How We Pay For Government…Part One

Jeff was riding in a car home with his father one day after a quick trip to the gas station. He turned and asked, "Where do the money go if we have to give more than what the product ask for?" His father turned his head and replied, "The government need the money to improve things in our society." On and on they drove down the road in silence. Each one is in concentrated thought of the question that was posed. Confused, Jeff then asked, "Why would the government need our money if they are the ones who give it to us?" His father merely shook his head and said, "I don't know"...

Sadly, many Americans do not know the full extent or where their hard earned money goes when they pay taxes. Taxes are the prices we pay for government services. It is important that we pay taxes if we want better public services. Raising money from taxes to pay for government services isn't the only purpose. Taxes levied on products ranging from alcohol and tobacco help control their use. Personal and estate income taxes not only raise revenue but also serve the purpose of redistributing income. The three R's of taxation are revenue, regulation and redistribution.

The American democracy is based on principles of equality under law. This application of this principle requires equal treatment of subsequent equals. Simply stated, the benefit principle upholds that people who receive or benefit from a public service should pay for it. People who use toll roads to get to a place must pay a toll fee. People who visit parks must pay the city for park fees. However, it's not easy to determine the benefits people receive from the use of public services. It would be difficult to base payment for national defense, streets, and walkways on the benefit for very good reasons.

There are some people who have higher incomes and have more valuable possessions than others. Under the equal treatment principle, individuals who have more should pay more in taxes than those who have less. But time has revealed that this isn't always true. Equal treatment requires that people at the same income bracket be taxed in the same way. Our country's federal income tax is based on the ability-to-pay principle.

Taxes may be grouped by what type as well as by what principle on which they are based upon. For example, the percentage rate of tax may climb higher, remain the same, or fall as the amount by which the tax is based increases. Here are a few examples of the types of taxes:

• Progressive Taxes - These taxes are those that cause the rate to rise as income rises. The federal income tax is regarded as progressive because it can range from as low as 14 percent to 70 percent. However, these rates can be very deceiving. There are loopholes that permit individuals and corporations with larger incomes to sidestep from paying at these extremely high rates. In a nutshell, income received from sources other than the earnings from work is taxed at lower rates or is subject to deductions that lower tax obligations. This is more apparent in income from ownership of land or capitol. The effectiveness of this sort of tax is twofold. First, people with higher incomes pay larger amounts because their taxable income is larger. Second, because tax rates increase as taxable income escalates higher, the higher-income person pays significantly more in taxes as well.
• Proportional Taxes - These taxes are those whose rate remains the same even though the tax base continues to rise. Sales taxes generated from products and services are a proportional tax. This is generated from paying a certain amount of cents per dollar of purchase regardless of where you in your income or the purchase price. Some may ask if the proportional tax is fair or not. It is to many people's belief that it is however, once you look at the tax as a proportion of income rather than expenditure, you may notice that it isn't. For example, let's say that there's a poor family with a bring-home income of $5,000 and pay around $100 per year in sales taxes. This represents two percent of the income. On the other side of the spectrum, a wealthy family has a bring-home income of $50,000 yet pay only $500 in sales tax. This equates to about one percent of its income. Even though the fact that the wealthy family pays $400 more in sales taxes per year, this amount is still a smaller fraction of its income than the $100 paid by the poor family. Corporate income taxes are also an example. Corporations that boast a net income above $25,000 are subject to be taxed at a rate of 48 percent on all income exceeding the same $25,000. In other words, the rate stays the same as the tax base increases.
• Regressive Taxes - this sort of tax rate decreases as the tax base increases. Most proportional taxes are really regressive when considered from the point of view of income. There are few examples of true regressive tax rates exist. However, some examples of taxes that are regressive in relation to income include sales taxes, property taxes, motor vehicle license taxes and excise taxes.

There are taxes that may be grouped according to whether they are paid directly or indirectly to government. In certain cases, government requires businesses to collect the tax from customers. There are even some taxes that may be passed on or shifted to others. Let's further study the differences between direct and indirect taxes.

• Direct Taxes - Fees or taxes paid directly to government are this form of taxes. These kinds of taxes include progressive taxes like the personal income tax and regressive taxes like property taxes and motor vehicle license taxes. The advantages of direct taxes are that a citizen knows how much they're paying. This way, they can make sound decisions on whether or not public services are worth the cost.
• Indirect Taxes - These sorts of taxes are hidden. In other words, consumers don't know how much tax they're paying because the actual amount remains unseen in the price of the product or service they're purchasing. Some examples of indirect taxes include sales taxes, excise taxes and import duties. These sorts of taxes make it more difficult for citizens to figure out the cost of public services. The good thing about this form of tax is that they are popular with politicians because increases in them are less obvious to taxpayers.

Businesses or individuals who are assigned a tax aren't always the one who ends up paying the tax. Business taxes may be added to the whole markup of the goods and services that are sold. This means that the buyer of the goods and services pays the brunt of the tax. In a practice known as tax shifting, businesses may also shift or move the tax cost back to its employees in the form of lower wages or to its suppliers by reducing the amount it's willing to pay for materials and supplies. In the end, the consumer suffers by paying most of the business taxes because they're included in the price of the products and services that he or she purchases. In part two, we will further discuss who taxes affect our finances in the world we live in today. We will also go into depth on different levels such as federal, state, and local on how taxes affect us also.