What Is Tax Revenue? A Definition of Government Income

Tax revenue is the income governments generate through compulsory charges, known as taxes, levied on individuals and businesses. This mandatory income is the primary fuel for government functions, funding public services, programs, and administrative responsibilities. Understanding this income source is important for grasping public finance and the economic relationship between a government and its citizens.

Primary Types of Taxes Generating Revenue

The largest source of tax revenue in the United States comes from taxes on income. The federal government and most state governments levy a personal income tax on the earnings of individuals and households, which includes wages, salaries, and investment returns. The individual income tax is the single largest federal revenue source. This system is progressive, meaning higher earners pay a larger percentage of their income in taxes.

Corporate income taxes are another source of revenue, levied on the profits of businesses. While historically a larger share, this tax now accounts for a smaller portion of federal revenue than in the mid-20th century. These taxes are collected by the federal government and most state governments, forming a part of the overall tax structure that funds government activities.

At the state and local levels, sales taxes are a major revenue generator. These are consumption taxes applied to the sale of goods and services, with rates varying significantly across different jurisdictions. While the federal government does not levy a general sales tax, these taxes are a primary funding mechanism for many state and local governments.

Property taxes are the predominant source of revenue for local governments, including cities, counties, and school districts. These taxes are based on the assessed value of real estate, including homes and business properties. The revenue from property taxes funds local services such as public schools, police and fire departments, and local infrastructure maintenance. This reliance means that local government funding is closely tied to real estate values.

Governments also collect excise taxes and tariffs. Excise taxes are levied on specific goods, such as gasoline, tobacco, and alcohol, and the revenue is sometimes dedicated to related spending, like highway funding from gasoline taxes. Tariffs, or customs duties, are taxes on imported goods. While once a primary source of federal revenue, tariffs now represent a much smaller portion of total government income.

Government Use of Tax Revenue

The revenue collected through taxation is allocated to a wide array of public expenditures. A substantial portion of federal tax revenue is directed toward national defense and social programs. Major federal expenditures include funding for the military, as well as mandatory spending on programs like Social Security, which provides income for retirees and individuals with disabilities, and Medicare, which covers healthcare costs for seniors.

State and local governments also use their tax revenue to fund community services. A significant share of this spending is dedicated to education, covering everything from elementary schools to public universities. Public safety is another expenditure, with funds allocated to police and fire departments.

Infrastructure and other public services are also funded by tax revenue at all levels of government. This includes the construction and maintenance of roads, bridges, and public transportation systems. Governments also fund public assistance programs, housing aid, and the operational costs of the government itself.

Distinguishing Tax Revenue from Other Government Income

It is important to differentiate tax revenue from other forms of government income, as not all money collected by the government is a tax. The defining characteristic of a tax is a compulsory payment used for general public purposes. Other government income sources are often tied to specific services or are punitive in nature.

Fees

Fees are payments made in exchange for a specific government service or privilege. Examples include the amount paid for a driver’s license, a passport application, or an entrance pass to a national park. Unlike taxes, these payments are directly linked to a benefit or service received by the individual paying the fee.

Fines and Penalties

Governments also collect income from fines and penalties. This revenue is generated when individuals or businesses violate laws or regulations. Common examples include traffic tickets for speeding or penalties for late tax payments. This income’s primary purpose is to penalize unlawful behavior rather than to raise general revenue.

Government-Owned Enterprises

Another source of non-tax income is revenue from government-owned enterprises. When a government operates a business-like entity, such as a public utility or a state lottery, the profits it generates are considered non-tax revenue. This income is earned through commercial activity rather than through compulsory levies on the general public.