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taxes FAQ

How do governments raise money?

They impose and collect taxes.

Do all governments collect the same type of tax?

No. In the United States, federal, state, and local governments generally collect different types of taxes.

What sorts of taxes are collected by the federal government?

The federal government collects personal and corporate income taxes, as well as excise, estate, and trade taxes. It also collects payroll taxes to fund certain specified programs such as Social Security and Medicare. Individual income taxes make up the lion’s share of federal government revenue—about 45%. Corporate taxes produce about 12% of the government’s income. Customs Duties and Excise taxes generate about 3% a piece. And estate taxes yield 1% percent. Payroll tax withholding for Social Security and Medicare represent 36% of all federal government revenue.[5]

5. “A Breakdown of Federal Revenue Sources,” The Heritage Foundation, available online at: http://www.heritage.org/research/features/BudgetChartBook/Social-Insurance-Taxes-Account-for-36-percent-of-All-Revenues.aspx

What sorts of taxes are collected by state governments?

State governments design their own taxes so there is no single tax formula for all fifty states. But most impose some combination of personal and corporate income taxes, sales taxes and property taxes.

What sorts of taxes are collected by local governments?

County and local governments generally raise money through property taxes. But they tax different forms of property. Most commonly, they tax only real property—that is, land and the buildings attached to the land. But some also tax personal property such as cars, jewelry, and furniture.

Why do we tax the things that we do?

Most taxes are based on one of two tax theories-- on the “benefits received principle” and the “ability to pay principle.” According to the “benefits received principle,” taxes should be paid only by those using a particular government program and in proportion to amount that they use it. Gas taxes embody this principle. According to the “ability to pay principle,” those with greater wealth and therefore a greater ability to pay should finance a larger share of the government’s efforts regardless of their use or non-use of a particular government service. According to this theory, wealthier people should pay higher taxes to support schools, for example, even if they are childless.

What are the differences between progressive, proportional, and regressive taxes?

Progressive taxes impose higher rates of tax on people with higher incomes—the more you make, the higher rate of tax you pay. Based on the “ability to pay principle,” progressive taxes include the federal income tax and most state income taxes. proportional taxes impose the same rate of tax regardless of income. A person making $10,000 and a person making $100,000 pay the same rate of tax. The wealthier person writes a bigger check since x% of 100,000 is more than x% of 10,000. But both taxpayers pay the same percentage of their income. Finally, regressive taxes impose higher rates on people with lower incomes. The poorer you are, the higher percentage of your income you pay in taxes.

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