Know Your Taxes: Local, State, and Federal Explained
Understanding taxes on different levels of government can be very challanging, as a college student I had to learn about them when my paycheck was 100 dollars less than I was expecting. Although it might not feel like it, local, state, and federal taxes are helpful as they provide public goods. Here’s a straightforward breakdown of each level.
Taxes: Basic Definition
Taxes are mandatory charges that the government imposes on individuals or organizations to fund public expenses and services.
Taxpayer: The person or entity required to pay taxes
Types of Taxes on Different Levels
Local Taxes
Local taxes are levied by cities and counties to fund essential community services.
Property Taxes
Local governments mainly rely on property taxes, which are assessed based on the value of owned real estate. This tax funds public schools, police, and other community services.
Sales Taxes
In many areas, local governments add their own sales tax to the state sales tax. This revenue funds parks, road repairs, and emergency services.
State Taxes
State taxes support services provided by individual states, such as infrastructure, healthcare, and public education.
Income Taxes
Most states impose an income tax on residents’ earnings. These rates vary and can be progressive this means that higher earners pay more or flat everyone pays the same rate.
Excise Taxes
States also impose excise taxes, these taxes have the nickname Sin Tax and they will be placed on items like alcohol, cigarettes, vapes and gasoline. This tax is generally included in the price of the product.
This infographic illustrates the differences between the left’s views on taxes versus the right’s. The left believes that wealthier people should pay a higher percentage of their income in taxes compared to the less fortunate, as they think that when the lower class has more disposable income, it stimulates the economy through increased spending.
The right’s beliefs are highlighted in this infographic, showing the rich paying less in taxes. This is because they allow for loopholes that the more fortunate can take advantage of, such as donating to charities and receiving tax breaks—even if they also run the charity. The right believes that limiting financial freedom for the lower class will motivate them to work harder, thereby keeping the economy running.
Federal Taxes
Federal taxes fund nationwide programs like Social Security, national defense, and healthcare programs.
Income Taxes
Federal income tax is progressive, meaning higher incomes face higher tax rates. It funds the largest share of the federal government’s operations and services.
Payroll Taxes
Payroll taxes are withheld directly from employees’ paychecks to fund Social Security and Medicare. Employers also pay an equivalent amount.
Corporate Taxes
The federal government taxes corporate profits to raise revenue from businesses. While the rates are lower than individual income tax rates, they contribute significantly to federal revenue.
Key Terms
- Tax Bracket: The income range to which a specific tax rate applies.
- Withholding: Money automatically deducted from income to cover federal and state taxes.
Is This All?
Not at all? You are in the Square One, there is so much more for you to learn. This is the starter kit of tax knowledge for understanding government funding. Navigating taxes on each level will help you understand where your $100 is going and how it will be used to keep communities and the nation running smoothly.
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