Welcome

Do You Know How Taxes Work?

Taxes are an important part of having a job, owning a house, and…going to school and playing at the park?! Learn how taxes pay for things you use every day.

What taxes are, why we pay them, and who pays them

When a group of people live together as part of a city, state, and country, there are some important things and services everyone will need to use, but no one can pay for entirely on their own. Taxes are a way for everyone to pay money toward the costs of public services we use every day.

Local governments (in your city and state capitol) and the federal government (in Washington D.C.) collect taxes to pay for things like roads, parks, and public schools. Can you imagine if you had to pay all of the money to build the roads and sidewalks you use? You wouldn’t havecoin taxes any money left over to buy anything else! 

Everyone who is part of a community pays taxes because everyone in a community benefits from what they pay for. If you have a job, you pay income tax. If you own a home, you pay property tax. If you buy a book, a lawnmower, or shoes, you pay sales tax. Each of these taxes pays for different things.

Different types of taxes and what they pay for

There are many different types of taxes, but here are three major types most people pay.

Income tax

Income tax is money taken out of each paycheck you earn. The federal government collects income tax as well as most states. Some states, like Texas, don’t collect state income tax. Individuals and businesses pay income tax as a percentage of the money they earn. If a state collects 4% income tax, for example, that means 4% of what you earn will be subtracted from your paycheck and sent to the state government. The Internal Revenue Service collects federal income taxes.

The U.S. has a progressive income tax system, which means people who earn more money pay higher taxes compared to people who earn less money. The first income tax imposed in America was during the War of 1812 to pay for the cost of fighting the war.    

What does income tax pay for? A lot of things, including: the military, health care programs, money for those in need, veteran’s benefits, public schools, law enforcement, natural resources and conservation (our national parks!), and NASA.

Sales tax

If you’ve ever bought a DVD, a poster, or an iPOD, you’ve paid sales tax. It’s why the green number that flashes on the register is more than the sticker on the thing you’re about to buy. States, counties, and cities can charge different amounts of sales tax. Like income tax, it’s charged as a percentage—but this time it’s a percentage of the item’s price. For example, a state might have 3% sales tax, a county 2.5% tax, and a city 1% tax, so that residents of that city pay 6.5% sales tax total. Certain items you buy at the store are exempt (meaning sales tax isn’t charged), such as food. You pay sales tax even when you buy things online.

Sales taxes can pay for public education, health care, transportation like buses and subways, correctional facilities (like jails), parks, foster care for kids without parents, and zoos.

Property tax

Property tax is usually based on the value of the real estate property someone ones—this could be a vacant piece of land, a house, or some other type of building. Property taxes are usually paid twice a year: once in the winter and once in the summer.

Paying property tax means helping pay for road maintenance, animal control, emergency and fire services, sewage treatment and waste management (trash collection), local swimming pools and ice rinks, safe drinking water, education, and libraries.

When you understand how taxes work, it’s easier to appreciate what they pay for. When you’re old enough to vote, you’ll be able to cast your vote to change taxes—to increase them or decrease them—based on the public services you think are most important to the community and to you.

Poll

If you could learn something with a snap of your fingers, what would it be?