Taxes

What are Taxes and Why Do We Pay Taxes?

The government provides public goods and services for the community as a whole. To pay its bills, the government needs revenue, or a source of income. The money that the federal government uses to pay its bills comes mostly from taxes. Taxes shift resources from private individuals and businesses to the government.

There are many types of taxes including: income, Social Security, Medicare, sales, excise, and property.

• Income taxes are paid to the federal and most state governments and are based on both earned (from working) and unearned (from investments) income. Federal income taxes finance: national defense, veterans and foreign affairs; social programs; physical, human and community development; law enforcement; and interest on the national debt.

• Social Security and Medicare tax is also called the FICA (Federal Insurance Contributions Act) tax. Social Security taxes provide the following benefits for employees and their dependents: retirement benefits, benefits for the dependents of retired workers, and benefits for the disabled and their dependents.

• The Medicare tax is used to provide medical benefits for certain individuals when they reach age 65. Workers, retired workers, and the spouses of workers and retired workers are eligible to receive Medicare benefits upon reaching age 65.

• Sales taxes are assessed by state or local governments and are a percentage of the cost of the item purchased.

• Excise taxes are taxes on the sale or use of certain products or transactions (telephone, airplane tickets).

• Property taxes are paid to state or local governments and are based on the value of property (home, car).