Taxes: Why We Have Them
Understanding what taxes are, why governments collect them, and how they fund society
What Are Taxes?
Taxes are mandatory payments that individuals and businesses make to the government. They are the primary way governments fund public services and infrastructure that benefit everyone.
Think of taxes as a collective payment system: instead of each person paying individually for roads, schools, and police, everyone contributes a portion of their income or spending, and the government uses that money to provide services for the entire community.
Types of Taxes
Income Tax
Varies by income level (10% to 37% in US)
Tax on money you earn from work, investments, or other sources
- Wages and salaries
- Investment income
- Business profits
- Rental income
Sales Tax
Varies by location (0% to 10%+ in US)
Tax added to the price of goods and services when you buy them
- Retail purchases
- Restaurant meals
- Services
- Online purchases
Property Tax
Typically 0.5% to 2% of property value annually
Tax on the value of real estate and sometimes personal property
- Homes
- Land
- Commercial buildings
- Vehicles (in some states)
Capital Gains Tax
0%, 15%, or 20% depending on income and holding period
Tax on profit from selling assets like stocks, bonds, or property
- Stock sales
- Real estate sales
- Cryptocurrency sales
- Collectibles
Estate Tax
Only applies to estates over $13.61 million (2024)
Tax on the value of property transferred after someone dies
- Inherited money
- Inherited property
- Inherited investments
Payroll Tax
7.65% for employees (employer matches)
Taxes deducted from your paycheck for Social Security and Medicare
- Social Security tax (6.2%)
- Medicare tax (1.45%)
- Unemployment insurance
Why Do We Have Taxes?
Taxes exist because there are essential services and infrastructure that benefit everyone but would be impossible or inefficient for individuals to provide on their own. These are called public goods - things that everyone can use, but no one person can exclude others from using.
Examples of Public Goods:
- National Defense: You can't build your own army, but you benefit from national security
- Roads: You can't build highways yourself, but you use them every day
- Public Health: Disease prevention and clean water benefit everyone
- Law Enforcement: Police and courts maintain order for all citizens
What Do Taxes Fund?
Infrastructure & Public Works
Building and maintaining roads, bridges, water systems, and public facilities
- Highways and roads
- Bridges and tunnels
- Water treatment plants
- Public buildings
Education
Funding public schools, universities, and educational programs
- Public K-12 schools
- State universities
- Libraries
- Student financial aid
Healthcare & Social Services
Providing healthcare, social security, and assistance to those in need
- Medicare and Medicaid
- Social Security
- Food assistance programs
- Public health services
National Defense & Security
Maintaining military, police, fire departments, and emergency services
- Military forces
- Police departments
- Fire departments
- Emergency response
Regulation & Oversight
Regulating industries, protecting consumers, and maintaining fair markets
- Food and drug safety
- Environmental protection
- Financial regulation
- Consumer protection
Research & Innovation
Funding scientific research, space exploration, and technological development
- Medical research
- Space exploration
- Technology development
- Agricultural research
Principles of Taxation
💰 Ability to Pay
Progressive tax systems charge higher rates to those who earn more, based on the principle that those with more money can afford to contribute more.
⚖️ Fairness
Tax systems aim to be fair - treating similar situations similarly and ensuring everyone pays their fair share.
🎯 Efficiency
Taxes should be collected efficiently without creating too much burden on taxpayers or distorting economic decisions.
📊 Transparency
Tax systems should be clear and understandable so people know what they're paying and why.
Cryptocurrency and Taxes
Cryptocurrency transactions are taxable events. Understanding how crypto is taxed is important for anyone using digital assets.
Transaction Tracking
Banks and employers automatically report transactions and income to tax authorities
Blockchain transactions are public, but you must self-report. Tax authorities are improving tracking.
Tax Reporting
W-2s, 1099s, and bank statements automatically sent to IRS
You must track all transactions yourself and report on tax forms. Exchanges may provide 1099s.
Complexity
Relatively straightforward - income, deductions, credits
More complex - capital gains, staking rewards, DeFi yields, airdrops, NFTs all taxed differently
Enforcement
Easy to track through banks and employers
Harder to track, but blockchain is public. Tax authorities are catching up with technology.
Deductions & Credits
Standard deductions, itemized deductions, tax credits available
Same deductions apply, but crypto losses can offset gains. Gas fees may be deductible.
Key Takeaways
🏛️ Collective Funding
Taxes are how we collectively fund services that benefit everyone but no individual could provide alone.
🛣️ Public Goods
Many essential services (roads, schools, defense) are public goods that require collective funding through taxes.
📋 Different Types
There are many types of taxes (income, sales, property) that fund different aspects of government services.
💻 Crypto is Taxable
Cryptocurrency transactions are taxable. You must report gains, losses, and income from crypto activities.
⚖️ Progressive System
Most tax systems are progressive, meaning those who earn more pay a higher percentage, based on ability to pay.