Taxes
What are Taxes?
At the most basic level, taxes are fees charged by a government on people, businesses, or transactions. The primary purposes of taxes are to raise revenue to fund government operations. Tax revenue allows governments at all levels to pay for public services like roads, schools, police and fire departments, courts, parks, and more. Tax revenue also funds important government programs like national defense, health care, and social services.
Types of Taxes
There are several different kinds of taxes levied by governments: Income taxes - Charged on the income of individuals and businesses. Income taxes make up the largest source of US federal tax revenue. The federal personal income tax has a progressive tax rate structure, meaning higher earners are taxed at higher rates.
Payroll taxes - Payroll taxes are levied on wages paid to employees and used to fund specific programs like Social Security and Medicare. The largest payroll taxes are Social Security and Medicare taxes. Employers and employees each pay a percentage of wages up to an annual limit. Sales taxes - Sales or consumption taxes are charged on the purchase of goods and services. Most states levy retail sales taxes, as do many cities and counties. Sales taxes are usually calculated as a percentage of the purchase price.
Excise taxes - These are taxes on specific goods, like gasoline, alcohol, cigarettes, and services. Excise taxes may be designed to raise revenue or discourage consumption of certain goods.
Wealth taxes - Some jurisdictions impose taxes on ownership of property, assets, or net worth. Wealth taxes are less common than other forms of taxation.
Customs duties - These are taxes on imported or exported goods. They serve to raise revenue and also to protect domestic industries. Estate taxes - These are taxes levied on the transfer of property after someone dies. Fewer than 10 US states collect estate or inheritance taxes at the state level.
How the Tax System Works
The collection and administration of taxes involves many government agencies at federal, state, and local levels. Key players include: Internal Revenue Service (IRS) - The federal agency that oversees tax collection, audits, tax law enforcement, and other administration for the US federal government. The IRS is part of the Department of Treasury. State departments of revenue - Each state has its own agency to collect and enforce state taxes.
Local tax collectors - Cities, counties, school districts, and other local entities have offices to administer and collect local taxes like property taxes or sales taxes.
Most individuals pay a variety of federal, state, and local taxes. For example, an employed individual will pay federal income taxes, payroll taxes for programs like Social Security and Medicare, state income taxes in most cases, local sales taxes on purchased goods, excise taxes like gas taxes, and potentially property taxes and other local taxes.
The taxpayer responsibility in the US tax system is referred to as voluntary compliance. Taxpayers are expected to complete tax returns honestly, accurately report income, claim eligible deductions, and comply with all tax laws and regulations. State and federal tax agencies use audit programs and enforcement capabilities to verify compliance and identify fraud or evasion.