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Financial Literacy

Financial Literacy

Home Financial Literacy Taxes Shmaxes Taxes: The ABC's, 123's and W-2's

Taxes: The ABC's, 123's and W-2's

A road.

The gas in that Navy trawler protecting the coast line from evil people.

Your local cop’s salary.

School teachers’ salaries.

Subsidies for U.S. farmers so that they don’t go bankrupt competing with foreign companies who have incredibly cheap labor as a weapon.

The paint that keeps the POTUS’ house white.

Your (or more likely your parents) tax dollars pay for all this stuff and more. It costs a lot to run a country. Oh, and soon your taxes will pay for healthcare for… everyone.

As always, tax laws are in a state of major flux, so we will be focusing more on the general whats, whys and hows rather than giving you a rundown of specific taxes. We’re sure we haven’t ruined your day with that news.

To make taxes – an ordinarily ungodly dull subject – seem a bit more human, emotionally connected, consider a big fat tax issue that is related to our big fat country.

In theory, under various proposed healthcare bills, every American would receive health insurance (translation: anyone can go into a hospital and for a small entry fee called a deductible, get health care services, from a booboo to liver cancer chemotherapy).

Here’s the issue:

We don’t have enough money.

Yes, you read that right. We are one of the wealthiest nations on earth and we don’t have nearly enough money to pay for all the stuff our citizens want. Sounds like the line your parents are always giving you, doesn’t it?

We don’t have the dough at the Federal / national level. And in some states like California, Illinois, and the state of Depression, we are well on the way to bankruptcy, with many individual cities declaring bankruptcy or well on their way there.

Your parents make money (hopefully). A portion of it is taken by the government to pay for its operations – this thievery… er, um, taxing is “personal income tax.” The U.S. government taxes your parents on … yep, their personal income. Dad makes $88,562 hauling UPS boxes all over creation; Mom is a substitute school teacher and brings home $34,698. They have $3,894 in investment income from some bonds they bought a while ago. So they “file their taxes” or just “file” as a married couple and they pay, based on the current IRS schedule.

The IRS charges income taxes in a bunch of ways – you can file as a single person, a married couple filing separately – i.e. as if you are two single people… sometimes that’s cheaper. Or a host of other ways. Here are some of the IRS schedules:

http://cdn1.thecollegeinvestor.com/wp-content/uploads/2011/02/irs_schedule_c.jpg

http://images.brighthub.com/06/d/06d3e7b5c0184c9c54465f3e4e60855e9ea2a817_large.jpg

http://www.unclefed.com/IRS-Forms/2001/HTML/graphics/15021x07.gif

Key unifying theme: These are all PERSONAL income taxes. And they aren’t that old. They were introduced in the early 20th century. YOU may not have hatched by that time, but trust us – in the scheme of things, it wasn’t that long ago. Before then, the tax system was based on products you bought – that is, if you bought a horse for $350, there was a “Value Added Tax” or VAT tacked on to the tune of $50 or so. (Stomp your hoof twice if you understand.)

That’s how the government raised money to defend the country in the 1800s – the logic was that if you had the money, you’d buy stuff and then the government would be, in effect, taxing you.

The problem with the system was that, as robber barons / entrepreneurs (ah, the rich get such a bad rap from poorly paid journalists…) who made out like bandits, they couldn’t SPEND anything close to the amount of money they were making. So they just accumulated massive amounts of wealth while paying almost no taxes. Ah, the American dream.

So the system had to change and... that led us to a gradual hike of personal income taxes over many years.

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