You should love paying taxes—it's for your own good

Despite the enormous budget at its disposal, the American government doesn't generate its own wealth; your tax does.

Photo byVladimir SolomianyionUnsplash

The American government is unique in how it sustains itself financially. Despite overseeing the world's largest economy, with a GDP of nearly $26 trillion in 2022 and a federal budget exceeding $6 trillion, the U.S. government doesn't generate its own wealth. Instead, it relies on the economic activities of individuals and businesses to maintain its operations and provide public services. That's where your tax comes in.

This reliance is evidence of the government's role in the broader economic system. The U.S. Constitution grants the federal government the power to levy taxes, borrow money, and regulate commerce. These powers are essential for managing the country's finances but do not extend to directly generating wealth.

Instead, the American economic system, which is predominantly capitalist, encourages individuals and businesses to create wealth through their efforts. The government's role is to encourage this process by creating an environment conducive to economic growth.

The U.S. government has various types of taxes to collect revenue from individuals and businesses. These taxes include:

1. Income Tax: The federal income tax is the most significant source of revenue for the government. Individuals and businesses are taxed on their income, with the amount determined by a progressive tax system where higher earners pay a higher percentage of their income in taxes. This tax supports a wide range of government services, including social programs like Social Security and Medicare.
2. Corporate Tax: Businesses are also subject to corporate income tax on their profits. This tax is vital for funding government initiatives and maintaining infrastructure that supports business operations. Corporate taxes have been a topic of much debate, with discussions around tax rates and loopholes that can affect the overall revenue generated.
3. Payroll Tax: Payroll taxes are levied on both employers and employees to fund Social Security and Medicare. These taxes are deducted directly from employees' wages and are matched by contributions from employers. Payroll taxes are a significant part of the government's revenue, ensuring that critical social safety nets are funded.
4. Excise Tax: Excise taxes are applied to specific goods and services, such as gasoline, tobacco, and alcohol. These taxes are often used to fund related public services, like highway maintenance, through gasoline taxes. Excise taxes can also be used as a tool to discourage certain behaviors, such as smoking, by making harmful products more expensive.
5. Estate and Gift Tax: The government also collects taxes on large estates and gifts above a certain threshold. These taxes are designed to prevent the accumulation of wealth in a few hands and to ensure that wealth is redistributed more evenly across society.
6. Tariffs and Customs Duties: The government imposes tariffs on imported goods, which can protect domestic industries and generate revenue. Customs duties are also collected on goods brought into the country, contributing to the federal budget.

While the government does not generate revenue by producing goods, it can charge fees for specific services to cover operating costs. For instance, fees are collected for services like processing passports, granting permits, and accessing national parks. These fees, however, are only a small part of the government's overall revenue.

The federal government's budget is used to pay for a wide range of public goods and services. This includes everything from social welfare programs like Social Security and Medicare to defense spending, infrastructure development, education, and research. By funding these areas, the government indirectly creates wealth by providing the necessary infrastructure and services that enable businesses to operate more efficiently and individuals to thrive.

The government's role in the economy is to create policies that encourage economic growth. This can involve offering tax incentives for businesses to invest in research and development, supporting infrastructure projects that create jobs, or investing in education to build a skilled workforce. These policies help create a stable environment where businesses can succeed and generate wealth, which in turn leads to higher tax revenues.

In contrast to the U.S., some governments have a more direct role in their economies, particularly in socialist or mixed economies. In these systems, the government may own and operate businesses, directly generating revenue from their activities. However, in the U.S., the focus remains on enabling private enterprise, while the government plays a supporting role.

The government's ability to levy taxes, regulate commerce, and create policies that foster economic growth has been key to its success. While it does not generate its own wealth, the U.S. government's role is to ensure that the country remains competitive and prosperous economically in the global landscape.