We pay taxes to fund public services such as roads, schools, defense, and healthcare.
Purpose
Taxes fund government services that people share: roads and bridges, public schools, national defense, police and fire, courts, health programs (Medicare and Medicaid) and Social Security.
US federal spending
In fiscal 2023, the largest categories were Social Security (about 21 percent), health programs (about 28 percent combined), defense (about 13 percent) and net interest (about 10 percent).
Types
Income taxes, payroll taxes, sales taxes and property taxes.
Legal basis
The 16th Amendment (1913) allows income taxes.
How much
Total federal, state and local taxes are about 25 to 30 percent of US GDP.
Legal obligation
Failure to pay can result in penalties.
Debate
People argue about how much and what taxes should fund.
Purpose of taxes
Taxes pay for public goods and services that individuals could not easily provide on their own: roads, schools, courts, police, fire protection, national defense, public health, research and social safety nets. Governments also use taxes to redistribute income and to discourage harmful activity, such as high taxes on tobacco.
US federal spending
In fiscal year 2023, the federal government spent about $6.1 trillion. The largest categories were Social Security (about 21%), health programs including Medicare and Medicaid (about 25%), national defense (about 13%), net interest on the debt (about 10%), and programs such as income security, veterans benefits, education and transportation. Federal revenue was about $4.4 trillion, with about 50% from individual income taxes and 36% from payroll taxes.
Types of taxes
- Income tax on wages, interest and profits.
- Payroll taxes that fund Social Security and Medicare, 15.3% of wages split between employer and employee.
- Sales tax and value added tax on goods.
- Property tax, the main source of funding for local schools.
- Corporate tax, 21% at the federal level since 2018.
- Excise taxes on fuel, tobacco and alcohol.
- Estate and gift taxes.
Legal basis
Article I of the US Constitution gives Congress the power to lay and collect taxes. The 16th Amendment, ratified in 1913, allowed a federal income tax without dividing it among states by population. The first income tax was created during the Civil War in 1861.
How much
The Tax Foundation estimates that the average American’s total tax burden, including federal, state and local, is about 28% to 30% of income. The US collects taxes equal to about 27% of GDP, below the OECD average of about 34%. Denmark and France collect over 40%.
Legal obligation
Filing is required by law for those above income thresholds. For 2023, the threshold for a single filer under 65 was $13,850. Failing to pay or file can lead to penalties, interest and, in cases of willful evasion, criminal charges.
Debate
People disagree about how high taxes should be, who should pay more, and what government should fund. Supporters of lower taxes say it boosts growth and personal freedom. Supporters of higher taxes say it funds services and reduces inequality. Research shows trade-offs, and views depend on values.
Numbers on where the money comes from
In fiscal year 2023, the US federal government collected about 4.4 trillion USD in revenue, with individual income taxes giving roughly 49 percent and payroll taxes about 36 percent, according to the Congressional Budget Office. Corporate income taxes made up about 10 percent. Federal outlays were about 6.1 trillion USD, with Social Security, health programs including Medicare and Medicaid, and defense among the biggest categories. State and local governments rely on income, sales and property taxes to fund schools, roads, police and fire services. The 16th Amendment, ratified in 1913, gave Congress the authority to levy income taxes without apportioning them among the states. In total, US federal, state and local taxes were around 27 percent of GDP, lower than the average of about 34 percent for OECD countries.
Based on data from the Congressional Budget Office and the OECD
