Many may find themselves asking, “what is tax?” A tax is money that the government requires citizens to pay. Citizens who owe a tax must pay the tax or the government can take their assets and even send them to jail. Tax money is used to provide government services including police, public schools, roads and firemen. Tax money is also used to support social welfare programs such as food stamps (called the Supplemental Nutrition Assistance Program), Temporary Assistance for Needy Families (TANF) and a host of other entitlements. Tax is assessed on the state level and on the local level and there are a number of methods used to determine how much tax a person owes.
Types of Taxes
In the United States, citizens have many different taxes to pay. The taxes owed include:
- Income tax. This is a progressive tax, with people in the lowest tax brackets paying significantly less than people in the highest tax bracket. Under the tax system in the United States, the top 20 percent of the income earners in the country pay 70 percent of all of the income tax burden for all of the services provided by the federal government. The lowest 20 percent of income tax earners pays just 3/10 of a percent of the total tax burden. There are some who believe this is unfair and that a flat tax should be assessed so everyone has to shoulder some of the burden; however, the current administration seeks to impose additional taxes on the top earners to further increase their share of the tax burden.
- Social security/Medicare taxes. These taxes are based on a person’s income as well. Individuals pay 6.2 percent of their income in social security taxes up to the first $113,000 in income and their employers match this contribution. No social security tax is assessed on incomes over $113,000. This is because benefits are capped in the social security program and this program was not intended to be a redistributive program but instead was intended to allow each person to pay to fund their own retirement savings.
- Sales tax. Sales tax are assessed on the local level and there is no federal sales tax, although there are some who would like to change this. Sales tax is charged as a percentage of things you buy, and is also referred to as a consumption tax. Not every state has sales tax, and the amount of sales tax charged varies from location to location. Certain items like food are often exempt from sales tax.
- Property tax. Property tax is assessed on the local level as well. Typically, property taxes are based on a percentage of the value of your property. Property taxes fund schools and local services.
All of these taxes add up to, in some cases, create a very high effective tax rate for top earners. In California, for example, some residents have a tax burden as high as 51.9 percent of their total income. Many states try to offer lower sales taxes, property taxes or income taxes in order to try to attract businesses to their tax friendly climate. The federal corporate tax system, which has very high rates and a host of confusing loopholes, also creates a disincentive for businesses to come to the United States, and many corporations have millions of dollars kept offshore in order to avoid the high tax burden imposed here.