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In 1958, a horror movie called Macabre was released. William Castle, the guy who created the film, had women in nurse's outfits walk around the theater in case anyone passed out. He also guaranteed that anyone who died of fright at the movie would be compensated with the $1,000 insurance policy he took out for every member of the audience.

Yeah, these are the sorts of precautions most people feel they need when faced with taxes.

This is nothing compared to taxes.

But why are taxes so scary—and why do we need them anyway?

Why Do we Need Taxes?

You've probably already figured out that it costs a lot of money to run a household. There are groceries to buy, leaky roofs to fix, and that cute cashmere throw to buy for the back of the sofa.

Take that, multiply it by a few billion, and you have an idea of how much it costs to run a country.

While the United States doesn't need to buy scented candles for the kitchen, it does need to pay for schools, police officers, jails, the military, and all the other services that we rely on every day.

And these costs can add up.

So where does the U.S. of A. get the money to pay for all this stuff? We hate to break it to you, but Uncle Sam doesn't head out to his job as a corporate CEO every day. Instead, he relies on your income and your taxes to pay for all the stuff that the government needs to keep running.

Personal Income Taxes

The government charges a "personal income tax" for everyone who works in the United States. The Internal Revenue Service (IRS) is the government agency that takes care of this stuff, and if you really want to scare an adult, just mention those three little letters, and watch them get nice and pale.

The IRS passes incredibly tough-to-read tax laws that are meant to keep everything fair and they also take care of tax filings. That means you need to tell them how much you've made and how much you need to pay in taxes.

Want to see something freaky? Here are some tax forms:


The Scary History of Taxes

Personal income taxes haven't always been around: they were introduced in the early 1900s. Before that, your great-great grandparents didn't need to worry about them. Which is good, because they were too busy building the country, surviving epidemics, and driving on really bad roads because there wasn't any money to build better ones.

Back then, taxes were based on a "Value Added Tax" system. If you bought something, there was an extra charge added onto that. If you bought a horse for $200, then $30 might be added on as a tax. The idea was that if you had money, you were spending it, so you could be taxed when you were busy spending.

Well, lots of folks thought this was unfair.

Why? Because the rich were getting richer. The very rich were buying more than the poor, sure; but they had so much money that they couldn't spend all of it, which meant they could keep it in vaults (or the 1800s version of sock drawers) and never get taxed on most of it. Meanwhile, the poor used up all their cash and were taxed on all of it.

Taxes, Taxes Everywhere

Personal income taxes aren't all you need to worry about, though. (Yay!)

You also pay taxes on everything from bikes to a haircut. Even if you're three years old and buying your first pack of candy with the money grandma gave you, you're paying taxes. It's like…taking candy from a baby. That's what we call sales tax.

If you decide to launch your own app or starts a business, you're also going to have to pay taxes for that. If you decide to incorporate your business (i.e., create a Corporation by talking to a lot of lawyers and filling out a lot of forms so that your business can become a legal thing and not something you run out of your parents' garage), you'll pay corporate tax.

Unless you live in a container in the woods, you're also going to be paying property tax, either directly or through rent. Oh, and don't think you can get away from taxes by moving to a country that doesn't charge income tax (and yes, there are a few out there). The United States has a citizenship-based tax system. This means that even if you live outside of the country you may still have to pay taxes to the IRS.

Where Does it All Go?

With all these taxes, the country must be rolling in money, right?

Not exactly.

In fact, all the talk about making healthcare available for everyone has shined a light on exactly how much money we don't have. In theory, we could cover every American for health insurance. Whether you were headed to the hospital for a broken foot or a heart attack, you'd just pay a small amount and the government would take care of the rest.

Problem: we don't have the cash.

The United States is a lot like your parents: making plenty of cash but still saying there's not enough to pay for the stuff you want. In fact, some states such as Illinois and California are headed on the road to bankruptcy. Some cities have even declared bankruptcy.

And all this in one of the richest countries in the world—a country that is reaching into your paycheck to take taxes.

So where's all that tax money going? Well, it depends who you ask.

  • Some people claim that America spends the money it needs on roads, the military, law enforcement, and government workers, and there simply aren't enough citizens earning the money to get enough cash. These people might claim that taxes should be increased to pay for everything.
  • Others claim that tax money isn't being spent smartly. There's a lot of squabbling about how your money is spent once it reaches the government. Lots of people think it shouldn't be up to the government to decide where a person's money goes.

Whatever side you fall on, there's no two ways about it: you'll be paying taxes until you die.

And maybe even after.

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