It’s easy to think your taxes don’t really matter. It’s one of the reasons people get behind on taxes and end up needing tax relief.
They know that taxes from big companies and wealthy individuals seem to matter but have trouble believing that taxes from ordinary people (like me and you) really count for much. From that concern comes the rationale that it won’t make a difference if they don’t pay their taxes.
We all feel small when we look out over a cityscape at night or look down from an airplane on city streets and traffic spreading for miles below us. Social media allows us to quickly scroll through tens and even hundreds of smiling faces, all seemingly engaged in meaningful work and relationships.
In a world of hustle and crowds, hoarding your share of the taxes may seem like a tempting option. You love your country, of course, so you are a good citizen, generally speaking. It’s just that you may find yourself wondering, “Do my taxes really matter, considering the fact that they are a big sacrifice for me and a drop in the bucket for Uncle Sam?”
You may be surprised to learn that most of the federal government’s revenue comes from individual income taxes. Less than 10% of the federal government’s revenue comes from corporate taxes. Almost 40% of the federal government’s revenue comes from payroll taxes. Excise tax and other revenue sources account for the final few percentage points.
The federal government collected approximately $3.5 trillion in revenues in 2019, which was about 16% of the gross domestic product (GDP). The GDP is the total market value of all the goods and services produced within a country’s borders within a specified period of time, normally one year. The GDP functions as an important indicator of economic performance and as an indicator of a country’s economic health. GDPs can be compared from one nation to another, and from one year to another year, allowing economists to make long term forecasts and judge the fiscal effects of various policies and events.
Calculating the GDP also allows economists and analysts to compare the relative tax burden on citizens of one nation to another, or from one year to the next. For example, the tax-to-GDP ratio in the United States has decreased from 28% in 2000 to 24.5% in 2019. Many European Union nations have tax-to-GDP ratios between 40% and 50% of their national GDP. In contrast, most of the nations with the lowest tax-to-GDP ratios are the oil-rich countries of the middle east. Kuwait, for example, collects 1.4% of the national GDP in taxes; Saudi Arabia, 3.4%.
Besides individual income taxes, the single largest revenue stream for the federal government comes from Social Insurance taxes, otherwise known as payroll taxes. There are four basic types of payroll taxes: Social Security, Medicare, unemployment, and income. Social Security, Medicare, and unemployment taxes are paid through automatic payroll deductions. Many individuals opt to have their federal income tax deducted automatically from their payrolls as well.
Excise taxes, sometimes known as “sin taxes,” serve to raise revenue for the government and reduce destructive behavior and spending patterns. Excise taxes are most often attached to cigarettes, alcohol, gasoline, gambling, and air travel. Excise taxes have historically been imposed on goods and services that are considered unnecessary and even undesirable.
Excise taxes in the US accounted for less than 3% of the federal government’s revenue in 2019, with the average predicted to drop to <1% in coming years. Excise taxes are on the wane, dropping from an average of 1.7 percent of GDP in the 1960s to an average of 0.5 percent over the period of 2015 – 2019. Compared to lawmakers from many developed countries, American lawmakers have been hesitant to appear that they are infringing or meddling with citizens’ perceived rights to access cheap goods and services.
What does the federal government do with the tax revenue, most of which comes directly from an income tax on private citizens like you and me? The government uses tax revenues to invest in education, infrastructure, diplomacy, Medicare and Medicaid, police, national defense, government agencies and government employees of all types. Tax revenue gives the government power to function as a government. Without reliable revenue, our nation would cease to exist. Income taxes, the backbone of the current revenue system, are the single largest revenue stream for the federal government.
Regardless of your feelings about taxes, it’s always best to stay right with the IRS. If you have gotten behind and need a tax debt lawyer, our experienced team at The Tax Defenders can help. We won’t sugar coat your situation but will give you an honest assessment of how to deal with your tax debt in the most financially advantageous way.