Federal Government Revenue Sources: Largest (2024)

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In 1861 the Union government enacted the first federal income tax. Any guess as to what they used the money for? It was to finance the Civil War. A few years after the war ended, the tax was repealed. Not until the Sixteenth Amendment to the U.S. Constitution was ratified in 1913 did the country have a permanent income tax.

What was the biggest federal government revenue source until then? What is the biggest federal government revenue source now? What are other federal government revenue sources? Read on to find the answers to these questions and much more!

Types of government revenue

Let's get started by talking about the types of federal government revenue sources. First, there are taxes. There are three types of taxes: proportional, progressive, and regressive.

A proportional tax taxes everyone at the same rate, regardless of income.

An example of this type of tax is the tax on corporate dividends.

A progressive tax taxes people with higher income at a higher rate.

An example of this type of tax is the individual income tax.

A regressive tax tends to hit people on the lower end of the income scale the hardest.

An example of this type of tax is the sales tax.

Since lower-income people tend to spend more of their income on items that are taxed, like food and clothing, the share of their income paid as tax also tends to be higher than for higher-income people.

Now, among taxes, there are income taxes and non-income taxes. Income taxes include individual income taxes, social insurance taxes (payroll taxes for Social Security and Medicare), and corporate income taxes.

Non-income taxes include excise taxes, estate taxes, and gift taxes.

The federal government can also generate revenue from asset sales, transfer receipts, customs duties, and fees.

To learn more about the different types of taxes, read our explanation of Types of Taxes!

Federal government's primary source of revenue

After the Civil War and up until 1913, the federal government's primary source of revenue was customs duties, which were levied on goods that were brought into the U.S. from abroad.

Customs duties are levied on many products, large and small, from automobiles and mineral shipments to liquor and art. However, these duties bring in only a small share of overall federal government revenue compared to the days before the introduction of the individual income tax, which is now the federal government's primary source of revenue.

Customs duties are taxes that are levied on goods that are brought into the U.S. from abroad.

The largest source of revenue for the federal government

Let us now take a look at the largest source of revenue for the federal government, individual income taxes, compared to other sources of revenue.

As you can see in Figure 1 below, 55.8% of that came from taxes, of which a whopping 45.5% came from individual income taxes! The other 10.3% came from corporate income taxes, excise taxes, and customs duties.¹ The next largest revenue source was contributions to social insurance, better known as payroll taxes, or FICA, which accounted for 39.2% of revenue. Asset income came next at 3.3% of revenue, while transfer receipts from individuals and businesses, and other smaller sources, accounted for the remaining 1.7%. So, at almost half of all revenue, individual income taxes are heavily relied upon to fund the U.S. federal government.

Figure 1. U.S. Federal Government Total Revenue 2020, StudySmarter Originals. Source: Bureau of Economic Analysis¹

U.S. federal government revenue sources

Let's now take a look at federal government revenue sources in a little more detail.

Under FICA - the Federal Insurance Contributions Act - taxes are equally levied on employers and employees to fund Social Security and Medicare. These taxes are also known as payroll taxes. While income is only taxed up to a certain threshold to pay for Social Security, there is a flat tax rate and no threshold for Medicare.

FICA is deducted from almost everyone's paycheck. It stands for the Federal Insurance Contributions Act, under which taxes are deducted to pay fund Social Security and Medicare.

Corporate income taxes are taxes on the profits of companies. They are reported on the company's income statement. However, when they are paid varies. Depending on their tax situation, some companies pay their taxes in advance, while others pay them later. In addition, corporate taxes reported on the income statement don't always match the taxes reported to the IRS, but this issue is beyond the scope of this article.

Corporate tax is a tax on a company's profit.

Excise taxes are taxes on the manufacture or sale of goods. These taxes tend to be regressive (hurting low-income families more) because they tend to buy these items more frequently than higher-income families.

Excise taxes are taxes on the manufacture or sale of goods.

Estate taxes are taxes on the transfer of property after the property owner passes away. They are generally only paid by the very wealthy because the minimum value of an estate required to pay these taxes is in the millions of dollars.

Estate taxes are taxes on the transfer of property after the property owner passes away.

Gift taxes are taxes on the transfer of money or wealth, generally from one generation to the next. This tax was established to prevent people from passing on parts of their estate to their children before they die, thereby bypassing the estate tax.

Gift taxes are taxes on the transfer of money or wealth, generally from one generation to the next.

Customs duties are taxes on goods brought into the U.S. from abroad. This was the largest federal government revenue source before the implementation of the income tax. In 2020 they accounted for just 1.9% of total federal government revenue.¹

Grants-in-aid are transfers specifically from the federal government to state governments to fund state programs and projects.

Asset income accounted for 3.1% of revenue, while contributions to social insurance, or payroll taxes, only accounted for a tiny 1.3% of revenue, as can be seen in Figure 2 below.

Asset income is income generated from the sale of assets the government owns.

Thus, while taxes and asset income are pretty much equal at the federal level compared to the state and local level, transfer receipts and contributions to social insurance are essentially flipped in comparison. The federal government relies much more heavily on contributions to social insurance, while state and local governments rely much more heavily on transfer receipts.

Figure 2. U.S. State and Local Government Total Revenue 2020, StudySmarter Originals. Source: Bureau of Economic Analysis²

To learn more about state and local revenue sources, check out our explanations - State Government Revenue Sources and Local Government Revenue Sources!

To help you better understand the differences between federal and state, and local government revenue sources, have a look at Table 1 below. Again, the biggest differences between federal and state, and local government revenue sources are between contributions from social insurance and transfer receipts. These rows are highlighted for your convenience.

Note: The sub-category percentages do not add up to the category percentages because there are other much smaller taxes that were not included as they do not add to this discussion.

Table 1. Differences Between Federal and State and Local Government Revenue Sources.

Source: Bureau of Economic Analysis^1,2

References

1. Bureau of Economic Analysis, Table 3.2 https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey
2. Bureau of Economic Analysis, Table 3.3 https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey

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