The Government Raises Money on the Federal Level Through Which Taxes?

The U.S. federal government relies on various taxes to fund essential services, infrastructure, and programs, including national defense and social programs like Medicare and Social Security. Without these funds, the government could not function effectively or meet its financial obligations.

To generate revenue, the government collects different types of taxes, each targeting specific sources of income or transactions.

Income Taxes

The federal government collects income taxes from individuals, estates, and trusts based on earnings from wages, investments, and other sources. The tax system is progressive, with higher income levels taxed at higher rates. For 2024, tax brackets range from 10% to 37%, depending on filing status. A single filer with taxable income above $609,350 falls into the highest bracket, while income up to $11,600 is taxed at the lowest rate.

Deductions and credits help lower tax burdens. The standard deduction for 2024 is $14,600 for single filers and $29,200 for married couples filing jointly. Some taxpayers benefit more from itemized deductions, such as mortgage interest and medical expenses. Tax credits, like the Child Tax Credit, which provides up to $2,000 per qualifying child, directly reduce the amount owed.

Self-employed individuals must pay estimated taxes quarterly since they do not have taxes withheld from a paycheck. Failure to do so can result in penalties. The IRS enforces tax compliance through audits and penalties for underpayment or fraud.

Payroll Taxes

Employers and employees contribute to payroll taxes, which fund Social Security and Medicare. These taxes are automatically withheld from workers’ paychecks and matched by employers. The Social Security tax rate for 2024 is 6.2% on wages up to $168,600. Medicare taxes have no income cap, with a rate of 1.45% for both employees and employers. High earners—those making over $200,000 as single filers or $250,000 for married couples filing jointly—pay an additional 0.9% Medicare surtax, though employers do not match this extra contribution.

Self-employed individuals pay both the employee and employer portions, effectively doubling their tax burden to 15.3% on earnings up to the Social Security wage limit. However, they can deduct the employer-equivalent portion—7.65%—from their taxable income. To avoid penalties, they must make estimated tax payments throughout the year.

Businesses must comply with payroll tax reporting requirements. Employers file Form 941 quarterly to report wages paid and taxes withheld, while Form W-2 summarizes each employee’s earnings and tax contributions annually. Failure to deposit payroll taxes on time can result in severe penalties, including the Trust Fund Recovery Penalty, which holds business owners personally liable for unpaid withholdings.

Corporate Taxes

Businesses operating in the U.S. are subject to federal corporate income tax, which applies to C corporations—entities legally separate from their owners. The Tax Cuts and Jobs Act (TCJA) of 2017 set the corporate tax rate at a flat 21%, replacing the previous graduated structure. This rate remains in effect for 2024, though ongoing discussions in Congress could lead to future adjustments. Unlike individuals, corporations cannot claim standard deductions but can deduct business expenses such as salaries, rent, and utilities.

Tax planning plays a significant role in corporate finance, with companies leveraging deductions, credits, and deferrals to minimize tax liability. The Research & Development (R&D) Tax Credit incentivizes investment in innovation, while the Foreign Tax Credit helps multinational corporations avoid double taxation. Depreciation deductions, including bonus depreciation and Section 179 expensing, allow businesses to recover costs of equipment and property faster.

Corporations must file Form 1120 annually, disclosing income, deductions, and credits. Estimated tax payments are required quarterly if expected liability exceeds $500. Noncompliance can result in penalties, such as failure-to-pay charges of 0.5% per month on unpaid taxes, up to 25% of the total due.

Excise Taxes

Excise taxes apply to specific goods, services, and activities, often structured as a per-unit charge or a percentage of the sales price. Fuel, alcohol, tobacco, and airline tickets are among the most notable examples. The federal gasoline tax has remained at 18.4 cents per gallon since 1993, while diesel fuel is taxed at 24.4 cents per gallon. These funds support the Highway Trust Fund, which finances road maintenance and transportation projects.

Alcohol and tobacco products face excise taxes that differ by category and potency. Distilled spirits incur a federal tax of $13.50 per proof gallon, while beer is taxed at $18 per barrel. Small brewers producing less than 2 million barrels annually qualify for reduced rates. Cigarettes are taxed at $1.01 per pack, with additional levies on cigars, smokeless tobacco, and other nicotine products. These taxes serve as both revenue sources and policy tools, discouraging consumption through higher prices.

Customs and Trade Duties

The federal government collects customs duties on imported goods, generating revenue while regulating trade. These duties vary based on product type, country of origin, and trade agreements. The Harmonized Tariff Schedule (HTS) assigns specific duty rates, which can range from a few percentage points to over 25%. Imported passenger vehicles face a 2.5% tariff, while light trucks are subject to a 25% rate.

Trade policies influence duty rates, with free trade agreements (FTAs) like the United States-Mexico-Canada Agreement (USMCA) reducing or eliminating tariffs on qualifying goods. However, Section 301 tariffs on Chinese imports, imposed under the Trump administration and maintained under Biden, add duties of 7.5% to 25% on select products. Importers must comply with U.S. Customs and Border Protection (CBP) regulations, filing entry summaries (Form 7501) and paying duties upon arrival. Noncompliance can result in penalties, shipment delays, or seizure of goods.

Estate and Gift Taxes

Transfers of wealth through inheritance or gifts may trigger federal taxes, depending on the value of the assets. The estate tax applies to estates exceeding $13.61 million in 2024, with rates ranging from 18% to 40%. Assets below this threshold pass to heirs tax-free, while amounts above it are taxed progressively. Married couples can combine their exemptions, effectively shielding up to $27.22 million from taxation.

Gifts are subject to a separate tax structure, though annual exclusions allow individuals to give up to $18,000 per recipient in 2024 without incurring tax liability. Gifts exceeding this amount count against the lifetime exemption, reducing the amount that can be transferred tax-free at death. Certain transfers, such as payments for medical expenses or tuition made directly to providers, are exempt. Donors exceeding exemption limits must file Form 709, reporting taxable gifts to the IRS.