Tax Series: What Are Taxes?

It isn’t the most interesting topic, but taxes are an integral part of personal finance, and yet often aren’t taught in schools. Therefore, this article will cover what taxes are and why they exist. 

Taxes have been around for thousands of years, and the majority of countries still use them to keep their economies going. In short, taxes are mandatory payments that people make to the government. Then, that money is used to fund the government, schools, social security, medicare, new infrastructure, and more. 

You have most likely heard of income taxes, which are applied to a taxpayers salary and any other income additions (like investment gains or interest). The US has a progressive income tax system, which means that people or companies with a higher income pay a larger percentage of tax than low-income companies or individuals. Apart from income taxes, there are lots of other types, with some common ones being sales, property, and payroll taxes. For example, sales tax is applied to the purchase of goods and services, with the percentage varying from state to state.

One widely misunderstood concept is the difference between tax evasion and tax avoidance. Though it is integral to pay your taxes, a big part of personal finance is learning how to lessen tax liability and maximize the amount of after-tax income you can earn. On the other hand, deliberately underpaying or not paying taxes is tax evasion, and that’s illegal (so don’t do that). 

Hope this helped, and check back for more, because we will be adding more to our tax series soon!