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How taxes work

Ever wonder why we pay so many different types of taxes, who collects them, and what they're used for? This article will help answer those questions. We'll discuss various kinds of taxes, explain how they support essential public services, and make understanding taxes effortless and straightforward.


When you hear the word "taxes," you might think of that stressful time at the beginning of the year when everyone is busy filing their tax returns and waiting for refunds. But did you know that taxes are actually a part of our lives all year round, even if you don't have a job?
That's right! We pay taxes on so many things, like the things we buy, the homes we live in, and even when we stay in a hotel. But why do we even have taxes and why do we have to pay them? Keep reading to learn about the different types of taxes we encounter and how they help keep our communities running.

Why do we have taxes?

Think of taxes like a group of friends chipping in to buy a pizza for everyone to share. Each person contributes a little bit of money (less than the cost of the pizza), and together, they can buy a pizza that everyone can enjoy. Just like the pizza, taxes are a way for everyone to contribute a portion of their money to pay for things that benefit the whole community.
We have to pay taxes because they help fund important services and programs that we all use and need, like schools, roads, parks, and hospitals. Without taxes, it would be difficult for the government to provide these services to everyone.
So, when you pay your taxes, it's like you're chipping in for a big, shared pizza that benefits everyone in your community. And just like how different toppings on a pizza cater to different tastes, the taxes we pay help support a variety of programs and services that make our lives better.

Which taxes do I pay?

There are many different types of taxes that help fund various services and programs in our communities. Here's a quick look at some of the most common ones:
  1. Income taxes: These are taxes you pay on the money you earn from a job, a business, or investments. The federal government and some state governments collect income taxes. The more you earn, the more you pay in taxes.
  2. Payroll taxes: These taxes are taken out of your paycheck to fund Social Security and Medicare, which provide retirement and health care benefits for older Americans. Both you and your employer contribute to payroll taxes. These taxes are taken out separately from your income tax.
  3. Sales taxes: When you buy goods and services, you might pay a sales tax. This tax is a percentage of the purchase price and is collected by state and local governments. The rate varies depending on where you live.
  4. Property taxes: If you own a home or other property, you'll pay property taxes. These taxes are based on the value of your property and help fund local services like schools and public safety. Property taxes are collected by local governments.
  5. Corporate taxes: Businesses pay taxes on their profits. These taxes are collected by the federal government and some state governments. Corporate taxes help fund various government programs and services.
  6. Estate and inheritance taxes: When someone passes away and leaves behind money or property, the government may collect estate or inheritance taxes. These taxes are based on the value of the assets and are collected by the federal government and some state governments.
  7. Excise taxes: These are taxes on specific goods, like gasoline, alcohol, and tobacco. Excise taxes are collected by federal, state, and local governments and are usually included in the price of the product.
  8. Hotel and occupancy taxes: When you stay in a hotel or other short-term rental, you might pay hotel and occupancy taxes. These taxes are collected by local governments and help fund local tourism and other community services.
  9. Toll taxes: When you use certain roads, bridges, or tunnels, you might have to pay a toll tax. These taxes are collected by state and local governments and help pay for the maintenance and construction of transportation infrastructure.
These are just some of the many types of taxes we encounter in our daily lives. While it might seem like a lot, each tax plays a role in funding the services and programs that make our communities better places to live.

Check your understanding

Which tax do you pay?
You just got your paycheck and noticed that some money was taken out for taxes.
Which taxes were most likely taken out of your paycheck?
Choose all answers that apply:

Meet the tax collectors: federal, state, and local governments

Now that you've learned about the different types of taxes, let's meet the tax collectors - the different levels of government! Federal, state, and local governments each have their own set of taxes they collect to fund various programs and services.
Type of taxFederal governmentState governmentLocal government
Income taxesSome states
Payroll taxes
Sales taxesSome localities
Property taxes
Corporate taxesSome states
Estate taxesSome states
Excise taxesSome localities
Hotel taxes
Toll taxesSome localities
Keep in mind that some taxes, like sales and excise taxes, can be collected by both state and local governments, depending on where you live.

What do taxes pay for?

Great, you've discovered the various types of taxes and who collects them! Now let's explore what taxes pay for. Taxes help fund important services and programs that serve our communities, like schools, roads, parks, and fire department.
GovernmentUses of taxes
FederalSocial Security, Medicare, national defense, environmental protection, research, federal programs, national parks
StateEducation, health care, transportation, public safety, state programs, state parks
LocalPublic schools, libraries, police and fire departments, local programs, local parks
Keep in mind that the specific use of taxes can vary and often overlap. For example, schools receive most of the money from state and local government, but also receive a portion from the federal government, too. Local police departments usually get their funding from local government to help keep neighborhoods safe. On the other hand, state police receive funding from state government, to protect and serve the entire state.

Do I have to pay taxes? If so, how much?

Everyone has to pay taxes in one way or another, but the types of taxes you pay and how much you pay can vary. Some taxes are the same for everyone, while others are progressive, meaning they depend on how much you earn or the value of your property.
Sales tax is an example of a tax that's the same for everyone. When you buy something, you pay a percentage of the purchase price as sales tax. It doesn't matter how much money you make; everyone pays the same rate. This is known as flat tax.
On the other hand, income taxes are examples of progressive tax. With income taxes, the more money you make, the higher your tax rate. This means that people with higher incomes pay a larger percentage of their income in taxes. So, progressive tax adjusts based on income or value of what is being taxed.
Some taxes, like excise taxes on gasoline or alcohol, happen automatically when you make a purchase. You might not even realize you're paying them because they're included in the price of the product. You cannot control how much you pay for these taxes. Other taxes, like income and property tax need to be calculated based on multiple factors, and there are ways that you can lower these.
There are different reasons for having flat and progressive taxation systems. Flat taxes, like sales tax, are simpler to understand and apply. Progressive taxes, like income and property taxes, are designed to be fairer by asking those who can afford to pay more to contribute a larger share.
So, yes, you do have to pay taxes! But remember, taxes help fund important services and programs that we all use and benefit from. And while some taxes are the same for everyone, others are designed to be fair and based on your ability to pay.

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