Why Do We Pay Taxes?

Updated February 3, 2023 · 3 Min Read

Why do we pay taxes to our government? Where are all these tax dollars going, anyway? This video tries to illuminate some of these mysteries.

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This Is Why You Pay Your Taxes

This is Why You Pay Your Taxes

Flying into a rage over taxes is an American birthright. In 1773, angry colonists sparked revolution when they thumbed their noses at crazy British taxes and dumped three shiploads of tea into the Boston Harbor. Two-hundred and forty years and two world wars later, Americans are still demanding answers to tough tax questions. Who is bearing the brunt of the tax burden? Am I getting as much out of government spending as I'm paying in? And where are all these tax dollars going, anyway?

Online MBA's latest video tries to illuminate some of these mysteries. Running a superpower is expensive and the U.S. tax system, as imperfect and controversial as some of its finer points may be, is built to allocate the burden of payment as equitably as possible.

As it turns out, most people with average or below average incomes will actually receive a lot more in lifetime government benefits than they've put in. For instance, an individual that has earned $43,000 a year in taxable income for forty two years will have paid $345,000 in income taxes throughout their working life. But once they've retired, that same individual is eligible to receive a total of $417,000 in Social Security and Medicare benefits alone. So how does this balance out on the books? Well, theoretically (current budget shortfalls aside), those who make and save more over a lifetime will only be eligible for a benefit sum that's either equal to or less than their total tax contributions. The idea is to allocate money to workers who need it most when they need it most.

We can ignore them most of the year, but as soon as November elections or April tax deadlines approach, high-seeming tax rates that we forgot to plan on start to feel a little oppressive again. We hope this new video helps you feel tax-literate and tax-sane again.

Video Transcript

America is a country born from upheaval against taxes - think the Boston Tea Party of 1773 - and yet 240 years later, we're still shelling out taxes from every paycheck to keep the lights on in the White House. Of course, these days Americans enjoy more direct representation for their tax dollars, but there are still many questions around just why we all have to pay our taxes and what good is coming of it.

The average American pays 12.6% of their income in federal taxes and since the average wage is about $46,000, that's about $5,800 in taxes. If this average American works 45 years in her life, she'll have paid $261,000 during her working career. Her total lifetime taxes could be enough to send two kids through twelve years of public school, or pay for building just 1.8% of an average sized elementary school-pretty well proving why pooling taxes from everyone is the only way to raise the capital required to operate a nation.

A double income, two-child family making a cumulative $80,000 per year will pay $1,016 each year for national defense - they'd have to work over 4,000 years to pay for just one second of the military costs from the 9.5 years between 9/11 and Osama Bin Laden's death.

PBS receives about $430 million in tax payers' money each year. If you take a highest tax bracket earner - let's say Warren Buffett's secretary rumored to earn potentially $500,000 annually - and put all her tax contribution towards PBS which would equate to about $170,000 - she still only pays .0003% of PBS's annual tax-paid budget.

When it comes to taxes, it's all about every single American contributing to the big pot of money. Fortunately, most Americans will receive their tax money back and then some upon retirement. For example, a man who earns $43,000 per year and works 42 years will have paid $345,000 cumulative over his lifetime in federal taxes and will receive an average of $417,000 back in social security and Medicare.

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