The only certainty besides death? Taxes... at least according to some individuals like Ben Franklin. Taxes may not seem like a particularly thrilling topic, but the subject itself can be exciting since it stirs so much controversy. Who gets taxed, and how much? Where does the tax money go? Why does tax law have to be so confusing??? History shows us that taxes are of great concern with examples in Mahatma Gandhi’s Salt March in 1930 as resistance against British salt taxes or the Rosetta Stone created as a multi-lingual written tax decree from the Ptolemaic Dynasty in 2nd Century B.C. Many imperialistic civilizations throughout history imposed taxes on conquered peoples, and tax systems themselves have evolved over the last few millennia. This week, we’ll take a look at modern taxes in the United States, where the money goes, and how the United States compares to other countries in these respects. Don’t worry... tax season in 2021 still hasn’t kicked into gear for most people, so sit back, relax, and enjoy this article brought to you tax-free.
Where does the Money Come From?
With taxes applied in most monetary transactions, I’m sure we’re all well aware of where tax revenues come from. Taxes come in different forms, though, whether it’s your paycheck or your receipt at the grocery store. Several forms of taxes include:
Proportion of federal revenue from various tax sources
Individual income tax: Just a percentage of any income that you make.
Capital gains tax: Applied to money made in the sale of assets such as property or stocks.
Corporate tax: Applied to the profits from a company.
Payroll tax: Also called the Social Insurance tax, this includes a portion of your regular income that goes to Social Security, Medicare, and unemployment insurance. Your employer (if you have one) pays money towards this tax as well.
Excise tax: Applied to certain goods such as alcohol, tobacco, and gasoline. These taxes are often used to influence consumer behavior.
Estate tax: Applied to assets (such as cash, property, or stock) that are transferred from a dead person to their heir.
Sales tax: Applied to any goods or service purchased. This tax is set by the state or municipality.
Customs duties: Taxes on goods imported from other countries.
…among others
The largest tax revenue for the United States federal government comes from individual income taxes, which make up about 50% of the federal government’s tax revenue. The overall federal government tax revenue for fiscal year 2020? $3.42 trillion. Unfortunately, that $3.42 trillion was STILL not enough to finance all of the federal government’s expenditures, but we’ll talk about that a bit later. Just for comparison, that’s almost an order of magnitude larger than the company with the highest revenue in the world, Wal-Mart, which pulls in close to $510 billion per year in revenues.
Overall, the United States tax system is generally progressive. A progressive tax means that individuals with higher incomes pay a larger percentage of their income towards taxes. The overall progressive nature of the tax system is created through mechanisms such as tax brackets and is intended to mitigate severe wealth inequality. Estate taxes are also used to moderate the effects of “dynastic” wealth, which is wealth that stays within a family or is passed onto heirs. Most recently, estate taxes in the United States only apply to those with an estate worth of at least $11.2 million, so the tax does not apply to most Americans. The types of taxes paid, whether estate tax or any other tax, vary based on your level of income, and most in the lowest income brackets pay a majority of their federal taxes in the form of the payroll tax.
Types of taxes paid by various income levels, from those in the lowest quintile (fifth) of earners to those in the top 0.1% of earners.
In comparison to the federal government, states use a different set of methods to tax and get funding. Around one-third of funding for states actually comes FROM the federal government in the form of grants or other programs. The remaining funding comes from different sources depending on the state, but primarily sales taxes, individual income taxes, and miscellaneous charges (public university tuition, public hospitals, road tolls, etc.) make up a majority of the state income. State tax laws can get pretty bizarre, and a few weird ones include:
Hawaii: Residents can receive a $3,000 tax deduction every three years for each “exceptional tree” on their property to help cover maintenance costs. Yes... they do use the word “exceptional” in the law.
New York: Whole bagels are tax-exempt, but SLICED bagels get slapped with the hefty state tax as a “prepared” food.
New Mexico: Residents that are at least 100 years old do not have to pay income tax (with a few stipulations, of course).
Illinois: Snickers candy bars are taxed at a higher rate than Twix candy bars. This is because Twix is not considered a “candy” under Illinois tax law.
While I won’t cover local government taxes in detail (these include counties, municipalities, school districts, etc.), a majority of the local government funding comes from property taxes or money passed along from the state or federal government.
Where does the Money Go?
While it may not be particularly enthralling to think about all the money given to governments, that money can certainly be put to good use (or not, depending on your views). A major source of “spending” is income tax expenditures. Tax expenditures include such things as tax exclusions, exemptions, or credits that are claimed. Basically, the federal government COULD have pulled in more tax money, but both people and businesses used the tax code (legally) to reduce what they owe. These tax expenditures were equivalent to around $1.8 trillion in 2020... so yeah, that’s a lot of money.
United States national deficit/surplus for 2000-2020
Alas, the federal government had no problem spending the $3.42 trillion that they did make in 2020, and with the craziness of 2020, the spending was much higher than normal at a whopping $6.55 trillion. A large portion of this spending was caused by additional legislation associated with COVID-19 relief, such as the CARES act. If you’re a math whiz, you might have noticed that $6.55 trillion is larger than what the federal government actually made. So... the United States just tacked that deficit onto the national debt. As of 2020, the United States’ national debt is close to $27 trillion, which is equivalent to around $80,000 per person living in the country. The United States pays off this debt rather slowly, spending about $300 billion per year.
Other than the additional COVID spending and paying off debts, though, a majority of federal spending typically goes towards what is considered “mandatory” spending. This mandatory spending includes Social Security, Medicare, food assistance programs, Veterans’ benefits, and unemployment compensation.
The remaining spending is discretionary spending, which is decided on each year by Congress and the President. While discretionary spending changes every year, typically a majority of this spending goes towards national defense, particularly the military. The remaining spending goes towards a variety of areas such as energy, education, environmental programs, scientific research, international affairs, transportation, housing programs, and much more!
United States government spending by category for the 2020 Fiscal Year.
Tracking all of this spending is by no means easy, but the federal government still manages to do it (somewhat effectively). You can explore much more regarding the United States government spending, including COVID-related spending, here: https://datalab.usaspending.gov/
Though a detailed look at United States federal spending is nearly impossible to cover, I will list a few cool programs that are funded by the federal government:
National Institutes of Health (NIH): Researches various areas of health and develops of new health technologies. Recent research points towards a cure for Sickle Cell disease through the use of gene editing, and other research is working to translate brain signals into speech sounds for patients that can’t speak.
Animal and Plant Health Inspection Service (APHIS): Detects, controls, and eradicates animal and plant pests and diseases that have a significant economic impact on the country. This government agency recently eradicated plum pox virus from the country, which was considered one of the most devastating viral diseases of stone fruit in the world.
Bureau of International Narcotics and Law Enforcement Affairs (INL): Funded and helped train personnel who arrested over 129,000 individuals associated with illegal drugs, chemicals, and weapons and/or associated with wildlife or human trafficking. They also seized 1,300 metric tons of illicit narcotics. (Note: these statistics are based on Fiscal Year 2019)
These programs are in addition to numerous other federal services such as maintaining interstate highways and providing educational grants and loans.
International Comparisons
Spending by national government of various countries in 2017, including as a percent of GDP.
The United States tax system and spending does differ from that of other countries understandably. For one, the United States raises more money in taxes than any other country in the world, and the government also spends more than any other country. This is partially due to the fact that the United States has a very high Gross Domestic Product (GDP), defined as the total value of goods produced and services provided during one year. As a percentage of the GDP, the United States does not actually spend or tax as much as some other countries. Some cool visuals are provided below to help visualize these comparisons:
In general, the United States generates a greater proportion of its revenue on income taxes compared to other countries, while other countries focus a bit more on taxes on goods and services (e.g., a sales tax or excise tax). Spending also breaks down much differently based on the country. In Costa Rica, the military was abolished back in the 1900s, so there is much lower spending on national defense as compared to the United States.
Examining the tax laws and government spending in different nations can be a good indicator of how those nations operate and even where those nations are headed. One common thread that unites us all? Pretty much everyone pays some form of tax… or at least has to avoid some form of tax (legally or illegally). In the same way, though, we all receive some benefit from government spending, certain individuals perhaps more than others. Either way, whether you think of taxes as a public good or as the bane of humanity, they’re not going anywhere anytime soon.
To think about
For the state that you live in, where does the tax revenue come from? (e.g. income taxes, sales tax, highway tolls, federal grants, etc.)
Which federal programs (e.g. military, educational grants, medical research) do you believe are the most valuable? Would you increase spending in these programs, and if so, what other programs would you cut budgets for?
Would you rather have a higher tax on income or a higher tax on goods and services and why? Consider that the United States has a higher tax on income as opposed to goods and services when compared to other countries.
Sources
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