Learning Materials
Features
Discover
If you have ever ridden a city bus, driven on a public road, attended school, or received some kind of welfare assistance, then you have benefited from government spending. Have you ever wondered where the government gets all that money? In this article, we will explain what government revenue is and where it comes from. If you are ready to learn how governments generate revenue, continue reading!
Millions of flashcards designed to help you ace your studies
Sign up for freeIn the U.S., contributions from social insurance taxes are for programs that include which of the following?
Are funds raised by government borrowing considered revenue?
From which sources does the government generate revenue?
From which sources does the federal government generate revenue?
What is the largest source of federal government revenue?
When the government borrows to finance deficit spending, the outstanding debt increases.
Which of the following are non-tax sources of government revenue?
The largest source of state and local government revenue is...
Property taxes are a larger share of state and local government revenue than personal income taxes.
_____ is for healthcare for the elderly, while _____ is for healthcare for people with low income.
Which of the following is NOT spent by state and local governments?
In the U.S., contributions from social insurance taxes are for programs that include which of the following?
Are funds raised by government borrowing considered revenue?
From which sources does the government generate revenue?
From which sources does the federal government generate revenue?
What is the largest source of federal government revenue?
When the government borrows to finance deficit spending, the outstanding debt increases.
Which of the following are non-tax sources of government revenue?
The largest source of state and local government revenue is...
Property taxes are a larger share of state and local government revenue than personal income taxes.
_____ is for healthcare for the elderly, while _____ is for healthcare for people with low income.
Which of the following is NOT spent by state and local governments?
Achieve better grades quicker with Premium
Geld-zurück-Garantie, wenn du durch die Prüfung fällst
Review generated flashcards
Start learning or create your own AI flashcards
Team Government Revenue Teachers
Government revenue is the money the government raises from taxes, asset income, and transfer receipts at the federal, state, and local levels. Although the government can also raise funds by borrowing (selling bonds), the funds raised are not considered revenue.
Government revenue is the money the government raises from taxes, asset income, and transfer receipts at the federal, state, and local levels.
The government account consists of both inflows and outflows. Fund inflows come from taxes and borrowing. Taxes, which are required payments to the government, come from several sources. At the national level, the government collects personal income taxes, corporate profit taxes, and social insurance taxes.
Refer to Figure 1 below which shows the Federal government revenue sources. Personal income taxes and corporate profit taxes account for about half of all tax revenue. In 2020, they accounted for approximately 53% of all tax revenue. Payroll taxes, or social insurance taxes - taxes for programs to protect families in case of hardship (e.g. Social Security) - accounted for 38% of tax revenue. There are also taxes at the state and local levels on sales, property, and income, in addition to various types of fees collected.
Figure 1. U.S. Federal Government Tax Revenue - StudySmarter. Source: Congressional Budget Office1
In 2020, the U.S. government collected $3.4 trillion in tax revenue. However, it spent $6.6 trillion. The difference of $3.2 trillion was financed by borrowing and was added to the total outstanding national debt.1 Thus, almost half of what was spent was borrowed. Put another way, the government spent almost twice as much as it collected in revenue. Furthermore, current budget projections from the Congressional Budget Office show continuing deficits for at least the next decade, which will push the debt held by the public (which does not include intragovernmental trust accounts) up to $35.8 trillion, or 106% of GDP, by 2031 (Figure 2). That would be the highest since 1946, which was right after World War II ended.
Figure 2. U.S. Debt-to-GDP Ratio - StudySmarter. Source: Congressional Budget Office1
Fund outflows go toward government purchases of goods and services and transfer payments. Purchases include things like defense, education, and the military. Transfer payments - payments by the government to households with no good or service in return - are for programs such as Social Security, Medicare, Medicaid, Unemployment Insurance, and food subsidies. Social Security is for the elderly, disabled, and relatives of deceased people. Medicare is for healthcare for the elderly, while Medicaid is for healthcare for people with low income. State and local governments spend money on things like police, firefighters, highway construction, and infrastructure.
Learn more about government expenditure in our article - Government Spending
In addition to taxes, another type of government revenue is receipts on assets. This includes interest and dividends on investments, as well as rents and royalties, which are receipts from the leasing of federally owned lands. Transfer receipts from businesses and individuals are yet another type of government revenue, although it is a very small amount. As you can see in Figure 3 below, these other types of revenue account for a very small portion of overall government revenue.
Figure 3. U.S. Federal Government Total Revenue - StudySmarter. Source: Bureau of Economic Analysis2
What we've seen so far is a breakdown of the sources and types of government revenue classified as federal government revenue. There is also another classification of government revenue at the state and local levels.
As you can see in Figure 4, while taxes and asset income make up a similar share of state and local government revenue compared to federal government revenue, transfer receipts are a much higher share of state and local government revenue. The majority of these are federal grants-in-aid, which are payments from the federal government for education, transportation, and welfare programs.
Meanwhile, the contribution from social insurance taxes is almost nil, as those are primarily for federal programs like Social Security, Medicare, and Medicaid. In addition, while personal income taxes account for 47% of federal government revenue, they only account for 17% of state and local government revenue. Property taxes are actually a larger source of revenue at the state and local levels, accounting for 20% of all revenue in 2020.
Figure 4. U.S. State and Local Government Total Revenue - StudySmarter. Source: Bureau of Economic Analysis3
Tax rates vs tax base
The government can increase tax revenue in two ways. First, it can cut tax rates to increase consumer demand, which will hopefully lead to more jobs and a larger tax base, meaning there will be more people from which the government can collect taxes. Second, it can raise tax rates, but that could ultimately backfire if it leads to a pullback in consumer spending and jobs, which would reduce the tax base.
Sign up for free to gain access to all our flashcards.
What is government revenue?
Government revenue is the money the government raises from taxes, asset income, and transfer receipts at the federal, state, and local levels.
How does government generate revenue?
Governments generate revenue by collecting income taxes, payroll taxes, sales taxes, property taxes, and social insurance taxes. Revenue is also generated from income on assets and transfer receipts from businesses and individuals.
Why are restrictions placed on government revenue?
Restrictions are placed on government revenue both for political purposes and economic purposes. While some political parties prefer higher taxes and spending, others prefer lower taxes and spending and, thus, lower revenue. At the state and local levels, budgets must be balanced so there is more scrutiny among policymakers to keep both revenue and spending within reasonable limits, some of which are written into law.
Does a reduction of a tariff mean less government revenue?
A tariff is a direct tax imposed on certain imports and exports. Therefore, if a tariff is reduced, government revenue will decline.
What is the federal government's largest source of revenue?
The federal government's largest source of revenue is personal income taxes.
At StudySmarter, we have created a learning platform that serves millions of students. Meet the people who work hard to deliver fact based content as well as making sure it is verified.
Lily Hulatt is a Digital Content Specialist with over three years of experience in content strategy and curriculum design. She gained her PhD in English Literature from Durham University in 2022, taught in Durham University’s English Studies Department, and has contributed to a number of publications. Lily specialises in English Literature, English Language, History, and Philosophy.
Get to know Lily
Gabriel Freitas is an AI Engineer with a solid experience in software development, machine learning algorithms, and generative AI, including large language models’ (LLMs) applications. Graduated in Electrical Engineering at the University of São Paulo, he is currently pursuing an MSc in Computer Engineering at the University of Campinas, specializing in machine learning topics. Gabriel has a strong background in software engineering and has worked on projects involving computer vision, embedded AI, and LLM applications.
Get to know Gabriel
Explanations 
Flashcards 
StudySmarter AI 
Notes 
Study Plans 
Study Sets 
Exams 
Magazine 
Find a job 
Mobile App