8.1 Introduction

Raising revenue through taxation reallocates scarce resources from the private to the public sector. The revenue enables the funding of services and infrastructure. How the revenue is collected and distributed affects economic outcomes as well as various socioeconomic groups. Tax revenue is redistributed back into the economy, supporting public services, social programs, and investments in national infrastructure. Government revenue does not solely come from taxes but can also include other sources such as payments for services (e.g., purchasing a stamp from the U.S. Postal Service), or fees such as for annual vehicle registration (at the state-level). Income tax is a more traditional form of taxation but is only one of several ways governments can finance their activities. Other activities besides the one mentioned are privatization of government assets or services and debt financing, each carrying distinct economic and social implications.

At the federal level, revenue primarily comes from personal and corporate income taxes, along with payroll taxes that finance social security. The federal government does not impose sales or property taxes, but a well-known consumption tax are gasoline and diesel taxes.

Figure 8.1: Tax Revenue Distribution at the Federal Level

States generally rely on sales and excise taxes as well as personal income taxes for their revenue as illustrated in the graph below. Note that transfers between governments (i.e., federal, state, and local) are intergovernmental transfers and are important sources of revenue for both state and local governments.

Figure 8.2: Revenue at the State Level

Local governments, on the other hand, primarily generate revenue through property taxes, general sales taxes, user fees, and support from state and federal aid (i.e., intergovernmental transfers).

Figure 8.3: Revenue at the Local Level