This infrastructure is developed by governments or through close involvement of the government. When governments collect money from taxes, it ploughs this money into development of this infrastructure and in turn promotes economic activity throughout the country. The concept of taxation is also important to businesses because governments can fund this money back into the economy in the form of loans or other funding forms.
Taxes help raise the standard of living in a country. The higher the standard of living, the stronger and higher the level of consumption most likely is. Businesses flourish when there is a market for their product and services. With a higher standard of living, businesses would be assured of a higher domestic consumption as well.
Taxes are essential and every citizen is meant to reap benefits of these taxes. Your Name. Your Email. In the United States and many other countries in the world, income taxes are applied to some form of money received by a taxpayer. The money could be income earned from salary, capital gains from investment appreciation, dividends or interest received as additional income, payment made for goods and services, etc. Tax revenues are used for public services and the operation of the government, as well as for Social Security and Medicare.
As baby boomer populations have aged, Social Security and Medicare have claimed increasingly high proportions of the total federal expenditure of tax revenue.
Throughout U. On the other hand, tax avoidance —actions taken to lessen your tax liability and maximize after-tax income—is perfectly legal. Most governments use an agency or department to collect taxes. There are several very common types of taxes:.
Below, we will take a look at various tax situations in the United States. Generally speaking, the federal government levies income, corporate, and payroll taxes; the state levies income and sales taxes; and municipalities or other local governments mainly levy property taxes. Like many nations, the United States has a progressive income tax system, through which a higher percentage of tax revenues are collected from high-income individuals or corporations than from low-income individual earners.
Taxes are applied through marginal tax rates. A variety of factors affect the marginal tax rate that a taxpayer will pay, including their filing status— married filing jointly , married filing separately , single , or head of household. Which status a person files can make a significant difference in how much they are taxed. Capital gains taxes are of particular relevance for investors. Levied and enforced at the federal level, these are taxes on income from the sale of assets in which the sale price was higher than the purchasing price.
These are taxed at both short- and long-term rates. Tax records should be maintained to substantiate the length of ownership when both the assets were sold and the tax return was filed. In , employees pay 1. Payroll taxes have both an employee portion and an employer portion. The employer remits both the employee portion, described above, and a duplicate amount for the employer portion.
The employer rates are the same 6. Therefore, the total remitted is Payroll taxes are specifically to fund Social Security and Medicare programs. A self-employed individual must pay the equivalent of both the employee and employer portion of payroll taxes through self-employment taxes , which also fund Social Security and Medicare. Sales taxes are charged at the point of sale , when a customer executes the payment for a good or service.
The business collects the sales tax from the customer and remits the funds to the government. Different jurisdictions charge different sales taxes, which often overlap, as when states, counties, and municipalities each levy their own sales taxes. As of , the highest average state and local sales tax rate is found in Tennessee, at 9.
Alaska does allow municipalities to charge local sales tax. The amount of the tax cost for businesses matters for investment and growth. Where taxes are high, businesses are more inclined to opt out of the formal sector. A study shows that higher tax rates are associated with fewer formal businesses and lower private investment. A percentage point increase in the effective corporate income tax rate is associated with a reduction in the ratio of investment to GDP of up to 2 percentage points and a decrease in the business entry rate of about 1 percentage point.
Keeping tax rates at a reasonable level can encourage the development of the private sector and the formalization of businesses. Modest tax rates are particularly important to small and medium-sizeenterprises, which contribute to economic growth and employment but do not add significantly to tax revenue. In Brazil, the government created Simples Nacional , a tax regime designed to simplify the collection of taxes for micro and small enterprises.
Revenue collections rose by 7. Simples Nacional was also credited with increasing the revenue, profit, paid employment and fixed capital of formal-sector firms.
Businesses care about what they get for their taxes. Quality infrastructure is critical for the sound functioning of an economy because it plays such a central role in determining the location of economic activity and the kinds of sectors that can develop.
Basic education increases the efficiency of each worker, and good-quality higher education and training allow economies to move up the value chain beyond simple production processes and products. The efficiency with which tax revenue is converted into public goods and services varies around the world. Recent data from the World Development Indicators and the Human Development Index show that economies such as Ireland and Malaysia — which all have relatively low total tax rates — generate tax revenues efficiently and convert the gains into high-quality public goods and services figure 2.
The data show the opposite for Angola and Afghanistan. Economic development often increases the need for new tax revenue to finance rising public expenditure. At the same, time it requires an economy to be able to meet those needs. More important than the level of taxation, however, is how revenue is used.
In developing economies high tax rates and weak tax administration are not the only reasons for low rates of tax collection. The size of the informal sector matters as well; the tax base is much narrower because most workers in the informal sector earn very low wages. Efficient tax administration can help encourage businesses to become formally registered, thereby expanding the tax base and increasing tax revenues.
In many transition economies in the s, the failure to improve tax administration when new tax systems were introduced resulted in the uneven imposition of taxes, widespread tax evasion and lower-than-expected tax revenue. Compliance with tax laws is important to keep the system working for all and supporting the programs and services that improve lives. One way to encourage compliance is to keep the rules as clear and simple as possible.
Overly complicated tax systems are associated with high tax evasion. High tax compliance costs are associated with larger informal sectors, more corruption and less investment. Economies with simple, well-designed tax systems are able to boost businesses activity and, ultimately, investment and employment. Tax administration is changing as the ecosystem in which it operates becomes broader and deeper, mostly owing to the vast increase in digital information flows.
Tax administrations are responding to these challenges through the introduction of new technology and analytical tools. They must rethink how they operate, offering the prospect of lower costs, increased compliance and incentives for compliant taxpayers.
In , Tajikistan launched the Tax Administration Reform Project and, as a result, the country built a more efficient, transparent and service-oriented tax system. Department of Treasury website. Thank you for sharing your opinion, Michael! By doing a little extra WONDERing, we found that there are different tax brackets so that people who make more money pay a higher tax percentage than those who make less.
That's a great question, SuperSmash22! Each time an employee gets paid, his or her employer electronically sends a portion of that money to a special accounting office located at their local, state and federal governments.
Employers use banks to send money, just like individual people do. It's true, we do have to pay taxes - whether at the store, when we purchase things, or at work, when we get paid.
It may not be our favorite thing to spend money on, but our dollars go towards helping pay for things we use everyday, like streets, public school, police and water. Paying taxes is pretty important, don't you think? We are undergoing some spring clearing site maintenance and need to temporarily disable the commenting feature.
Thanks for your patience. Drag a word to its definition. You have answered 0 of 3 questions correctly and your score is:. Want to add a little wonder to your website? Help spread the wonder of families learning together.
We sent you SMS, for complete subscription please reply. Follow Twitter Instagram Facebook. Why do you have to pay taxes? What is the IRS? How is tax money used by the government? Wonder What's Next? Try It Out Are you ready to pay up? Be sure to check out the following activities with a friend or family member: Although you won't have to worry about paying income taxes until you have a job, there is one tax you're probably already familiar with: sales tax. The next time you head to the store, bring a calculator with you.
As you travel the aisles of the store, look at the prices of products. Use the calculator to figure out how much each product would be if you purchased it. It's important to remember sales tax when you start saving up for an important purchase you want to make.
Always remember to calculate how much an item will cost — after tax — so you'll be sure you have enough money when it's time to head to the store! Talk with an adult friend or family member about their views on taxes. Do they think they pay too much in taxes? Why or why not? What kinds of things do they think their tax money should be used for? Are there things that governments spend money on that they don't think is worth it? Ask for examples, if so. What kinds of avenues exist for objecting to the way your tax money is spent?
Ask an adult friend or family member to go with you on a walk or take you for a drive around your hometown. Bring along a piece of paper and a pencil. As you walk or drive around, look for examples of your tax dollars at work.
Do you see roads being repaired? Is there a public library in your town? What about police and firefighters?
Try to come up with a list of at least 10 examples of your tax dollars at work. You might be surprised at how far your tax dollars go to provide services shared by everyone in your community! Did you get it? Test your knowledge. What are you wondering? Wonder Words year federal legislator executive withheld revenue percentage property civic penalty fortunate refund form duty job income expense resource Take the Wonder Word Challenge.
Join the Discussion. JJ Jan 30, Jan 30, How taxation is connected to our economy and Why do we need to pay tax? Jan 15, Great questions for a Wonder Journey--or a read through your textbook! Tony Oct 5, Sans Jan 29, Oct 15, Erika Feb 21, Feb 24, Hi, Erika! Feb 5, A Nov 6, Nov 8, John Oct 5, This article is kind of misleading, we stay with a question like "why do we have to pay taxes" but that isn't really answered, it does day because it's required by law but what does that mean?
It means the government rulers claim the right to force all tax payers to find the things they prefer for the prices they choose Taxation is theft by definition, more specifically extortion; "tax noun a compulsory contribution to state revenue, levied by the government on workers' income and business profits or added to the cost of some goods, services, and transactions. Fiona Oct 18, Kj Sep 11, How do you pay taxes, what do u need to do Could u guide me through the process.
Sep 17, Alex May 21, May 23, We appreciate you sharing your thoughts with us, Alex! Apr 2, We hope that reading through this Wonder will help answer your question, klk! I would like to say thank you to Chrysler kings financial investment for all the things they have helped me with.
I have a large family, and every time we have had a crisis Chrysler kings Loan finance has helped us out. Jan 5, B Dec 3, Dec 5, Hi, B! April 15 is "tax day" - hope this helps!! Dear All, " During the middle decades of the fourteenth-century, the average tax-paying peasant would had to pay the equivalent of 32 grams of silver to the royal treasury. Jun 5, That's some interesting research!
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