hope that it was helpful to you and got you thinking more about your taxes. I always want to hear your thoughts and questions, especially on financial literacy. Please email me your questions and leave comments below because I want to know what you think. To keep this conversation going, learn about whether I should hire a tax professional or just do it myself?
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And remember, like Earl Nightingale said, “Everything begins with an idea.” See you again next time!