Taxes are good for society but don't pay too much

What are Taxes?

Taxes are financial charges put in place by governments to pay for resources that their society benefits from.

The importance of understanding Taxes

Contrary to popular belief, taxes are actually a good thing. It provides funding for public programs, infrastructure and educational advancement. The United States has some of the highest tax rates in the world but taxes enable the quality of living in the United States that Americans are used too.

Tax Avoidance vs. Evasion

While taxes overall are a good necessity for society to offer it's citizens a higher standard of living, you shouldn't pay more than you owe. Two important terms to understand are tax avoidance and tax evasion. Tax avoidance is the legal utilization of the tax code to legally reduce your tax liability. Tax evasion is the illegal misrepresentation of your financial affairs normally by stating your income and profits were less than they were. Evasion is illegaland it is very important to know the difference as tax evasion results in potential audits and jail time.

Fast Facts

• Tax refunds are not optimal; it's an interest free loan to the government.
• Taxes are complex; in 2003 54,846 pages of tax rules were on record.
• The highest income tax rate was 77% in 1918, financing World War I.

The Basics of Taxes

Tax Base

This is the amount to which the tax rate is applied. It is also referred to as "taxable income". For example, if you made $30,000 this year that is your tax base or taxable income (before any credits, adjustments or deductions).

Tax Rates

This is the rate at which taxes are applied to your tax base. Using the example above, if you made $30,000 this year and were single then your tax rate would be $755.00 plus 15% of the amount of the amount over $7,550. The math is below:

• Income: $30,000
• Tax Rate: 15% over $7,550
• $30,000 - $7,550 = $22,450
• $22,450 *.15 = $3,367.50 owed (before any credits, adjustments or deductions)

Progressive vs. Regressive Tax

There are two types of tax rates progressive and regressive. A progressive tax rate increases as the tax base it is being applied against rises. Basically, the wealthier you are, the more you are taxed. With a regressive tax rate, the tax base of an individual increases and they pay a lower tax rate. The United States has a progressive tax rate system.

Myths about Taxes

1. Government spending "pumps" new money into the economy.
   Every dollar that government injects into the economy must first be taxed or borrowed from it.
2. #2 Tax cuts help the economy by "putting money in consumers' pockets. The right tax cuts help the economy by creating incentives to work, save, and invest.
3. Budget deficits substantially increase interest rates.
   Budget deficits have only a trivial effect on interest rates.
4. Tax cuts in 2000 - 2008 wiped out the projected budget surpluses.
   The 2001 recession and new government spending caused 78 percent of the declining surplus projection.
5. The top 1% of taxpayers are millionaires paying less taxes every year.
   Most are actually small businesses, which are assuming more of the tax burden every year.
6. Ronald Reagan's tax cuts caused the budget deficits of the 1980s.
   Real tax revenues increased 28 percent during the 1980s, but spending increased 36 percent.
8. Republicans are using their majority to enforce spending restraint.
   Recent Republican Congresses have increased real spending by $404 billion in just five years.
9. Congress is cutting domestic programs to fund defense.
   Congress has added substantially more money to domestic programs than it has added to defense.
10. Social Security surpluses are saved in a trust fund for future retirees.
    These surpluses, like all other tax revenues, are spent automatically.
11. A federal bailout of the United States would help tax-weary state taxpayers.
    U.S. taxpayers would fund the federal bailout.