- The law obliges us to pay taxes, which in turn provide everything from health care and Social Security to education and defense.
- We pay taxes to the federal, state, and local governments, each of which uses the funds for different priorities.
- Taxes support the people and foster economic growth, giving the government legitimacy.
Taxes, though not particularly popular, are key to fostering economic growth and development and to achieving the common goal of a prosperous and functional society.
While we usually think about them around the start of a new year when tax season rolls around, we interact with them every day. In addition to our income, we are taxed on the purchases we make and the property we own.
It all amounts to trillions of dollars a year in revenue for the U.S. government and state governments and pays for everything from Social Security and the military to trash removal and the upkeep of community greenspaces.
Why do we pay taxes?
We pay taxes to fund our federal, state, and local governments so they can function properly, provide necessary services, and make improvements.
Each particular government has its focus, with the big-picture spending on things like defense and Social Security placed in the hands of the federal government. States take on education and health, while local governments pay for things such as garbage collection and children's school transportation.
$0 for Free Edition (~37% of filers qualify. Form 1040 and no schedules except for Earned Income Tax Credit, Child Tax Credit and Student Loan Interest), $39 to $69 for Deluxe, $89 to $129 for Premium
- Can be good for relatively complex tax situations that may require help navigating deductions and forms
- Offers step-by-step guidance
- Ability to upgrade for instant access to an expert
- Not all users will qualify for a $0 filing option
- Most expensive option for many tax situations
- No brick-and-mortar locations to meet with a tax pro
TurboTax is among the most expensive options for filing taxes online, but offers a high-quality user interface and access to experts. It's especially valuable for self-employed filers who use QuickBooks integration.
TurboTax Tax Software- Tell TurboTax about your life and it will guide you step by step. Jumpstart your taxes with last year’s info.
- Snap a photo of your W-2 or 1099-NEC and TurboTax will put your info in the right places.
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- You won’t pay for TurboTax until it’s time to file and you’re fully satisfied.
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Funding essential public services
The taxes collected by governments foster economic growth and development, paying for essential goods and services such as infrastructure, healthcare, and education in order to achieve the common goal of a prosperous, functional, and orderly society, says the World Bank, which provides development finance for collecting public revenue.
Taxes are also a key ingredient in the social contract between citizens and the government. How they're collected and spent can determine a government's legitimacy.
"At their most basic level, taxes address the 'free-rider' problem," says Poppy MacDonald, president at USAFacts, a not-for-profit and nonpartisan civic initiative that provides data visualizations of government data. "If government didn't require citizens to pay for services, those services would be underfunded and, as a result, underprovided," she says.
Total U.S. federal spending for fiscal 2023 was about $6.1 trillion, according to data compiled by the Center on Budget and Policy Priorities. Total state government spending, meanwhile, reached an estimated $2.96 trillion in 2023, according to a report from the National Association of State Budget Officers. All that money has to come from somewhere. That's why we pay taxes: to help fund governments at all levels.
Supporting government programs and initiatives
Each level of government uses the funds it raises in different ways, as each is responsible for different types of services.
On the federal level, the government is tasked with large-scale programs, such as defending the country and providing social safety nets in the form of Social Security and Medicare. State spending is focused on things like education, transportation, and public housing. Localities spend similarly to states but tend to put more toward services including fire safety, sanitation, and parks and recreation.
"We won't really appreciate some of the things our tax dollars pay for until our hair turns gray," says Gena Jones, founder and CEO of Jones Tax Group. "Look at the bright side, some of the taxes you pay are put into your Social Security savings account, which you can begin to withdraw at retirement age."
Redistributing wealth and reducing inequality
The US tax code was designed to saddle wealthier people with a larger tax burden. The federal income tax is progressive, meaning those with larger incomes pay a greater share. Rates range from as little as 10% on the lower end of the scale to as much as 37% on some income at the high end. Many states also use a progressive, or graduated, tax system.
Around 8% of federal tax revenues in fiscal 2023 supported economic security programs that help households experiencing financial hardship. These programs — including Supplemental Security Income, the Supplemental Nutrition Assistance Program, the refundable portions of the Earned Income Tax Credit and Child Tax Credit, unemployment insurance, and housing assistance — help keep millions of people out of poverty each year and reduce the racial and ethnic disparities in poverty rates, according to the Center on Budget and Policy Priorities.
Types of taxes
Income tax
The federal government's right to impose taxes is enshrined in the Constitution. Article 1, Section 8, Clause 1, states: "The Congress shall have the Power to lay and collect Taxes, Duties, Imposts and Excises to pay the Debts and provide for the common Defense and general Welfare of the United States."
However, people are probably more familiar with the specific tax provision established by the 16th Amendment, which was ratified in 1913, and reads: "The Congress shall have the power to lay and collect taxes on income, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."
The federal individual income tax is one of the taxes withheld from your paycheck, and is more than likely the biggest item deducted. It's also the federal government's largest single source of revenue. If you make money — however you make it — it's more than likely that income will be taxed.
State taxes
As with the federal government, states need their residents to pay taxes in order to fund services.
The way in which states impose taxes differs, with some states choosing not to collect an income tax while others forgo sales tax. All states levy some form of property tax.
A 2022 analysis from the nonprofit Tax Foundation of state and local tax burdens found that New Yorkers were hit the hardest, at 15.9% of net product going to state and local taxes, while Alaskans had the lowest burden, at 4.6%.
States with no income tax | States with no sales tax |
Alaska | Alaska |
Florida | Delaware |
New Hampshire * | Montana |
Nevada | New Hampshire |
South Dakota | Oregon |
Tennessee | |
Texas | |
Washington * | |
Wyoming |
* Does tax certain investment income.
"Don't be fooled by states not imposing a certain type of tax. They are going to get the money necessary to operate," Jones says.
Where does the money from state taxes go? Spending on Medicaid constituted the largest share, accounting for almost 30% of spending in fiscal 2023, according to the National Association of State Budget Officers. Elementary and secondary education was the second-largest spending category, at about 18%, followed by higher education — public university systems and community colleges — at around 9%.
Other areas of state spending include transportation, corrections, and public assistance programs.
$0 for Free Edition (~37% of filers qualify. Form 1040 and no schedules except for Earned Income Tax Credit, Child Tax Credit and Student Loan Interest), $39 to $69 for Deluxe, $89 to $129 for Premium
- Can be good for relatively complex tax situations that may require help navigating deductions and forms
- Offers step-by-step guidance
- Ability to upgrade for instant access to an expert
- Not all users will qualify for a $0 filing option
- Most expensive option for many tax situations
- No brick-and-mortar locations to meet with a tax pro
TurboTax is among the most expensive options for filing taxes online, but offers a high-quality user interface and access to experts. It's especially valuable for self-employed filers who use QuickBooks integration.
TurboTax Tax Software- Tell TurboTax about your life and it will guide you step by step. Jumpstart your taxes with last year’s info.
- Snap a photo of your W-2 or 1099-NEC and TurboTax will put your info in the right places.
- CompleteCheck™ scans your return so you can be confident it’s 100% accurate.
- You won’t pay for TurboTax until it’s time to file and you’re fully satisfied.
- TurboTax is committed to getting you your maximum refund, guaranteed.
Local taxes
Just like with state taxes, local taxes can vary. They can include taxes on property, sales, income, as well as miscellaneous items like water fees and parking meters. Local governments often get a significant portion of their revenue from sources such as grants from federal and state governments, and from charges for business-like entities that provide services like public utilities, hospitals, and public transit, MacDonald says.
Localities also collect revenue from licenses and sales taxes. Some also tax income or payrolls, such as New York City, which taxes some income at as much as 3.876%, the highest in the country, MacDonald says.
Local taxes generally pay for services that people use daily, like K-12 public schools, transportation, police and fire services, and garbage removal.
Payroll tax
The Federal Insurance Contributions Act, better known as FICA, is the law that established the payroll tax that is deducted from each paycheck. It is separate from the federal income tax and helps fund both Social Security and Medicare programs, which provide benefits for retirees, the disabled, and children.
Other taxes
There are other federal taxes as well. For example, corporate income tax is levied on business profits. The estate tax is a tax on your right to transfer property when you die.
Excise taxes are imposed on various goods, services, and activities and may be imposed on the manufacturer, retailer, or consumer, depending on the specific tax. Cigarettes, alcoholic beverages, and gasoline are among those items that are subject to an excise tax. Excise taxes also make up a relatively small and volatile portion of state and local tax collections, according to the Tax Foundation.
"At tax time, we are hyper focused on our income tax rates and how much income tax we will pay," says Jones. "These other taxes should also be part of the tax conversation because they can be substantial."
FAQs on why we pay taxes
Your tax money goes toward funding a number of essential public services such as healthcare, Social Security, and defense. State and local taxes pay for things like public education, transportation, and housing.
Not everyone agrees on whether taxes are fair or not. The federal income tax is progressive, meaning wealthier people are intended to pay a greater share of their income than lower-income people. Around 56% of Americans say they pay more than their fair share in taxes, according to a Pew Research Center report, while 34% say they pay the right amount, and 8% say they pay less than their fair share.
Yes, you can reduce your tax burden legally via deductions and credits. For example, contributing to a tax-advantaged retirement account lowers your taxable income in the year you contribute and allows you to defer taxes on investment gains. Parents of young children can also qualify for tax credits, such as the Earned Income Tax Credit or the Child Tax Credit, that directly lower their tax bill.
Tax rates are determined by tax law. Tax law outlines the federal tax rates and brackets and is voted on by Congress and enforced by the IRS. The top marginal tax rate, and the income threshold it applies to, has varied widely over the last century. It currently stands at 37% and applies to income above $609,350 for single filers and $731,200 for married joint filers.
