Purpose of Federal Taxes
Every year, the federal government collects 30 to 31 percent of the nation's wealth in taxes. The main purpose of this taxation is to fund the government's operations, but that is hardly the only reason, and sometimes not even the most important one. Furthermore, not all the taxes collected in the U.S. are levied by the federal government.
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Raising Revenue
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First and foremost, federal taxation is designed to raise revenue. The 2007 federal budget was $2.7 trillion, and ideally all of that money should be raised through taxation. Simply borrowing almost $3 trillion in a single year is something the U.S. government can only contemplate under emergency circumstances. The government needs to pay its bills, and it does that through taxes.
Collecting Information
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Another purpose of taxes is to collect economic and financial information on U.S. citizens and corporations. This is not a widely known purpose for federal taxes, and no tax was ever created for the primary purpose of collecting data. However, many of the government's tax forms and the regulations for filing them were designed specifically with collecting information in mind. For example, in addition to citizen's filing their income tax returns, employers must file corresponding wage statements. This is both to verify income tax returns and to collect data.
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Protectionism
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A classic use of tariffs, or taxes on imports, was to protect U.S. industries from foreign competition. This practice has fallen out of favor with the emergence of the global free trade regime and the World Trade Organization, but the U.S. still uses tariffs for protectionist purposes. In 2002, President George W. Bush imposed a tariff of up to 30 percent on foreign steel imports.
Encouraging and Discouraging Behavior
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Taxation is often used as a tool to encourage or discourage certain activities. For example, a carbon tax is often discussed as a means of discouraging greenhouse gas-emitting activities and encouraging a switch to alternative energy. Excise taxes on tobacco products are levied in part to discourage smoking. Likewise, deductions and exemptions from taxation are used to encourage certain behaviors. The well-known deduction for home mortgage interest from income taxes is an example, since it rewards home ownership.
Types
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To implement its tax policies, the federal government has a variety of tools at its disposal. Federal taxes include the private, corporate and capital gains income taxes, payroll taxes (Social Security and Medicare FICA), excise taxes (alcohol, gasoline, tobacco), tariffs and transfer taxes (gift and inheritance taxes). They also include fees collected for federal services. However, federal taxes do not include either sales or property taxes, which are collected by state and local governments.
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