Our comprehensive guide to taxes is here to help you understand your role in the complicated process that makes up tax season. Not sure where to start? Check out some of our guides below.
An Expansive Guide to Taxes
Why do we have taxes?
Most people pay taxes because they have to, but it’s essential to understand why we do. The most common reason is that the money goes towards public goods and services, such as roads and schools, which every member of society benefits from, whether or not an individual pays taxes. So, for example, the community benefits from having roads to drive on and schools to educate our children.
The other reason that we pay taxes is that they redistribute wealth across different people within a society. Taxing some individuals at higher rates than others allow governments to spend more money on programs that benefit lower-income individuals. These programs are centered around healthcare or social support programs.
Another less common reason for having taxes is that they encourage certain behaviors that are deemed socially desirable. Taxes on goods like alcohol and tobacco, for example, are considered by some to be an excellent strategy to reduce their use among the population by increasing the cost of purchasing them.
How does a country’s tax system work?
Companies and individuals compete to make the best product at the lowest cost in a market-based economy. This competition can result in more efficient manufacturing processes or lower prices for consumers. However, market forces also have their downfalls. Without some intervention from the government, markets often fail to consider negative externalities, such as pollution from manufacturing or the environmental cost of extracting natural resources.
To fix some of these market failures, governments levy taxes on certain goods and services to correct for imbalances in a free-market economy. So, while stores may collect sales taxes at the point of purchase, income taxes are managed by the government to compensate for negative externalities.
What is an example of how tax revenue is spent?
Tax revenue typically goes towards public services like roads, hospitals, and social support programs. Let’s look at Canada as an example: in 2014, $207 billion was collected in total federal tax revenue, with around $118 billion of that going towards public services. They spent the remainder on social programs, healthcare, and education.
Just because a country has a progressive system where people with higher incomes pay more tax doesn’t mean that the wealthiest individuals spend the majority of taxes. High earners might be taxed at a rate of 50% on their income, but that doesn’t mean they pay 50% of the total tax! Since the wealthy have more money than others, they contribute to disproportionate total tax revenue.
At the same time, not everyone pays taxes in Canada. For example, low-income individuals are sometimes exempt from paying federal income tax (although provincial and municipal taxes are still considered). If you are a married individual, you can start a joint account with your spouse. According to the experts at SoFi, “Separate accounts in marriage might also be appealing if one of you has taken on major debt. This can protect the other spouse in the event that debt collectors show up, or regarding sole rights of survivorship in the event of an accident. And while no one wants to consider it, separate finances could also mean a simpler split down the line if worse comes to worst.”