LeoGlossary: Taxes

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Taxes are compulsory financial contributions to a government imposed on individuals or businesses. Governments use tax revenue to make its payments.

In the United States, the federal government collects income taxes, payroll taxes, and estate and gift taxes. State and local governments collect income taxes, sales taxes, property taxes, and other taxes. This is similar to other countries.

There are many different types of taxes, but some of the most common include:

Income tax: A tax on the income that individuals and businesses earn.
Payroll tax: A tax that is paid by both employers and employees on wages and salaries. Payroll taxes fund Social Security and Medicare.
Sales tax: A tax that is paid on the purchase of goods and services.
Property tax: A tax that is paid on the value of real estate and other property.
Estate and gift tax: A tax that is paid on the transfer of property from one person to another.

Taxes are an important part of modern society. They provide governments with the revenue they need to provide essential services and programs. However, taxes can also be a burden on taxpayers, especially those who are low-income. Many believe that taxes can affect the economy, hindering productivity and output if too onerous.

Here are some reasons why we pay taxes:

To fund public services and programs including education, healthcare, infrastructure, national defense, and social safety nets.
To redistribute wealth: Taxes can be used to redistribute wealth from the rich to the poor. For example, income taxes are levied on a progressive scale, meaning that higher-income earners pay a higher percentage of their income in taxes. This revenue can then be used to fund programs that benefit low-income individuals and families.
To regulate the economy: Taxes can be used to regulate the economy and promote economic growth. For example, governments may use tax breaks to encourage businesses to invest or create jobs.

Deficit Spending

Taxes are the revenues for a government. This can come in other forms such as fees. Governments can only receive revenue by extracting it from the private sector.

When politicians spend more money than is brought it, the result is a deficit. State and local governments are not able to engage in deficit spending. The federal government can do this due to its access to the money supply.

To make up for the shortfall, the government will sell bonds. This is issuing debt into the market, which investors buy seeking to gain a return. There is a specific yield on the asset which enables them to safely invest.

United States Treasuries are considered the lowest risk investments there are. This is due to the government never defaulting on its debt.

The treasuries are auctioned off through the Federal Reserve, which sells them to the primary dealers. These financial institutions then push them into the market through their clients.

This is how politician resolve deficit spending. Governments raise the money by selling the bonds in exchange for legal tender, giving it the funds to meet it obligations.

The result is running up the national debt. In 2023, the United States saw its national debt surpass $30 trillion. It is a point of contention with many people since the path does not seem sustainable.

Some, especially politicians, believe the answer lies in raising taxes. If the government can only bring in more tax revenue, the budget will be balanced. The problem is these same politicians tend to make more promises in exchange for votes.


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