Are Our Taxes Being Put to Good Use?

POSTED February 24, 2023

“The rich have grown richer, but their tax rate has declined. The poor have grown poorer, but their tax rate has increased” – Michael Parenti, an American political scientist. 

In today’s world, taxes are a necessary part of life but how do they work, where does tax money go, and how is it decided who pays what?

How do taxes work?

There are two main types of taxes: income tax and sales tax

 

Sales tax refers to the tax put on purchased goods and services. It varies from state to state. For example, Alaska, Delaware, Montana, New Hampshire, and Oregon have no sales tax; Colorado has the lowest general state tax at 2.7%; California has the highest at 7.25%. A sales tax can range from 0% – 8% of the item/service purchased. Sales taxes are very important because they often fund infrastructure areas like transportation, fire/police departments, and education buildings/programs. 

 

Income tax refers to the tax put on your overall income at the end of the year. Income tax can get a little complicated. In general, each person falls into a category depending on how much they have or earn. The more money you make, the more you are taxed, or that’s the idea. There is taxable income and non-taxable income, and this is where it gets complicated. For example, receiving child support payments or life insurance proceeds are non-taxable. There are many other things that play into tax payments but these are just the basics. 

 

Where do your income taxes go? 

In 2022, it was estimated that the United States government would spend around 5.8 trillion dollars, most of it being income tax dollars. 21% or 1.2 trillion dollars of that would fund social security, which provided money for 49 million retired workers. 25% or 1.4 trillion dollars would fund health insurance programs such as: Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and Affordable Care Act (ACA). Programs like these help people who can’t afford healthcare, people with disabilities, and people aged 65 years and older. Another 13% or 665 billion dollars was invested in US defenses. Most of that money goes to the defense department for large operations and maintenance. 11% or 665 billion dollars would fund economic security programs other than health insurance and social security. Some of these programs include the Supplemental Nutrition Assistance Program (formerly known as food stamps), school meals, low-income housing assistance, and child care assistance. 7% or 420 billion dollars would support veterans and federal retirees. Only about 3% of the budget would be invested into education programs. 11% of the budget would fund other various things like transportation, law enforcement, agriculture, and medical research.


Is our tax money being put to good use? 

According to Cameron Huddleston, an award winning personal finance journalist, only 17.8% of Americans think our tax dollars are being spent efficiently as of 2020. 26.6% of Americans do not know where our tax money goes. A whopping 55.6% of Americans think the government spends our taxes inefficiently. When these people were asked where they think their tax money should go, 53% said spending on social insurance such as Social Security and Medicare would be the most important. This was followed by education and infrastructure. Around one-third or 32.9% of respondents said they don’t want their tax dollars to pay for war.

 

Do rich people pay less taxes? 

The average American has a 13.3% tax rate on their income as of 2018. The top 400 billionaires only have a 8.2% tax rate on their income, if they are even taxed at all. How is this possible? There are many loopholes one can take to pay less in taxes. One very common thing wealthy people do is generate wealth from assets like stocks. When the average American makes a dollar, it’s taxed immediately. When you gain money from stocks, it’s taxed at a preferred rate, if it’s ever taxed at all. About half of Americans don’t own any stock. 

 

Property taxes can also be written off as well. They are only deductible if you itemize everything and it comes with a limit of $10,000. Generally, you can deduct charitable contributions of cash totaling up to 60% of your adjusted gross income, or AGI. Donations of items or property also are considered deductible charitable contributions. For example, let’s say you own $10,000 worth of property. You give it to someone in your family and this counts as giving a gift/giving charity. Now you are able to deduct up to $10,000 on your income tax. The property stays within the family and you are able to write it off from your taxes. Many Americans don’t own a substantial amount of property and therefore cannot participate in this loophole. You can also deduct mortgage insurance premiums, mortgage interest and real estate taxes that you pay during the year for your home.

 

In 2021, the President of the United States said “The wealthy have to start paying their fair share of taxes. For decades, our economy has worked great for those at the very top, while hard working Americans who built this country have been cut out of the deal and left behind”. The President’s Build Back Better agenda will help give working people a fair shot and restore fairness to our tax code. For now, these loopholes allow the rich and wealthy to abuse the system. 

 

Sources:

https://smartasset.com/taxes/what-are-income-taxes#:~:text=The%20IRS%20has%20tax%20brackets,to%20your%20entire%20income%2C%20though.

https://www.taxpolicycenter.org/briefing-book/how-do-state-and-local-sales-taxes-work

https://www.cbpp.org/research/federal-budget/where-do-our-federal-tax-dollars-go

https://www.cbpp.org/sites/default/files/atoms/files/4-14-08tax.pdf

https://www.gobankingrates.com/taxes/tax-laws/americans-believe-tax-dollars-spent-right-way/

https://www.cnbc.com/2021/09/23/americas-richest-400-families-pay-a-lower-tax-rate-than-average-taxpayer.html

https://www.pewresearch.org/fact-tank/2017/10/06/a-closer-look-at-who-does-and-doesnt-pay-u-s-income-tax/

https://www.whitehouse.gov/omb/briefing-room/2021/09/23/new-omb-cea-report-billionaires-pay-an-average-federal-individual-income-tax-rate-of-just-8-2/#:~:text=September%2023%2C%202021-,New%20OMB%2DCEA%20Report%3A%20Billionaires%20Pay%20an%20Average%20Federal%20Individual,Tax%20Rate%20of%20Just%208.2%25&text=For%20far%20too%20long%2C%20our,the%20expense%20of%20ordinary%20people.

https://www.forbes.com/advisor/taxes/tax-write-offs-you-can-claim-on-your-taxes/

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