It’s widely known across America that April 15th is Tax Day. But you might be unaware of all the reasons behind why we pay taxes. If you’ve ever wondered, “What’s the point?” then this article is for you.
What Is Taxation?
At its core, taxation is the act of the government imposing levies on individuals so that they can raise money for government expenditures such as road repair, infrastructure projects, and public safety measures (among other things). Although this is the most common reason that the government taxes you, there are other reasons and principles behind the act as well!
Taxation Purposes
As mentioned, taxes are specifically meant to provide the government with additional finances. These finances are meant to be used to make widespread, sweeping expenditures and infrastructure changes. Because your taxes go towards government-sanctioned products, it’s in your best interest to vote in local elections to ensure that you know which projects your money is going towards.
However, you don’t just pay your money and the government does whatever it wants with it. In most cases, the government works to prioritize three objectives when it increases and collects taxes: income redistribution, economic stability, and resource allocation.
Economic Stabilization
The goal of economic stabilization is to try to maintain a high level of price stability and employment rate. There are many stabilizers in place that work to automatically adjust transfer payments and tax rates to stabilize consumption, business spending, and incomes during the business cycle.
Although economic stabilization is not a perfect system, it strives to give people the ability and finances to access essential life resources such as quality food and housing, financial resources, and a job that provides a living wage.
Resource Allocation
This goal is meant to try and pay for elements that the government needs to interfere with for the betterment of the population (such as dealing with pollution). For example, the government might decide to add a high tax on harmful consumption goods (e.g., alcohol, sugar-added drinks, tobacco, gambling, etc.) and lower taxes on essential goods.
Income Redistribution
This element of taxation is meant to try and lessen inherent inequalities between the distribution of wealth and income. This means that, if you make more money, the goal is that you’ll be taxed more and vice versa.
Tax Types
Next, we must discuss the different types of taxes you will likely encounter. The two main tax types are direct and indirect taxes.
Direct Taxes
Direct taxes are taxes determined by consumption, income, or net wealth. These taxes typically impact individuals rather than large corporations (although not always), and they can include things such as income taxes or personal taxes. These taxes are also known as spending taxes or expenditure taxes, and they occur on all income that isn’t turned into savings. Inheritance tax and estate tax are two other types of direct taxes.
Indirect Taxes
Indirect taxes are taxes used for the consumption or production of services and goods/transactions, such as imports and exports. For example, sales taxes, VAT, and manufacturing or production taxes count as indirect taxes. Additionally, customs, import taxes, and legal transaction taxes are included in this category as well.
Knowing the two main types of taxes may not seem important, but without knowing how you might be taxed, you can’t prepare for when you are taxed.
Guardian Tax Law
Here at Guardian Tax Law, we are available to help you with all elements of taxes. It can be difficult to understand everything about taxation, so we want to help you. If you have questions, don’t hesitate to reach out for answers.
Call us today at (602) 691-5325 for a free consultation.
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