Government Tax Revenue: A Comprehensive Overview

It is quite an undertaking to calculate how much money the government collects in taxes because the many avenues of tax revenue go well beyond just income taxesIncome Tax PayableIncome tax payable is a term given to a business organization’s tax liability to the government where it operates. The amount of liability will be based on its profitability during a given period and the applicable tax rates. Tax payable is not considered a long-term liability, but rather a current liability,. However, income taxes do provide the bulk of U.S. federal income.

The federal government provides individuals with many different services, including the regulation of things, such as interstates, issues related to healthcare, and military protection. However, the services cost money to maintain – a lot of money. In order to enjoy all the privileges, American citizens must pay taxes. It is, essentially, how the government earns income.

There are several types of taxes the government imposes to generate the income it needs to pay its employees and render its services. One of the frequent criticisms of the government’s operations is that it pays federal employees much too generously and that the federal bureaucracy does not deliver the government’s services with financial efficiency.

The figures contained in the remainder of this article are from 2017 and 2018. Due to the nationwide coronavirus pandemic, taxes and figures for 2019 haven’t been completely compiled.

Summary

• The government’s yearly income comes from the taxes it imposes; the largest source comes from individual income taxes, which are based on the income an individual earns for the year.
• The second-largest source of the government’s income comes from payroll taxes, which are imposed only on an individual’s wages and salaries; the taxes are used exclusively to fund Medicare and Social Security.
• Corporate income taxes make up about 6% of the government’s annual income.

Income Taxes

Taxes on an individual’s income are applied to all income that an individual earns throughout the year. Income tax is applied to:

• SalariesRemunerationRemuneration is any type of compensation or payment that an individual or employee receives as payment for their services or the work that they do for an organization or company. It includes whatever base salary an employee receives, along with other types of payment that accrue during the course of their work, which
• Wages
• Interest
• DividendsDividendA dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend.
• Other forms of personal income

The U.S. income tax is structured to be progressive. Individuals are placed in tax brackets, with the tax amount being a percentage of income, which increases as the amount of the individual’s income increases. In 2018, marginal tax rates ranged from 10% (for individuals earning up to $19,525) up to 37% (for individuals earning more $500,000) annually.

For example, if an individual earned $40,000 in 2018, they owed 22% of their income in income tax, or $8,800. If an individual earned $4 million for the year, they paid 37%, or $1,480,000.

Payroll Taxes

Payroll taxes are different from income taxes, although they are, in fact, a tax on income. The taxes are only applied to an individual’s wages or salary. They do not apply to other forms of income, such as stock dividends, capital gainsCapital Gains YieldCapital gains yield (CGY) is the price appreciation on an investment or a security expressed as a percentage. Because the calculation of Capital Gain Yield involves the market price of a security over time, it can be used to analyze the fluctuation in the market price of a security. See calculation and example from investing, or interest earned from a bank account.

Payroll taxes also differ from income taxes because they are used by the government exclusively to fund the country’s two primary social insurance programs – Medicare and Social Security. The current Social Security payroll tax is 6.2%, both for employees and employers. For an individual earning $100,000 for the year, that’s $6,200.

The payroll tax, however, is only applicable to (as of 2018) the first $128,400 of an individual’s income. The Medicare part of the payroll tax is 1.45%. Unlike the SS taxes, it is applied to the entirety of an individual’s earned income. In addition, individuals earning more than $200,000 annually pay an extra 0.9% (or 2.35% total).

Corporate Income Taxes

Corporate income tax is the amount the government charges all businesses on the income they generate each year. The tax applies not only to companies in the United States but also to any foreign companies that operate within the U.S. and generate income inside the country.

Corporate income tax is levied against a company’s operating earnings. They are calculated by deducting depreciation and expenses, which includes the cost of goods sold (COGS)Cost of Goods Sold (COGS)Cost of Goods Sold (COGS) measures the “direct cost” incurred in the production of any goods or services. It includes material cost, direct, from a company’s revenues. It is the short version. The calculation of corporate taxes is typically quite involved and complex – the larger the company, the more involved and complex it is.

Before the Tax Cuts and Jobs Act (TCJA), the maximum corporate income tax rate was 35%, and the minimum was 15%. President Trump signed the TCJA tax reform into legislation at the end of 2017. As of 2018, a flat corporate income tax rate of 21% has been put into effect.

The theory behind the cut in corporate rates is that by making corporate tax rates more attractive – and more competitive with the rates in other countries – that more companies will be attracted to headquarter their operations in the U.S., and that it will result in broadening the corporate tax base and, thus, lead to higher total corporate tax revenues.

Other Federal Taxes

Many other federal taxes provide a substantial amount of tax revenue. The bulk of the other federal taxes is in the form of additional sales taxes that are charged on specific goods that are sold. Often referred to as “sin” taxes, they include the taxation of goods and services, such as tobacco, alcohol, and gambling.

There are additional federal taxes on things such as gasoline, cell phone service, internet services, and cable and satellite television. Typically, a flat taxFlat TaxA flat tax refers to a tax system where a single tax rate is applied to all levels of income. This means that individuals with a low income is placed on each good or service and collected from the producer or wholesaler, which ultimately drives up the cost for the consumer.

In addition to being a source of revenue, many of the taxes are imposed as a public policy. It’s believed that placing additional taxes on things such as alcohol and cigarettes will help curb consumption on items that pose potential health and safety hazards to the population. However, such taxes are often criticized as unfairly burdening the poor, who are often major consumers of such items.

How Much Money the Government Collects in Taxes – the Totals

For the 2018 fiscal year, the government brought in $3.32 trillion in revenue.

• Individual income taxes are always the largest portion of earned income for the government; they accounted for 51% (approximately $1.7 trillion) of the income for the year.
• Payroll taxes accounted for 35% (approximately $1.2 trillion) of the year’s income.
• Corporate income taxes accounted for roughly 6% ($205 billion) of government income.
• Around 8% of government income in 2018 (approximately $270 billion) came from taxes on alcohol, cigarettes, and other excise taxes.

Additional Resources

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• Corporate vs. Personal Income TaxesCorporate vs Personal Income TaxIn this article, we will discuss corporate vs personal income tax. Corporate tax is an expense of a business (cash outflow) levied by the government
• FUTA TaxFUTA TaxFUTA is an abbreviation for Federal Unemployment Tax Act. FUTA Tax is a United States federal tax imposed on employers to help fund unemployment payments.
• Non-Refundable Tax CreditNon-Refundable Tax CreditA non-refundable tax credit is a credit that is applied to taxes payable that only reduces a taxpayer’s liability to a minimum of zero. In other words,
• Taxable IncomeTaxable IncomeTaxable income refers to any individual's or business’ compensation that is used to determine tax liability. The total income amount or gross income is used as the basis to calculate how much the individual or organization owes the government for the specific tax period.