Where Does the Government Get Money?
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The only money the government has to spend comes from you. It also comes from me, the business down the street, state and local governments and on and on. Actually, when you compare the United States to other countries, the U.S. taxpayer has a fairly low burden. Of the 30 member countries in the Organization for Economic Co-operation and Development (OECD), the United States levies one of the lowest tax burdens on its citizens, bested only by Korea and Mexico. The U.S., with a tax burden of 25.5 percent of the Gross Domestic Product, ranks well below the average of 35.9 percent and the majority of Europe where taxes average up to 50 percent. A majority of revenue comes from individual income tax and payroll taxes such as those levied for Social Security and Medicare. It was not always so.
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Article I, Section 8 of the United States Constitution gives Congress the authority to "lay Taxes, Duties, Imposts and Excises to pay the Debts and provide for the common Defense and general Welfare of the United States." This power was the first and most important given to the new central government in 1789 because many of the states were struggling to pay off debts incurred during the Revolution. In return for relieving the debt---and thereby reducing the likelihood that the lending countries might invade and slice up the newly united states, the central government assumed responsibility not only for debts but also for the common interests of all of the states. The ability to tax was crucial to the survival of the new union, allowing it to finance government and its services (like a central bank and armies), negotiate with foreign countries as an equal (as in the Louisiana Purchase) and to raise armies to defend itself against invasion (War of 1812) and insurrection (Civil War).
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Until 1913, this was done primarily by raising tariffs, import and export taxes, special-duty taxes and assessments. The adoption of the 16th Amendment added a "progressive" income tax, based on ability to pay, to fund federal government. After 1950, this tax and the payroll taxes attached to the Social Security program, founded in the 1930s, provided the majority of federal revenue. With the addition of the Medicare payroll tax in 1964, payroll taxes became the second-largest source of revenue for the national government. U.S. payroll taxes are matched by employers at a slightly lower percentage (13 percent compared to an average of 17) than other OECD countries. In addition to income and payroll taxes, which together make up about 80 percent of the money the government has to spend, another 15 percent comes from corporate income taxes (a drop from over 30 percent in 1950). The remaining 5 percent of government revenue comes from excise and other taxes and from investments, either by citizens (as in savings bonds) or from other countries.
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