https://datalab.usaspending.gov/americas-finance-guide/spending/categories/
Taxes; you can’t get away from them, and everyone will pay them one way or another. Taxes are something we have always heard about, but if I were to ask you what they were and what they were used for, would you know? Well, taxes are money collected by the government for the purpose of funding government operations1. They are collected in a number of different ways.
In this blog post, we will go over a couple of different types of taxes and discuss some of the interesting ways our tax dollars are spent.
To start off, there are 3 basic tax types.
1. Tax on what you earn.
As it implies, we are taxed on anything we earn such as a salary, hourly wage, and gains on our investments (property, stocks, mutual funds, etc.) that we use as income. Many individual income taxes are “progressive,” meaning tax rates increase as a taxpayer’s income increases, resulting in higher-earners paying a larger share of income taxes than lower-earners.2
Another example would be capital gains tax. This tax is assessed on anything you’ve made a profit on that you bought for a lower price. For example, you buy a stock for $100. A week later you sell that same stock for $120. You will only pay taxes on the $20 you’ve made.
2. Tax on what you buy.
The most recognizable example would be the sales tax you see at the bottom of your receipts. A sales tax is a tax imposed by the government on the sale of goods and services. The tax is usually charged at the point of sale, collected by the retailer, and forwarded to the government when the retailer files its own taxes. Depending on what city or county you live in, this tax percentage can vary.
3. Tax on what you own.
Although it might sound weird that you would have to pay taxes on something you already own after paying taxes on the money that you’ve earned and a sales tax when you initial bought said item, this would only apply to a certain things. Some examples would be land and buildings. The Tax Foundation mentions that property taxes in the U.S. account for over 30 percent of total state and local tax collections and over 70 percent of total local tax collections. Local governments rely on property tax revenue to fund public services like schools, roads, police and fire departments, and emergency medical services3.
Another example of a tax on what you own would be estate and inheritance taxes. Estate taxes are due and payable by the estate’s executor on or before nine months following the date of death. Inheritance taxes are only due if the amount being inherited exceeds a certain threshold4. I did want to note that estate and inheritance taxes are different with every state. Make sure to reach out to an estate attorney and a Certified Public Accountant for the more information.
What is it spent on?
With all of the taxes that are payed by individuals and businesses on what you make, what you buy, and what you own, it begs the question, where does our money go? Well Data Lab, a website created by the Office of the Chief Data Officer at the Bureau of Fiscal Service, reported that the government collected $4.04 trillion in revenue for 2021. The federal government spent $6.82 trillion on various categories such as Social Security ($1.1T), Health ($796.8B), National Defense (754.8B), Medicare ($696.5), Education ($273.1B), Social Services ($21.9B) and more. For an awesome visual and interactive representation, click here for Data Lab’s charts where you can explore federal spending by category or by agency5.
We hope you found this blog post educational. If you have any questions, we encourage you to schedule a quick chat with Tori and Alex below.
1 https://smartasset.com/taxes/understanding-taxes
2, 3 https://taxfoundation.org/the-three-basic-tax-types/