Governments provide a variety of services to the people they serve. In order to pay for these services, the government levies taxes on the citizens and companies who benefit from these services. The government must also make payments on any money borrowed to sustain operations. Also, the government levies taxes to alter the behaviors of its citizens and the companies that do business in the country.
National Defense Spending
One of the primary functions of national governments is to provide for the common defense of the nation. Today, this requires having a standing army which involves expenses for salaries, supplies, equipment, training and housing. This also includes the expenses for research and development of new technologies and weapons. According to the Tax Policy Center, military spending accounted for approximately 50 percent of all United States discretionary expenditures in 2015.
Funding Government Programs
Governments provide a number of services to their citizens that are paid for with taxes. The specific services will vary from government to government depending on the scope of the government, such as whether it is a local government or a national government, and its reach, meaning how much power the citizens believe the government should have. These programs can include police forces, schools and health care. The government also protects corporations and their products through trade regulations and copyright laws. In order to uphold copyrights, the government must set up a court to hear the cases and determine damages.
Government Debt Payments
Most governments carry significant debt that they must pay interest on. Many times the government has unexpected expenses such as wars, or a recession will limit the tax revenue but not the need for services, so the government needs to borrow money to pay for them. According to the Department of the Treasury, the United States debt is over $21 trillion. Some of this debt is owed between government agencies, but most of it is owed to individuals and companies, both American and foreign. In 2015, according to the Tax Policy Institute, debt payments accounted for about 6 percent of the United States' expenses.
Effects on Individuals
Taxation is a passive way for governments to affect the behaviors of its citizens on top of bringing in money. Citizens must choose what to spend their limited supply of money on so by offering tax breaks or imposing tax increases on certain products the government can affect what people buy. For example, if the government wants to reduce the number of SUV's that are sold, it can impose extra taxes on these vehicles. Or if it wanted to increase hybrid car sales it can offer a tax incentive for individuals to buy these cars.
Effects on Companies
Just as taxes can affect the choices that individuals makes, taxes can also be passed to affect the way that corporations do business. For example, if the government wants to encourage more employers to offer retirement plans to their workers, the government can pass a law that gives a tax break to companies that sponsor retirement plans for employees. Similarly, if the government wanted to increase the production of clothing made within its borders, it could pass a higher tax, or tariff, on any imported clothing to make it easier for clothing made in the country to compete.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."