Understanding the Taxes We Pay & Why

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Generally speaking, the taxes we pay are based on income. In theory, the more money you earn, the higher your incremental tax rate will go. Through clever tax planning, there are a number of ways to reduce your bracket. For instance, with deductions and write-offs like medical insurance, student loan interest, real estate taxes, mortgage interest and charitable contributions.

The rest of the taxes we pay are as varied as a rainbow, and include just about every hue in between – both seen and unseen.

The primary spectrum of taxes...

  • Social Security, Medicare, Federal, State and local paid on earned income
  • Federal and State paid on unearned income, like interest and dividends

The taxable shades in between…

  • Payroll taxes, sales taxes, property taxes, gift and estate taxes
  • Taxes hidden in fees, surcharges, tariffs, duties, assessments, dues, excises, and licenses
  • Taxes levied at the gas pump; collected on toll roads; added to airline passenger tickets

The glaring neon, “but-so-darn-hard-to-quit-you” taxes…

  • Also called “sin” taxes, which are imposed on cigarettes, alcohol, casinos, soft drinks, guns and ammo, and more

And misty rose-tinted ones…

  • Also known as “luxury” taxes imposed on expensive, nonessential items, like certain cars and just about every yacht

What Happened to Fairness?

When it comes to preparing and amending tax laws, legislators have three aims:

  • Raising revenue
  • Influencing taxpayers’ behavior
  • Being fair

The reality, though, is that nothing is fair when it comes to love, war and taxes. Individuals and businesses can easily trump concepts of horizontal equity (“equals should be taxed equally”) and vertical equity (“unequals should be taxed unequally”) with tax credits, exemptions and deductions. It’s simply a matter of knowing what they are and how to get them.  

By all means, find them. They’re yours for the claiming.

But it’s equally important to understand that tax breaks are directly correlated to the decline in government revenue. It’s a real paradox, one that results in tax increases and tough government cuts.
As an individual taxpayer, it’s up to you to:

  1. Report your income freely and voluntarily
  2. Calculate your tax liability correctly
  3. By all means, file! And do it on time
  4. Avoid tax “misunderstandings” by keeping track of your records and educating yourself on tax laws thoroughly before attempting to benefit from them