(futuristic pop music)
(light, orchestral music)
(chalk writing on a chalkboard)
(beep)
- Hey so how did you feel when you
received your first paycheck?
I was pretty excited I'll be honest.
I worked for weeks and weeks
and there in the sealed envelope
was my very first hard-earned compensation.
I had so many plans about what I was going
to do with the money.
But those hopes were brutally
dashed the moment I read the bottom line.
By the time the money actually got to me,
it had been sliced up like a pizza.
An alphabet soup of government agencies
each got their cut before I did.
What are taxes anyway?
How do they work?
How did we end up with this present system?
First things first, the basic idea
of taxation is pretty simple.
There's some sort of state or similar authority
that imposes a levy on an individual or legal entity
like a corporation or something.
If you can't pay, then you can be charged with a crime.
This is a very old concept.
It dates back as far as Mesopotamia
and Egypt's Old Kingdom.
Nowadays the tax man's not gonna beat the crap
out of you for being late.
But the system is way, way more complicated.
In the United States the taxes you pay
vary from person to person, from company to company,
from check to check, and then from state to state.
However most people do have to pay the federal income tax.
The US tax system is huge.
Complex doesn't even begin to describe it.
A better word would be byzantine,
which I looked up earlier.
In 1913 Congress passed the 16th Amendment.
The 16th Amendment says this specifically:
"The Congress shall have power to lay and collect taxes
"on incomes from whatever source derived,
"without apportionment among the several States,
"and without regard to any census or enumeration."
Okay, let's be honest.
While most folks in the US only think about taxes
when April approaches, the process really begins
when you start a new job.
You and your employer agree on your compensation
or before tax income.
Next thing you do is fill out a form
called the W-4 and it determines
how much income tax your employer
will withhold from each check.
Why do they do this? Good question.
Employers are required by law
to withhold income tax
and deposit the money in a federal reserve bank.
This is how the federal government
maintains a steady stream of income
while also drawing interest on your tax dollars.
Pretty clever, huh?
So instead of paying taxes once a year in April,
you're actually paying them all year long,
every time you get a paycheck.
The rules change when you're a freelancer
or independent contractor or you're otherwise self-employed.
Nobody's gonna withhold income taxes each time you get paid
by a client or a customer
so it's up to you to manage what you owe.
What's a good way to think of income taxes?
Let's think of filing income taxes in April
kind of like settling up with the IRS.
All you're doing is figuring out
if you paid the right amount of cash.
If you paid too much, boom, you get a refund.
If you paid too little, boom, you're writing another check.
Income tax forms like the 10-40 are notoriously confusing.
But that's because they're based on a code
that's more than 5000 pages long,
because somebody thought that would be a good idea.
Presidential candidates are always talking about
revising the system, but how?
Well there are all sorts of potential alternatives
like, for example, this thing called the flat tax.
Under a flat tax system, everybody pays the same rate.
Proponents of a flat tax system say that it would
do away with all the complicated codes and forms.
Critics say this system favors the wealthy
and that's not the most controversial idea.
There's another one.
It's even more controversial than the flat tax.
The idea that we should just repeal the 16th Amendment
altogether, abolish income tax, don't worry about it.
In place of income tax then,
they would have a national sales tax.
Many countries around the world already
levy a national sales tax.
You've heard of it before.
It's called a value added tax, or VAT.
The difference is that most of these countries
also collect income tax.
US backers of this plan want to get rid of the IRS
and charge a flat 10%-25% on all retail purchases
of new goods and services.
People who are fans of this say that a consumption tax
collects revenue from everybody,
even illegal residence, tax dodgers,
tourists from other countries et cetera.
Opponents say it puts an unfair burden
on the middle and lower classes
who buy a lot of the stuff that would be taxed.
They also say it might reduce consumer spending,
slowing the economy down.
Then they add that in order for it to be fair,
it would have to be applied to the purchase
of stocks and bonds in addition to consumer goods.
Yeah, so it's no secret that taxes
are a bigger subject in many countries.
The United States has had a, at best,
a rocky relationship with this issue.
The US doesn't just have one of the most
complicated tax systems in the world
it also grows more complicated each year.
This is a politically charged, divisive issue
but there is one thing that everyone can agree on.
The current system is not perfect.
So here's a question.
What would you change if you were in charge?
Let us know in the comments.
Go ahead and like and subscribe.
Thank you so much for watching.
We'll see you next time.
(futuristic pop music)