When you sit down to pay taxes every spring, you may wonder, “Why do we even pay taxes?” If you’re asking this question, you’re not alone. The tax history of the United States is long and complicated. Learn more about why we pay taxes in this article.
Why do we have taxes?
In America, the money we pay in taxes is distributed to cover many different expenses. For example, our tax money is used to maintain the roads we drive on, to fund public libraries and parks, and to pay the salaries of government workers
The United States didn’t always have taxes. When the colonies were founded, the colonists paid taxes to the British government. The colonists felt like this was unfair since they had no political voice or representation in the English government. This led to events like the Boston Tea Party, which played a part in America declaring independence from England in the Revolutionary War.
The fledgling country was first opposed to taxing its citizens due to its adverse history with taxes. However, when the Constitution was signed into law, Congress was given the power to tax the public to help fund the government. States collected taxes to send to the federal government as well. Most of these taxes were known as excise taxes, which are taxes imposed on specific services or goods, like alcohol or tobacco or gunpowder.
Later the Civil War led to the creation of income tax and the beginnings of the Internal Revenue Service (IRS). This group was responsible for collecting state and excise taxes. This signified the beginning of modern taxation as we know it today.
When were taxes introduced?
The U.S. has a long and complicated history with taxes. The British first introduced taxes to the United States with the Sugar Act of 1764. The federal income tax, as we know it today, was officially enacted in 1913. See more important tax dates on the timeline below.
What are the different types of taxes?
You might think that you simply pay taxes once per year, and it is just one flat tax. However, there are many different types of taxes that you will pay throughout the year. Some may come out of your paycheck, while others may be added to goods or services you purchase.
Federal income tax
A tax paid directly to the federal government that depends on how much income you earn and your marital status.
State income tax
A tax paid directly to the state you reside in or work in. These taxes vary because each state gets to set its own rates. Some states do not have state income tax.
Local income tax
A tax paid to the county or area that you live in.
Tax paid on specific goods, like gas or liquor.
When someone passes away, they might leave their house or property to a beneficiary. The estate tax taxes this transferal of property.
If someone gives a gift that exceeds $15,000, it will be subject to additional tax. This tax is cumulative, so even if someone broke the gift up into multiple payments, anything over $15,000 gifted in a year will be taxed.
Tax paid on goods or services you purchase. Sales tax varies by state.
Social Security and Medicare (FICA)
Also known as payroll tax, this tax comes out of each paycheck a traditional employee earns. The employee pays 6.2%, and the employer matches it for a total of 12.4% per paycheck. Self-employed individuals are responsible for paying this entire amount.
Alternative Minimum Tax
If a taxpayer has a high economic income, they can use the AMT to set a limit their tax benefits. It ensures that a taxpayer pays a minimum amount of tax.
An additional tax on items that are viewed as harmful to the human body, like tobacco or alcohol.
Investment income tax
Tax on income from interest, dividends, capital gains, or other investments.
Capital gains tax
Tax placed on the gains or losses of the sale of an asset such as a home.
Why do we get taxes back?
The Revenue Act of 1864 allowed the Office of Commissioner of Internal Revenue to refund taxes subject to current regulations. This created the first tax refunds. A tax refund is when the federal or state government reimburses a taxpayer for any excess taxes.
Who pays taxes?
Currently, any individual who earns more than $12,200 (or $24,800 for married couples filing jointly) must pay taxes. Also, anyone who earns more than $600 from self-employed income must pay self-employed taxes.