By: Cleo Washington, Intern | Cleowash@umich.edu
Did your teacher throw a pizza party for your class? You and your friends would give small amounts of money for your teacher to purchase pizzas, drinks, and napkins for the whole class to enjoy. Taxation works in a similar manner – everyone contributes to fund the government’s operations.
Taxes are required contributions imposed on individuals or corporations by a local, state, or national government to fund public works and services.
Local and state taxes are collected by agencies at each respective level, while federal taxes are gathered by the Internal Revenue Service (IRS). The most common types of taxes are income, payroll, sales, and property taxes.
Income taxes are the largest form of revenue for the federal government, as they encompass collections based on both earned (such as salaries and wages) and unearned (including dividends and interest) income. However, a few states and localities do not have income taxes. Employers withhold money from your paycheck and send it to the government, while self-employed people are solely responsible for paying these taxes. The federal income tax rate varies based on one’s filing status: single, married filing jointly or qualifying surviving spouse, married filing separately, or head of household. These options allow taxpayers to assess the most optimal status and tax deductions (which reduce the amount of taxable income) they seek to partake in.
Payroll taxes are withdrawn from an employee’s pay by their employer (or fully paid by self-employed people) to fund Medicare and Social Security programs. Sales taxes vary by state and locality and are charged at the point of sale for goods or services, with the funds benefiting programs at these levels. Local governments use property taxes to fund law enforcement departments, public schools, and other services.
Understanding taxes is key to making informed financial decisions throughout your life. Just as a pizza party wouldn’t be possible without student contributions, our government wouldn’t run smoothly without our tax dollars.
Author: cleowash
