Who Pays Taxes?

Tax Basics

Who Pays Taxes?

At the heart of our tax code, beyond all of the complexities and details that make tax law seem so impenetrable, is a simple question.

Who pays for the things we want to do together as a country?

Our government, as a representative of the people, decides to spend the nation’s resources on the priorities that we decide as a society are worth doing, whether it’s caring for our elderly, educating our kids, maintaining our infrastructure, subsidizing healthcare for our citizens, or protecting us from our adversaries. The government that provides those services relies on our taxes.

Broadly speaking, taxes are paid by two groups, corporations and individuals.

Individuals pay different tax rates depending on how they make their money. There is one rate for income earned through work (ordinary income), another, lower rate for income earned passively through investments (capital gains), and another rate for income earned through inheritance. So by counting those three rates plus corporations, we’ve got four main buckets of taxpayers:

  1. Corporations
  2. People who earn income through work (“ordinary income”)
  3. People who earn money passively (“capital gains” income)
  4. People who earn money from inheritance (tax free until $22.4 million)

Arguments about deficit spending and monetary policy aside, most people accept that the tax revenue that funds our government comes from these four buckets. This means that all tax policy is basically just a set of rules about how we treat income within these four groups (and subgroups within them) differently from each other.

At the end of the day it’s about values. We show how much we value each group and type of activity based on the tax rates and rules we apply to them.

Now, you might think that a country as enamored with the pioneer spirit and the value of hard work would give money earned through labor a preferential tax rate. After all, if people are working hard for their money, don’t they deserve to keep more of it than someone who just sits on a beach all day while their investments increase in value?

You might think so, but your values would be very different than the people who actually wrote our tax code, and especially the people who wrote last year’s Republican tax bill.

The sad truth at the heart of our tax code is that it gives huge incentives to corporations and people earning their money without working (who happen to almost exclusively be wealthy), and things are just getting worse. Last year’s massive tax bill did a lot of things for a lot of people, but almost all the benefits handed out were concentrated in three of the four baskets: corporations, passive income earners, and those inheriting millions.

That’s the story of the tax bill. There’s no shortage of infuriating specifics, many of which we cover elsewhere on this website, but the fundamentals are clearly and deeply disturbing. Republicans gave a tax cut to corporations and the idle rich while setting up the rest of the country to deal with the fallout. They may say they care about the middle class, or the value of work, or tax fairness, but taxes are really about values, and their values are clear and on display here.

 

NEXT: When Is a Dollar More Like A Penny?  →