Introduction
The United States government collects revenue from various sources to fund the country’s operations, services, and programs. Federal revenues are crucial for maintaining the nation’s infrastructure, providing public services, and funding national defense, among other things. Understanding where the largest proportion of federal revenues come from is essential for understanding how the government is financed and where the money for federal spending comes from.
Individual Income Taxes
Individual income taxes make up the largest proportion of federal revenues in the United States. This type of tax is assessed on the earnings of individuals and families and is the primary source of revenue for the federal government. According to the Congressional Budget Office, individual income taxes accounted for about 50% of federal revenues in the fiscal year 2020.
- Individual income taxes are progressive, meaning that higher-income individuals pay a larger percentage of their income in taxes compared to lower-income individuals.
- The tax rates for individual income taxes range from 10% to 37% for the 2021 tax year, with higher rates applying to higher income levels.
- Income tax revenue is used to fund a wide range of federal programs, including social security, healthcare, national defense, education, and infrastructure.
Payroll Taxes
In addition to individual income taxes, payroll taxes are another significant source of federal revenue. Payroll taxes are deducted from employees’ wages and paid by both employees and employers. These taxes go towards funding Social Security and Medicare, which are critical social safety net programs in the United States.
- For the 2021 tax year, the Social Security tax rate is 6.2% for both employees and employers, while the Medicare tax rate is 1.45% for employees and employers.
- Unlike individual income taxes, payroll taxes are regressive, meaning that they represent a larger share of income for lower-income individuals.
- Payroll taxes accounted for about 36% of federal revenues in the fiscal year 2020, according to the Congressional Budget Office.
Corporate Income Taxes
Corporate income taxes are another important source of federal revenue, although they contribute a smaller proportion compared to individual income and payroll taxes. These taxes are collected from corporations on their profits and play a significant role in funding the federal government.
- In the fiscal year 2020, corporate income taxes made up about 7% of federal revenues, according to the Congressional Budget Office.
- The corporate tax rate for 2021 is 21% for most corporations, although certain deductions and credits can lower the effective tax rate that corporations pay.
- Corporate income tax revenue is used to support federal programs, infrastructure projects, and other government initiatives.
Excise Taxes
Excise taxes are imposed on specific goods and activities, such as gasoline, alcohol, tobacco, and firearms. These taxes represent a smaller proportion of federal revenues compared to individual income, payroll, and corporate income taxes but still contribute to the overall funding of the federal government.
- In the fiscal year 2020, excise taxes accounted for about 2% of federal revenues, according to the Congressional Budget Office.
- Excise taxes are often levied to discourage certain behaviors, such as smoking or excessive consumption of certain goods, and to generate revenue for the federal government.
- The rates of excise taxes vary depending on the specific product or activity being taxed.
Other Revenue Sources
In addition to the major sources of federal revenue mentioned above, the government also collects funds from other sources, including customs duties, estate taxes, and various fees and charges. While these sources contribute to federal revenues, they make up a smaller proportion compared to individual income, payroll, corporate income, and excise taxes.
- Customs duties are taxes levied on goods imported into the United States and represent a small but essential source of federal revenue.
- Estate taxes, also known as inheritance taxes, are imposed on the transfer of property upon an individual’s death and contribute to federal revenues, albeit in a relatively small amount.
- Various fees and charges, such as passport application fees, national park entrance fees, and federal court filing fees, also contribute to federal revenues.
Conclusion
The largest proportion of federal revenues in the United States comes from individual income taxes, payroll taxes, and corporate income taxes. These sources of revenue are critical for funding federal programs, infrastructure, national defense, and other government initiatives. Understanding the composition of federal revenues is essential for understanding the funding of the federal government and how tax policies impact the country’s finances.
FAQs
What percentage of federal revenues come from individual income taxes?
Individual income taxes accounted for about 50% of federal revenues in the fiscal year 2020, making it the largest source of federal revenue.
How much do payroll taxes contribute to federal revenues?
Payroll taxes, which fund Social Security and Medicare, accounted for about 36% of federal revenues in the fiscal year 2020, making it the second-largest source of federal revenue.
Do corporations contribute significantly to federal revenues?
While corporate income taxes make up a smaller proportion compared to individual income and payroll taxes, they still accounted for about 7% of federal revenues in the fiscal year 2020, representing a significant contribution to federal funding.
What are excise taxes, and how much do they contribute to federal revenues?
Excise taxes are levied on specific goods and activities and accounted for about 2% of federal revenues in the fiscal year 2020. While they represent a smaller proportion, they contribute to federal funding and serve as a revenue source for the government.
