Tax Revenue

Updated on February 1, 2024
Article byGayatri Ailani
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Tax Revenue?

Tax revenue is the taxes collected by the government. In other words, it is the income obtained by the government through taxing people. The government applies a tax on income, profits, goods, services, payroll, etc.  

Tax Revenue

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Taxes are compulsory payments to the government, and their inflow forms the government’s primary funding source. Government establishes the tax rates and their application on the taxable income results in determining tax payable or the tax liability. Finally, when the taxpaying entity pays it, the government receives its revenue

Key Takeaways

  • Tax revenue is the revenue a government receives by taxing the people and firms. The government taxes income, profits, goods, services, payroll, etc.  
  • The federal tax system in the United States uses a variety of taxes to raise money. However, income tax is the most fundamental and significant source of funding. 
  • Tax rates are the rates the government establishes to tax entities. Therefore, the government can increase or decrease the revenue by altering the tax rates.
  • Non-tax revenue is the revenue collected by the government from sources other than taxes.

Tax Revenue Explained

Tax revenue is mainly composed of direct and indirect taxes. Direct tax revenue is composed of the taxpayers paying taxes directly to the authority imposing the tax. In contrast, indirect taxes mainly comes from the taxes on goods & services, which the taxpayers pay via intermediaries. All these collections contribute to the country’s output, and the government utilizes them to build and enhance the economy.

In the United States, multiple taxes are used by the federal tax system to raise money. Income tax is the most significant source of funds. The second-largest source of federal government revenue is the payroll tax, which the government utilizes for Social Security payments and Medicare.

Government can increase or decrease its taxation revenue. For example, sometimes, the government comes with tax cuts to reduce the people’s tax burden and boost spending to grow the economy. At the same time, tax cuts reduce the government’s revenue. When the government increases the tax rates, the revenue increases. The government can use the portion of revenue to tackle budget deficit issues and increase expenditure or government spending to stimulate economic activities.

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Types

There are many types based on their sources. However, the most common sources include the following:

  1. Federal taxes: The Internal Revenue Service (IRS) imposes a tax known as the U.S. federal income tax on the annual income of people or business entities, trusts, and other legal entities. 
  2. State taxes: State income tax is a direct tax levied by a state on income earned in or from the state. Like federal tax, state income tax is self-assessed, which means taxpayers file required state tax returns.
  3. Foreign income tax: It indicates the amount of income tax that a foreign entity, such as a foreign branch or subsidiary, pays to the government of its home country.
  4. Sales Tax: A sales tax is a fee paid to the government when specified goods and services are sold. Typically, laws permit the vendor to charge the customer the tax at the time of purchase.

Examples

Let us look at some examples to understand the concept better: 

Example #1

Denmark has a complex system of direct and indirect taxes for taxation. Income tax has been a crucial component of the Danish tax system since it was implemented in 1903 as part of a significant tax reform. As a result, most of the Danish tax revenue comes from various personal and corporate income taxes.  

Example #2

In the financial year 2021, states received over $455 billion in total income tax receipts, a startling 14.7% rise from the previous year. However, unexpected economic circumstances have a significant impact on these data. For example, when the pandemic started, states postponed their tax filing due for a significant period.

As a result, most people’s 2020 income tax collection was moved into the 2021 fiscal year. It artificially inflated 2021 revenues while artificially deflating 2020’s revenues. Most states generally tax capital gains at the same rate as ordinary income. Hence, those with a significant concentration of affluent people or wealthy investors benefit from the increased tax collection due to the bull market scenario.

Tax Revenue vs Tax Rate

The differences between Tax Revenue and Tax rate are as follows –

  • The tax rate is the rate at which an entity is taxed. Tax payable is calculated by applying the tax rate to the taxable income.
  • The different federal tax rates for the 2022 tax year are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The tax rate applicable is determined by the tax return filing entity’s filing status and taxable income. For example, if the taxpayer is single and his taxable income is equal to, or less than $10,275 (not over $10,275), then the tax rate applicable is 10%; in other words, tax due is the 10% of the taxable income. On the other hand, if the taxpayer is married and filing jointly, and the taxable income is not over $20,550, then the tax rate is 10% of the taxable income.

Tax Revenue And Non-Tax Revenue

The main differences between them are:

  • Tax revenue is the revenue derived by a government by taxing its citizen. Whereas, as the name indicates, non-tax revenue is the revenue collected by the government from sources other than taxes like the profit from state-owned enterprise (SOE), proceeds from bond issues, and customs duties.
  • Government can alter the level of taxes by modifying tax policies. However, economic circumstances primarily influence non-tax revenue.

Frequently Asked Questions (FAQs)

What are the three primary sources of tax revenue?

Individual income taxes, payroll taxes, and corporate income taxes are the three primary income streams for the federal government. Excise taxes, estate tax, and other taxes and fees are other sources of tax collection.

What is non-tax revenue?

It is the periodic income the government receives from sources other than taxes. They are the tax revenues that do not come from taxing the general public.

Why is tax revenue significant for the government?

It is essential for the government since it contributes to the national output, helps the government deal with budget deficit scenarios, contributes to public spending, and helps satisfy the basic needs of citizens and businesses.

This article has been a guide to what is Tax Revenue. Here, we explain its types and examples and compare it with non-tax revenue. You may also find some useful articles here –