What Is Tax Revenue?
Tax revenue is defined as the funds collected from taxes on income and profits; social security taxes or “contributions;” taxes levied on goods and services, generally categorized as “consumption taxes;” payroll taxes; taxes on the ownership and transfer of property; and other taxes.
Understanding Tax Revenue
In the United States, tax revenue is comprised of funds collected by federal, state and local governments through taxes on income and profits, sales and use taxes levied on goods and services, and taxes on the ownership and transfer of property. Tax revenue also is received through federal payroll taxes including federal Social Security contributions mandated by the Federal Insurance Contributions Act (FICA), federal unemployment tax required 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. At the federal level, the income tax is by far the largest source of revenue.
Most developed countries impose one or more tax structures similar to those used in the United States. However, many countries rely less on income taxes than the U.S. does and collect more of their revenue from consumption taxes, usually imposed as value-added taxes (VAT) on goods and services and from taxes directly supporting social welfare programs.
Types of Tax Revenue
U.S. federal taxes
Generally U.S. income taxes apply to income in any form—whether paid in money, property, or other benefits—that is received from any source, including wages, salaries and other earnings, rents, investment returns and gains, licensing royalties, and any other amount or thing of value unless expressly excluded. The U.S. imposes both individual and corporate income taxes.
U.S. tax law provides extensive, special rules for determining the tax on income from different sources, e.g., interest or dividends, and from different types of business activities. Income taxes are not owed with respect to the receipt of gifts, inheritances, or qualified educational scholarships. However, donors' and decedents’ estates are liable for gift and estate taxes, respectively, on substantial transfers.
State tax systems vary; they choose one or more of the different forms of taxation to fund their budgets. While some states rely principally on income taxes, others impose minor or no income taxes, but instead depend more on property or sales and use taxes. Some states tax decedents’ estates and some tax resident recipients on inheritances. Most income and estate and gift taxes, as well as some property taxes, are graduated, applying higher tax rates at higher amounts or values.
FICA, FUTA, Medicare and most state payroll taxes apply at flat rates with a specific cap on the amount subject to the particular tax. These taxes produce revenue to support the specific programs identified with them. Employers are required to withhold income and payroll taxes on employees’ compensation and to pay the withheld amounts, together with the employers’ own share of payroll taxes, directly to the IRS.
Sales and use taxes
Sales and use taxes are added to the prices charged for goods or the fees charged for services and are collected by the sellers or service providers who must pay them directly to the federal, state or local government imposing the tax. Most of these taxes apply only to the amount charged to the ultimate consumer of the product or service. The items subject to these taxes and the applicable rates differ according to jurisdictions. Most systems exempt essential food and medications from sales tax. Sales and use taxes usually are stated separately on bills.
VAT systems, which are used widely outside the U.S., differ from sales and use taxes in that the VAT generally is imposed at each stage of the exchange or transfer of goods, not merely upon the transaction price for the ultimate consumer.
Tax Revenue Sources Vary Among Countries
The U.S. relies primarily on individual income taxes for revenue. Individual income taxes imposed at the federal, state and local levels comprised the largest portion of total U.S. tax revenue, estimated at 41.5%, in 2019. Social insurance taxes accounted for 24.9 % of the total tax revenue; consumption taxes, i.e., excise and sales and use taxes, amounted to 17.6%; and property taxes, 12.1%. The corporate income tax accounted for only 3.9%.
Among the 37 countries, including the United States, that comprise the Organisation for Economic Co-operation and Development (OECD), the relative reliance on different revenue sources varies. Significantly, the US 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 countries, including the U.S., was: consumption taxes (VAT, excise taxes, and sales and use taxes), 32.3% of total tax revenue; social insurance taxes, 25.7%; individual income taxes, 24%, and property taxes, 5.6%. Corporate income taxes accounted for 9.6%.
These overall OECD averages contrast greatly with the U.S. percentages for some sources. For example, as noted above, the U.S. receives far less of its total tax revenue from consumption taxes, only 17.6%, and but receives a much larger portion from income taxes, 41.5%.
It should be noted that the U.S. and OECD corporate and individual income tax shares of total tax revenues are not directly comparable. U.S. individual income tax includes a greater portion of business income than does the OECD average income tax share. However, this difference does not affect the obvious greater reliance of the other OECD countries on VAT than on income taxes, which constitute the major portion of U.S. tax revenues.
U.S. and OECD consumption tax rates also differ significantly. Among the 46 U.S. states that impose sales taxes, Tennessee had the highest combined state and local rate for 2021 at 9.55%, while Alaska’s was the lowest at 1.76%. Typically, the standard VAT rates are much higher: For 2021, the average VAT rate for EU countries and the United Kingdom, which concluded its departure from the EU that year, is 21%. Due to the COVID pandemic, some countries have temporarily lowered their VAT rates below their standard levels.