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Why We Pay Taxes

When a group of people live together as part of a city, state, and country, there are important services everyone will need to use, but no one can pay for them entirely on their own. Taxes are a way for everyone to pay money toward the costs of public services all, most, or some of us will use at some point in our lives. What exactly tax money pays for is determined by the community’s government—in the case of the U.S., that’s the federal, state, and municipal governments. Elected officials decide the rate of taxes and where the money goes.

According to the IRS, taxes in the U.S. pay for Social Security, Medicare, and other retirement plans like pensions; national defense, veteran affairs, and foreign affairs; interest on national debt; physical, human, and community development; social programs; and law enforcement and general government expenses.

Federal Taxes

Approximately half of Americans’ tax burden is for federal programs via personal income tax. The rest of federal program funding comes from payroll taxes, corporate taxes, excise taxes, estate taxes, tariffs, and earnings from the Federal Reserve’s holdings.

Federal taxes pay for:

  • Social Security
  • Defense and support agencies like Homeland Security and the Department of Veterans Affairs
  • Medicare
  • Medicaid
  • Interest on national debt
  • Other welfare and government retirement programs
  • Health and Human Services (the administrative arm for Medicare and Medicare)
  • Department of Education
  • NASA
  • Natural resources and conservation (national parks)

State Taxes

The one-third of state revenue that comes from the federal government pays for Medicaid, a health care program for low-income families. States collect money from sales taxes; state income taxes (if applicable); license fees; estate taxes, and severance taxes; corporate income taxes; and charges and fees for state universities, public hospitals, and toll roads.

State taxes pay for:

  • Higher education
  • Hospitals
  • Roads
  • Corrections
  • Police forces
  • State parks

Local Taxes

Local taxes are charged by cities, school districts, and counties. These taxes include property taxes; fees for water, sewage, and parking meters; sale taxes; stadium and business license fees; and income taxes (if applicable).

Local taxes pay for:

  • Education and libraries
  • Hospitals
  • Police
  • Welfare programs
  • Roads
  • Parks
  • Transportation

When you understand what taxes pay for, it can be easier to appreciate how they’re a part of our government and economy. Of course, you can help determine if taxes increase or decrease and what they pay for by voting for local, state, and national government officials who share your values.

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