Financial Literacy & Independence for Teens - Step 6 -Taxation – What’s the Point?
KEY POINTS
Teens are often surprised by the significant tax deductions from their pay on paystubs. It’s crucial for them to understand the reasons behind taxation and how it contributes to their community, state/province, and country.
Teens must grasp that paystubs and income tax are just the beginning of taxation. They should also comprehend how consumption taxes, wealth taxes, and other government revenues affect their cash flow, investments, and overall net worth.
What is taxation?
Taxation is a critical component of your path towards attaining financial literacy.
Taxation is the process by which governments (e.g., federal, state/provincial, municipal) mandatorily collect money from individuals and businesses to fund public services and projects that benefit society. Such may include infrastructure development, education, healthcare, defense, and social welfare.
There are three primary tax systems utilized throughout the world: progressive, proportional, and tax havens.
How are you taxed?
This post will primarily focus on income tax. However, an overview of other government revenue sources will illustrate the broad nature of taxes and fees paid by individuals.
Individuals typically pay the following taxes and fees, directly or indirectly,
Tax Revenue
Income Taxes
Collected from businesses and individuals based on taxable income or profit levels.
Sales Taxes
These are a form of consumption tax as they are imposed on the purchase of goods and services, usually based on a percentage of the sales price.
Property Taxes
These are a form of wealth tax as they are based on the market value of the real estate properties owned by the individual.
Excise Taxes
These taxes are a form of consumption tax as they are legislated and applied to specific goods or services.
Value Added Tax or Goods and Services Tax
These are forms of consumption tax as they are applied to each stage of production or distribution of goods and services.
Customs and Duties
These are a form of consumption tax and are derived from the imposition of duties and tariffs on imports and exports related to international trade.
Non-Tax Revenue
Fees and Charges
Revenue collected in relation to specific services provided by the government (e.g., licensing, tolls, user fees).
Fines and Penalties
Revenue is generated because of individuals or businesses breaking laws or regulations.
Royalties
Revenue derived from the use of natural resources or intellectual property. Such may include the extraction of oil, gas, minerals, and other natural resources.
Government Owned Entities
Revenue may be generated from government entities (e.g., utilities, postal services).
Lotteries and Gambling
Many governments operate or regulate gambling and generate revenue from ticket sales and taxes on winnings.
Borrowings
Government expenditures often exceed revenues, even when maximizing all the above revenue sources.
The issuance of debt securities (e.g., government bonds) to the public can provide a critical funding source. All debt will need to be repaid as per the terms of the debt instrument issued.
Debt repayments are funded by the collection of tax and non-tax revenue from individuals and businesses.
What do taxes fund?
Taxes support a variety of initiatives that vary by country and may include,
Social Programs
Healthcare
Construction, operation, and maintenance of hospitals, clinics, long-term care homes, nursing homes, and facilities dedicated to mental health services (e.g., counseling, therapy, and psychiatric care).
Universal healthcare may be provided to varying degrees and cover doctor visits, hospitalizations, prescription medication, preventive care, and more. Subsidies may be provided to support healthcare insurance, medication, and medical devices.
Maternal and child health programs are often prioritized and include prenatal care, maternal healthcare, and child vaccinations.
Some governments will invest in healthcare research and development in the hopes of advancing medical breakthroughs, discovering new drugs, and achieving technological advancements.
Social Security
Pensions and subsidies are often provided to ensure a basic standard of living during retirement. Similarly, disability benefits provide disabled individuals with income assistance and access to critical services.
Social Assistance
Social assistance for low-income individuals and families may include unemployment benefits, housing assistance, food subsidies, and social support services.
Individuals, that lost their job involuntarily, may qualify for unemployment benefits, on a temporary basis to provide financial aid while securing new employment. Subsidized education and job training may be available to assist in employment transitions.
Families may benefit from child allowances, maternity leave, paternity leave, and subsidized housing. Low-income families may be eligible for welfare benefits.
Education
Public Schools
Construction, operation, and maintenance of schools, colleges, and universities. Operational costs are typically government funded and include teachers’ salaries, school facilities, utilities, textbooks, technology, and classroom materials.
Students can obtain support from government sponsored grants and scholarships.
The government may support vocational and technical programs, early childhood education programs, adult education programs, and programs designed for disabled students or those with special learning needs.
Financial Assistance
Governments may provide loans, grants, and scholarships.
Grants and scholarships do not need to be repaid and will have varying eligibility criteria (e.g., academic excellence, leadership qualities, extracurricular activities, or financial need).
Defense, National Security, Law Enforcement, Public Safety
Military
Army, navy, air force and specialized forces require training, food, housing, weapons, vehicles, aircraft, and other equipment.
Intelligence Agencies and Counterterrorism
These agencies gather and analyze data to detect and neutralize internal and external threats before they materialize.
Cybersecurity
Technological advancements require governments to safeguard infrastructure, data, and communication networks.
Security and Enforcement
Border security (land and water) and local law enforcement require training, technology, surveillance systems, vehicles, and more.
Firefighting and Emergency Response Agencies
Fire stations, vehicles, firefighters, training, water delivery infrastructure, call centers, and more.
Infrastructure
Transportation
Construction and maintenance of roads, highways, bridges, and public transportation systems (e.g., bus, trains, subways, light rail, railways, airports, ports, bicycle lanes and trails), accessible options, and emergency services.
Utilities
Construction and maintenance of systems for delivery of water, sewage, electrical, renewable energy, telecommunications, and waste collection and recycling.
Public Facilities
Construction of libraries, parks, national parks, wildlife reserves, playgrounds, sports, arts centers, and community centers.
Public Debt
Principal and Interest
The cost of the above spending initiatives often exceeds government tax revenues. Therefore, governments will borrow (i.e., issue government bonds) to cover annual budget deficits.
Repayment of the principal and interest is funded by tax revenues. Many governments will calculate the percentage of tax revenues required to service the national debt.
The above provides an overview of some of the most common use of tax dollars. Governments of some countries will offer many more services than those listed above.
BOTTOM LINE
The diverse array of taxation and other government revenue sources plays a pivotal role in supporting a wide range of services and community projects that are essential for the well-being and progress of society.
These revenue streams collectively enable governments to invest in education, healthcare, public safety, infrastructure, and community projects, enriching the lives of citizens and fostering a thriving and prosperous society for all.
