When tax season comes around and you have to pay your taxes, it’s easy to feel frustrated and annoyed. It seems like so much of the money you earned goes back to the government to pay taxes. But why are taxes so high in the US?
With the ability to tax, the government can have greater control over its revenue. It is possible for the federal, state, and local governments to mandate higher taxes and increase their revenues. Revenue raising for households and businesses is more difficult. As a result, US taxes are high and taxpayers are left with no choice but to fork over a large portion of their paycheck to the government.
Do you want to learn more about tax rates in the US and why the tax burden is so heavy? Here, we’re sharing everything you need to know about high taxes in the US.
How U.S. Taxes Work
Before you understand why taxes are so high, you first need to have a general idea about how taxes in the U.S. work.
A “tax” is the amount of money that the government raises within its borders in order to finance all of its activities. Americans are expected to have submitted their income taxes by today. The government withholds a portion of the money we earn—also known as our “income”—as taxes.
Because our income tax is what is known as a “progressive tax,” people who earn more money are subject to greater tax rates. You don’t pay any income tax if you earn relatively little money. If you earn a good living, you contribute a small portion of it to the government. The fraction you pay should be bigger if you earn a lot of money. This system is set up this way so that individuals who can afford to pay more taxes to the government can do so without having to worry about putting food on the table every day.
The U.S. National Debt Increases Taxes
The amount of the country’s debt has generated a lot of debate on American domestic policy. It is simple to understand why many people are starting to pay special attention to this issue given the volume of fiscal stimulus pushed into the U.S. economy over the previous couple of years. Unfortunately, the public rarely receives information about debt levels in a clear and understandable way. This issue is a focal point for discussion when combined with the reality that many individuals are unaware of how the magnitude of the national debt impacts their day-to-day life.
Currently, the nation owes a great deal of money. Spending well beyond our means and borrowing to make up the difference has led the United States to accumulate debt. That debt now totals more than $14 trillion, roughly the size of the entire U.S. economy.
We have to borrow money to make up the annual deficit when the federal government spends more than it collects. Our national debt is increasing as a result of the annual deficit.Our biggest deficits in the past have been brought on by increased spending during wars or economic downturns. Here are some more causes of today’s deficits:
- aging baby-boom population
- rising healthcare
- tax system
Approximately $3.8 trillion will be spent by the government this year while $2.2 trillion will be collected by taxes. A staggering 42 percent of its spending is being financed by borrowing. Government spending is dominated by two popular programs, Social Security and Medicare.
20 percent of the budget goes to defense.
7.5 percent of Americans are on Medicaid, which helps ensure that our high poverty rate doesn’t rise any further.
Washington must pay 5.4 percent of federal spending in interest on the debt unless it wants a global depression.
Besides this, the remaining 28 percent goes toward running the government, maintaining federal courts and foreign embassies, managing air traffic control, building and maintaining interstate highways, and helping victims of natural disasters.
In light of this, budget experts view tax increases as essential to solving budget issues. It is reasonable to ponder how this rising debt impacts common people given that the national debt has recently expanded more quickly than the size of the American population. Although it may not be visible, the amount of the national debt has a direct impact on people.
Voters Are Against Spending Cuts
Although many Americans are frustrated with the national debt and the extensive spending done by the U.S. government, voters are mostly against spending cuts.
There is no doubt that Americans are conflicted. They desire a smaller government but they oppose cuts to the most treasured programs. A recent survey found that respondents preferred more government spending over cuts.
However, Americans appear to be more pragmatic about the situation than Washington-based politicians. For instance, 64 percent of respondents to another poll stated that cutting the deficit is likely to include both expenditure cuts and tax hikes. Moreover, they are evenly divided on the necessity of reducing Social Security and Medicare spending and raising taxes.
Nationwide Inflation Affects Tax Rates
As you are probably aware, inflation is impacting the entire nation in unprecedented ways. The cost of living for consumers is influenced by the cost of living for households. It is also influenced by the cost of a variety of goods and services, and this cost of living is higher than it has ever been in recent decades. Things like groceries, gas, and rent are all costing more than they did last year, which puts a strain on families and can, in turn, lead to higher tax rates.
Compared to market expectations of 8.3 percent, the annual inflation rate in the US unexpectedly increased to the highest level it has been since December 1981. Energy, gas, food, and housing are all seeing rises in prices.
The IRS increased the federal income tax brackets, basic deductions, 401(k) contribution limits, and other tax benefits for 2022 in response to rising inflation. Other provisions, however, are unchanged, which over time will result in increased tax obligations.
The consumer price index experienced its largest increase in more than three decades in October, up 6.2 percent from the previous year. Additionally, while dozens of tax changes will reflect rising expenses, fixed provisions could put a strain on filers as their spending power declines.
As long as inflation is up, you may continue to see an increase in taxes.
Tax Holidays or Tax Pay Breaks
Another reason why tax rates in the US are going to increase is that the nation has been on a tax holiday, or a tax break.
Federal tax revenue made up 18% of GDP when Ronald Reagan left office. They represented 20% of GDP when Bill Clinton left office. Currently, taxes collected by the government only make up 14% of GDP. That is due to a reduction in tax revenues brought on by the recession as well as the Bush tax cuts from 2001 and 2003, which Obama extended through the end of 2012. With 7 million fewer workers than before the crash, federal tax receipts will remain below historical averages for the foreseeable future even if the economic recovery continues.
However, taxpayers may not feel as though they have received a tax break or holiday at all. The average household isn’t moving ahead and might even be falling behind after inflation since the median income has been stagnating and it even plummeted during the last recession.
Additionally, municipal and state taxes are increasing across the board, adding to the overall tax load. The reality that the federal government has been borrowing money from the future for ten years, however, remains unaffected.
Tax Increases in California
Like in other states, tax rates are on the rise in California.
The state income tax on individuals in California is progressive, with rates ranging from 1.00 percent to 13.30 percent. Another jurisdiction is in charge of collecting local income taxes. California has a corporate income tax rate of 8.84 percent. California has a state sales tax of 7.25 percent, a local maximum sales tax of 2.50 percent, and an average state and local sales tax of 8.82 percent. Even still, many people are moving from California to Texas to reap lower costs of living.
Ash Kalra and Alex Lee of the California Assembly introduced A.C.A. 11, a proposed amendment to the California Constitution, on January 5, 2022. A.C.A. 11 would enact significant tax reforms to pay for Cal-Care, a single-payer California healthcare system.
In other news, California proposed a new tax that would go into force in 2023 and bring in billions in revenue. Assemblyman Alex Lee of San Jose presented the legislation. This would be the country’s first legitimate wealth tax; it is not an income tax. A 1% annual wealth tax would be levied on households with a value greater than $50 million. Additionally, the rate would be 1.5 percent if your net worth exceeded $1 billion.
Why Are Taxes So High in the US?
Have you ever asked: “Why are taxes so high in the US?” If so, you’re definitely not alone. Many Americans are frustrated with the current tax system and increasing taxes are only causing more distress.
The total tax rates on individual income at all levels of government across major countries were recently compared by the Tax Foundation. With a top income tax rates of 42.9 percent today, which includes federal and average state taxes, the United States is the leading country in how much citizens pay in taxes.
Now that you’re aware of why taxes are so high in the US, you can better understand where your money is going every time you pay your taxes. For more resources and to learn more about how to handle taxes, check out this link!