Income Tax--The EZ Guide
Benjamin Franklin famously said, "In this world nothing can be said to be certain, except death and taxes." We Americans have always been especially resistant to paying taxes. But for most of the history of the United States, individuals did not pay income taxes at all. Even after 1913, when Congress first imposed the modern income tax, individuals paid only between 1 and 7 percent of their personal income in taxes, compared with the present-day range of 10 to 35 percent. And for many years, individuals were allowed so many deductions that very few people paid any income tax at all.

What changed? First, the huge financial costs of fighting World War II (1939-1945) raised income tax rates considerably. Then even higher income taxes were required to pay for rising health care costs, the high price of Social Security benefits, increased defense spending, and the cost of a host of other government programs that many of us take for granted.

The following articles provide background information on income taxes--it's just possible that the more you know about where your income tax dollar goes, the less painful it will be to open your wallet each April.

• Income tax--an overview of income tax in the United States and Canada, including profiles on the various types of income tax, its history, and explanations of how individuals compute and file their income tax. The article also discusses the most significant debates over income tax, including tax loopholes and shelters, capital gains tax, the so-called marriage tax, and other issues.
• Public Finance--background on how governments raise money, how that money is spent, and the effects of these activities on the economy and society.
• Taxation--a comprehensive primer on all types of taxes, how government spends taxes, the underlying principles of taxes, their history, and their effects on the economy and society.
• Commonly used tax terms--a glossary of tax terms you should know.

Where does the government get its money?
Income taxes paid by individuals account for the largest single source of money used to fund federal government programs. And individuals pay for a larger share of these programs today than they used to. In 2005, individual income taxes will account for an estimated 43.5 percent of the total money raised by the federal government to pay its bills. This is less than the 49 percent that individuals contributed in 2002, but up from about 40 percent in 1950. By contrast, corporations pay less income tax than they used to; corporate income taxes will account for just 11 percent of federal revenues in 2005, down from more than 26 percent in 1950.

Where does your tax dollar go?
The federal government spends most of its budget on just a few programs. In 2005, Social Security, defense, Medicare, Medicaid, and interest payments on the national debt will account for about three-quarters of all federal spending. The rest goes toward a wide variety of programs in education, transportation, health programs, veterans' benefits, and other areas. 

About two-thirds of federal expenditures are considered mandatory spending; the government spends this money automatically unless the president and Congress change the laws that govern it. Mandatory spending goes toward such entitlement programs as Social Security and Medicare, and it also goes toward paying interest on the national debt. The rest of government spending is considered discretionary; each year the president and Congress must decide which programs this money will fund. Discretionary spending goes toward such diverse programs as defense, highway construction, housing, foreign aid, space exploration, and other programs.

Also on Encarta

• Fiscal policy--a primer on the government's economic policy related to taxation and government spending
• They had something to say about taxes--memorable quotes about one of the two certainties of life

Also on MSN

• Tax resources on MSN Money