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Why pay taxes?

Governments provide services to its citizens.  Services cost money, therefore the Governments tax their citizens to raise the money needed to provide the needed services.

Governments are not good at doing everything.  But one must admit that they are good at doing certain things, e.g. do you realize how much it would cost every citizen to provide for their own snow-plowing services. Similarly, school bus service is a very cost effective way of taking kids to schools.  In the absence of school bus service, every parent would have to drive his or her child to school.  Considering most households these days have two working parents that would mean at least one of the parents will lose at least two hours of working time every day. I do not think I need to tell anyone how much it would cost everyone if they had to provide for their own safety and security of their communities.

However, how to determine fair share of those costs of services provided to you by the Government?  You may find it hard to believe (and this may not work perfectly), but policy makers in Washington, Albany, the county legislators do try their very best to make sure that everyone only pays their fair share of the taxes and nothing more (I may be biased here, but I was a tax policy officer for a government for many years). Here is the first sales pitch - It is my job as an Enrolled Agent to make sure that you only pay your fair share of the taxes and not a cent more.

There are three levels of Governments who provide services to its citizen: federal (US Government), State (e.g. NY State) and the local levels, (i.e. St. Lawrence County, your township or the City of Ogdensburg).

Incidentally, there are also three things that you can do with your money: you can earn it, you can spend it and you can save it.  The biggest asset that represents savings is the house you own. Everyone wants to buy a home as soon as they have saved enough of their hard earned money.

I think I may have given away the next thought, I am about to share with you.  There are three levels of Governments and there are three things you can do with your money.  That leads to a logical conclusion - there are three ways Governments can tax you.  Governments tax you when you earn money, Governments tax you when you spend money, and lastly, yes you guessed it right, they tax you if and when you save your money.

Taxes are based on what is called a “tax base.”  Taxes are usually a percentage of something and that something is the tax base.  And guess what, there are three types of tax bases - the same as the things you can do with money, i.e. how much you earn, spend or save.  Income taxes are based on how much money you earn, Sales taxes are based on how much money you spend and Property taxes are based on how much your house is worth - a close proxy for how much you have saved over time. (Do not worry, if you do not own a house, the Government will still tax you on your savings that either earn interest, dividends or if you are lucky enough, capital gains.)

Other than small exceptions, for the most part, the federal government taxes citizens based upon their earning capacity, i.e. how much they earn.  State governments on the other hand, not only tax based on how much one earns but also how much one spends, i.e. states not only charge income taxes but also sales taxes.  Local governments almost always earn their revenues by imposing sales or property taxes.  You may be wondering why this is so?

Most bureaucrats are just trying to do their jobs and the tax policy advisors working for the Governments are only trying to make sure that your tax bill reflects as accurately as possible the cost of government services that you have consumed. For the most part, federal services one consumes are a direct function of how much one earns. On the other hand, the services one consumes that are provided by the state are not only a function of how much one earns, but also how much one consumes (or spends) within the boundaries of that state. At the local level your ability to earn may have no relationship to how much and how many of the services provided by the local government you consume e.g. someone living in New York City may own a huge colonial era home in upstate New York.  The local Government in upstate NY will be responsible for providing electricity, sewer services and clean water to the home.  The amount of local services consumed in respect of the house is directly related to the size of the house.  In theory, the market value of the house should depend on the size of the house.  The property taxes will be based on the value of the property - a proxy for the amount of services consumed by the residents of the property.

To summarize Taxes are Government’s way of sending you a bill for the Government services you have consumed.