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The Purpose of Taxes

Why can't the United States government just get a job like everyone else? Why does it have to dig into your pockets? You already go to school, lead a very busy social life, and still find time to pull two shifts at the bookstore on the weekend.

Well, as it turns out, Uncle Sam already has a job: letting you live in the country and collecting money from you for the privilege.

Officially, America taxes you for three reasons:

  1. To provide revenues for the government
  2. To redistribute wealth from the rich to the poor (see: Hood, Robin)
  3. To avoid negative externalities (a.k.a. unintended bad results)

Revenues

The U.S. throws a mean party—just check out all the fun on the Fourth of July.

But your tax money isn't just going toward fancy shindigs at the White House (although, to be clear, it's used for that, too).

The government has a lot of bills to pay, and you're benefiting from some of those things. Here's some of the stuff the government pays for:

  • Roads, bridges, and all the other fun surfaces your car can drive on
  • Talks with other countries and diplomatic missions, so other countries aren't always trying to burst through the doors
  • Immigration, so we know who's coming in and out
  • Commerce deals with other countries, so we can trade our stuff for other stuff overseas
  • Jails, police officers, firefighters, and the fuzz that keeps everything in order
  • Government employees, including those charming folks at the DMV and IRS
  • The entire military system
  • Public schools
  • Social benefits, including the welfare system and food for those who need it
  • Medical benefits for those who don't have or can't afford medical care
  • Other stuff that you probably assume is free

Robin Hood-ing it Up

Governments get nervous about a lot of stuff, and one of the things they have sleepless nights about is the idea that a lot of their people will get upset and try to overthrow them.

One way that the government thinks that they can avoid that is by keeping people relatively happy.

You would think that taxes would make you less happy and more likely to overthrow the government, but they don't. The government thinks that by distributing wealth (taking some from the rich and giving it to the poor) fewer people are likely to get really, really upset.

Laughing yet? We'll continue.

Maintaining a big middle class keeps things humming. The middle class is doing well enough that they can afford what they need and some of what they want. They're more likely to be shopping online or watching bad TV than trying to stage a political coup. (As a side note, there are also more poor voters than rich ones, so the government can't ignore them.)

For about a hundred years, the system hummed along nicely and America enjoyed a very high standard of living as well as a very large middle class. If you were willing to work and had the most basic financial knowledge, you could enjoy a fairly good quality of life.

Now, the American dream is starting to look a little less photogenic. The size of the middle class has been shrinking for a number of years, with the rich getting richer and the poor getting poorer.

What happened?

Part of the problem is that other countries pay their workers a lot less, and as a result, can export products—everything from toothbrushes to computers—for a fraction of what it would cost to make them at home. Businesses love it since they can have whatever stuff they're making made overseas at a fraction of the price. Customers love it because they don't have to pay as much.

But it creates a few interesting questions around human rights. Are we willing to put people to work for a dollar a day to compete at that level? Are we willing to join countries who have very different (to be polite) views on human rights in order to make a quick buck?

Now that there's a big gap between the rich and the poor, there are lots of ideas about how to change it. One idea? Increase taxes. There are two very different opinions about that.

  • Some people think it's great. Taxing the wealthy 2% more would give the rest of the country more money, allowing the not-as-lucky people to live a decent life.
  • Other people remind the masses that the top 1% of wealthy people in the America already pay 40% of all the taxes gathered in this country, and that, if we increase taxes, the wealthiest people will leave and other people won't want to become wealthier.

Avoiding Something Worse Than Taxes

When you buy a new cell phone and dump the old one, your old phone clogs up landfills and releases pollution. When you drive your car to the movies, you're releasing toxins that contribute to global warming. When you drink too much at a frat party, you end up dancing on a table with a lampshade on your head.

These are what we call negative consequences.

The government cares about stuff like that (or claims to), and so they tax certain things—such as gasoline, alcohol, and electronics—putting the cash that they get from the tax toward solutions that help reduce some of the damage.

The government may not be able to do anything about those embarrassing pictures of you on Instagram, but they do invest in green technologies, environmental research, and conservation efforts that protect the birds and animals affected by your spending ways.

Some people, though, claim that it's an inefficient system. They say that taxes themselves create negative consequences. For example, they say, taxes can make the market less efficient and can end up hurting the economy. If you get taxed a lot, you might want to buy less, which means less demand—and pretty soon the economy is taking a hit. Or it could mean that you spend somewhere else to avoid the sales tax. If you're a business that's being taxed heavily, you could go out of business or be unable to compete with businesses in other countries.

So what's the story? Are taxes harmful to society, or do they benefit us?

Your answer will depend on your political views and your current experience with taxes. Either way, we suggest you have an answer.

And get ready to argue with people about it.

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