How Do Governments Raise Revenue?

Transcript

Every time you see a fire truck or school bus drive down the road, or get the mail, that’s thanks to a government service.

How does the government pay for all those services? Taxes.

And in the US, one look at a pay stub shows us that there are different levels and different types of taxes. The taxes that come out of your paycheck are taxes on what you earn, which include income taxes and social insurance taxes.

Together, individual and corporate income taxes make up the largest source of revenue for the US federal government, funding things like national defense, Medicare, and Social Security.

State and local governments also require revenue, which they raise through a combination of income taxes, sales tax, and property taxes. These taxes fund everything from education to transportation and more.

But not every state relies on the same taxes to generate their revenue. Some states forego a sales tax, while others may have no income tax.

Every country raises revenue differently too. For example, income taxes are the main source of revenue in the US, whereas taxes on what you buy generate the majority of revenue in most other developed countries.

Knowing how our taxes are raised is important because some taxes are more effective than others, and different tax sources can affect everything from how much you earn to where you choose to live.