U.S. Government for Students: Understanding Taxes!

Taxes are something that most kids hear their parents grumble about, especially on April 15. Although adults might complain, they know taxes are very important. They’re so important that countries all over the world collect them from their citizens. People pay taxes for many things. In fact, even kids sometimes pay taxes: If you’ve ever bought anything at a store, like clothes or video games, you’ve probably paid sales tax. The best way to learn about taxes is to understand what they are and how both the government and the people benefit from them every day. It is also to learn about tax credits, such as R&D tax credits which can be used help push innovation and creativity forward.

History of Taxes

The collection of taxes goes back at least 5,000 years. The first recorded proof of taxation was from ancient Egypt, where at least once a year, the pharaoh collected grain, cattle, or physical labor as tax payments. Ancient Romans frequently collected taxes on not only cattle and grain but also income, sales, and property. In fact, Julius Caesar was the first to apply a sales tax.

Since that time, other countries have taxed their citizens in much the same way. When European colonists first came to America, they, too, began collecting taxes from citizens of the New World. Taxes collected by colonies included excise taxes on goods, poll taxes, and property taxes. During that time, Great Britain was creating more taxes for the colonists. With the passing of the Constitution, Congress gained the right to receive taxes.

As the U.S. became more industrialized, more goods were being exported than there were goods coming into the country. This caused the government to lose money that they would have gotten from tariffs, which are taxes on goods that are imported. The 16th Amendment to the Constitution came about because of this. With this amendment, Congress gained the power to collect taxes on incomes.

New taxes followed the income tax, such as the Revenue Act of 1916, which introduced estate taxes. During the Depression, the taxes on people who made more than $5 million a year were increased. This was the Wealth Tax, which was a part of the Revenue Act of 1935. In 1937, the first Social Security payroll tax was collected.

World War II was expensive, and the country needed more money than what it was getting from income taxes. With the Revenue Act of 1942, President Roosevelt introduced a mass tax called the Victory Tax. With the Victory Tax, more Americans were paying more income tax to help cover government expenses. It was during this time that employers were required to withhold some of their employees’ earnings from their paychecks so that employees would not have to pay a large amount at one time.

Purpose of Taxes

Taxes serve many important purposes. When people pay taxes, the government uses this money to pay for necessary activities and services that are good for the public. Programs like Medicare, Social Security, and health care for veterans are examples of services that are paid for with tax money. The maintenance and repair of public infrastructure like schools, bridges, and roads is also paid for with taxes. National parks benefit from tax dollars, too, and taxes also help pay for the protection of the people by funding the police, fire departments, and military.

Another purpose of taxes is to pay for services that help people in need. Aid programs that receive tax funds include food stamps to help feed the poor, low-income housing, and benefit programs for children.

Types of Taxes

There are several types of taxes that people can expect to pay. Taxes fall into three categories. The first category is taxes on what people earn. The second category is taxes on what people buy. Lastly, people may pay taxes on what they own.

Income Taxes

Income tax is a tax on what a person earns. It is a tax on the money that people make from working, from investments, or from any other source of income.

Property Taxes

Property taxes are often also called real estate taxes. These are taxes on immovable property like a person’s house.

Sales Tax

Sales taxes are taxes that a person pays on the things that they buy.

Social Security Tax

Social Security taxes are a part of the Federal Insurance Contributions Act (FICA). This is also known as the Old Age, Survivors, and Disability Insurance (OASDI) tax. It is a percentage of a person’s wages that’s deducted from their paycheck to help provide benefits for retirees and the disabled.

Medicare Tax

Medicare taxes are also a part of FICA. Like Social Security tax, it is withheld from a person’s paycheck. This type of tax helps pay for hospitals and other types of care for people on Medicare.

Corporate Taxes

These are taxes on business profits.

Other Taxes

Examples of other taxes includes capital gains taxes and personal property taxes. When a person sells investment property, like a collectible item or real estate, they must pay a tax called a capital gains tax. Personal property taxes are annual taxes on movable property. Cars, RVs, and boats are types of movable property. Another type of tax is luxury taxes, which are taxes on high-end or expensive items.

Interesting Facts About Taxes

A 1791 tax on whiskey led to the 1794 Whiskey Rebellion in western Pennsylvania.
April 15 is officially tax day, the deadline to file tax returns, but it didn’t start out that way. Originally, the last day to file tax returns was March 1. In 1919, that date changed to March 15, which lasted until 1955.
The U.S. tax code is more than 10 million words long!

Activities and Additional Resources

This page was last updated by Steven Jefferies