Tax Revenue Definition

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Tax Revenue Definition

What Is Tax Revenue?

Tax revenue is defined as revenues collected through income and profit taxes, Social Security taxes or “contributions,” taxes placed on goods and services, sometimes referred to as “consumption taxes,” payroll taxes, taxes on property ownership and transfer, and other taxes.

Key Takeaways

  • Tax income in the United States is made up of revenues collected by federal, state, and municipal governments, as well as flat-rate payroll taxes and sales and use taxes.
  • For revenue, the United States depends mostly on individual income taxes; other nations rely more on consumption taxes, such as value-added taxes.
  • Corporate income tax accounts for 9% of total tax revenue in the United States.

Understanding Tax Revenue

Tax revenue in the United States is made up of revenues collected by federal, state, and local governments via income and profit taxes, sales and use taxes placed on products and services, and property ownership and transfer taxes. Federal payroll taxes, such as federal Social Security contributions mandated by the Federal Insurance Contributions Act (FICA), federal unemployment tax mandated by the Federal Unemployment Tax Act (FUTA), Medicare taxes, and state payroll taxes such as state unemployment taxes that can partially offset FUTA levies and other taxes, also generate revenue. The income tax is by far the greatest source of revenue at the federal level.

The majority of industrialized nations have one or more tax arrangements comparable to those employed in the United States. Many nations, however, depend less on income taxes than the United States and collect more money from consumption taxes, which are often imposed as value-added taxes (VAT) on goods and services, and from levies directly supporting social welfare programs.

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Types of Tax Revenue

U.S. Federal Taxes

In general, income taxes in the United States apply to all forms of income earned from any source, including wages, salaries, and other earnings, rents, investment returns and profits, licensing royalties, and any other amount or object of value unless specifically exempt. Individual and corporate income taxes are levied in the United States.

The law of the United States offers broad, particular procedures for computing the tax on income from various sources (e.g., interest or dividends) and from various sorts of commercial activity. Income taxes are not due while receiving gifts, inheritances, or eligible educational scholarships. On large transfers, however, donors’ and decedents’ estates are subject to gift and estate taxes, respectively.

State Taxes

State tax systems varies; states use one or more of the several kinds of taxes to support their budgets. While some states rely primarily on income taxes, others impose little or no income taxes and rely instead on property or sales and use taxes. Some states tax decedents’ estates, whereas others tax residents who receive inheritances. The majority of income, estate, and gift taxes, as well as certain property taxes, are graduated, with higher tax rates applied at greater amounts or values.

Flat-rate taxes

FICA, FUTA, Medicare, and the majority of state payroll taxes have flat rates with a set ceiling on the amount due to the tax. These taxes provide cash to sustain the programs associated with them. Employers are obligated to withdraw income and payroll taxes from workers’ pay and remit the withheld amounts, together with the employer’s portion of payroll taxes, to the IRS.

Sales and Use Taxes

Sales and use taxes are levied on the prices of products and services, and are collected by the sellers or service providers, who must pay them directly to the federal, state, or municipal authority imposing the tax. The majority of these taxes only apply to the amount paid to the final consumer of a product or service. The goods subject to these taxes, as well as the relevant rates, vary by jurisdiction. The majority of states exclude necessary foods and drugs from sales tax. Sales and use taxes are often shown separately on invoices.

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Value-added Taxes

VAT systems, which are extensively used outside the United States, vary from sales and use taxes in that the VAT is often levied at each step of the exchange or transfer of products, rather than just on the transaction price for the final consumer.

Tax Revenue Sources Vary Among Countries

Individual income taxes are the primary source of revenue in the United States. Individual income taxes levied at the federal, state, and municipal levels are expected to account for 51% of total U.S. tax revenue in 2021. Social insurance taxes contributed 31% of overall tax income, while consumption taxes (i.e., excise and sales and use taxes) contributed 2%. The corporate income tax accounted for 9% of the total.

The proportional dependence on various income sources varies between the 37 nations that form the Organisation for Economic Co-operation and Development (OECD), including the United States. Notably, the United States is the only one that does not have a VAT.

In 2019, the simple percentage average of total revenue by source for all 37 OECD nations, including the United States, was 32.3% for consumption taxes (VAT, excise taxes, and sales and use taxes); 25.7% for social insurance taxes; 24% for individual income taxes; and 5.6% for property taxes. Corporate income taxes accounted for 9.6% of the total.

These OECD averages disagree sharply with US percentages for various sources. For example, as previously stated, the United States obtains just 2% of its overall tax revenue through excise taxes, but 51% from income taxes.

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It is worth mentioning that the corporation and individual income tax percentages of overall tax receipts in the United States and the OECD are not directly comparable. Individual income tax in the United States involves a larger amount of company revenue than the OECD average income tax share. This disparity, however, does not alter the clear larger dependence of other OECD nations on VAT than on income taxes, which account for the majority of US tax collections.

The consumption tax rates in the United States and the OECD are also notably different. Tennessee had the highest combined state and local rate for 2021, at 9.55%, among the 46 U.S. states that levy sales taxes, while Alaska had the lowest, at 1.76%. Standard VAT rates are often significantly higher: The average VAT rate for EU members and the United Kingdom, which completed its exit from the EU this year, is 21% in 2021. Because of the economic crisis, various nations temporarily reduced their VAT rates below their usual levels.

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