The federal government and taxes tend to go hand in hand. But why does the government need taxes? And which types of tax does the federal government collect? After all, it is your hard-earned money. So, why should you give them a share of your earnings?
Why Does the Government Need Taxes?
Governments collect taxes to ensure that they raise revenue to fund their activities. It is the most practical way for them to finance their spending on the public goods and services you require as a citizen. And these include public benefit programs that assist those who cannot help themselves, such as the unemployed, disabled and children within the foster care system.
In addition, the taxes you pay also fund the building and maintenance of public infrastructure, payment for human resources that provide government services such as the military, the maintenance of public parks and other public investments.
So, until someone can develop a much better way of generating the necessary funds, taxation will remain.
In the U.S., the Internal Revenue Service (IRS) administers the Internal Revenue Code (the Code), which are the country’s tax laws. And Congress is responsible for the creation of the relevant tax laws.
How Much Does the Federal Government Collect?
The amount of money the U.S. federal government collects in taxes varies each year. So, how much taxes did the federal government collect in the previous years?
Below is a summary of the taxation revenue for the previous years:
What Taxes Does the Federal Government Collect?
The U.S. federal government collects several types of taxes. Below are the major categories of taxes imposed at the national government level.
1. Individual Income Tax
The U.S. government imposes a tax on its citizens worldwide on their earnings in the form of personal income tax. The progressive tax is also imposed on non-resident aliens on any payments whose source is within the country.
In this case, earnings may include salaries, wages and investments, among others. It would be best if you also remembered that some states charge income taxes while others do not.
Currently, individual income taxes are based on seven income brackets. And the rate varies from 10 to 37 percent. So, the higher your income is, the more individual income tax you will pay.
Read More: Who Must File Income Taxes?
2. Corporate Income Tax
Corporate income tax is imposed on corporations’ taxable income. So, a share of their profits will go to the federal government. In 2021, this form of taxation accounted for $370 billion of the total tax revenue.
The prevailing corporate income tax rate is 21 percent. However, you may also need to pay similar taxes at state and local levels but at different rates. As a result, the final tax rate may rise by several percentage points, depending on where you live and do business.
3. Payroll Tax
Payroll taxes refer to taxes paid from the employee’s earnings through payroll deduction, usually by the employer. They are mostly imposed at the federal level. But some states may help reduce your liability if they do not charge income taxes.
However, part of these taxes may be paid by the employer from their own funds. And they are used to fund public social programs, such as Medicare, federal unemployment and Social Security.
Read More: How to Calculate Social Security Tax
4. Excise Tax
Excise taxes are imposed on specified items, services or activities at the consumption, production or retail level at different rates, depending on the state.
Some of the products or services that attract excise taxes include coal, sports wagering, kerosene, heavy highway motor vehicles weighing 55,000 pounds or more and indoor tanning services, among others.
However, the excise tax rates also vary, depending on the products or services you purchase. For example, there is a 10 percent excise tax on tanning services.
It is worth noting that the federal government can charge you other forms of federal taxes, including gift taxes, which are imposed on anyone who gives property or money to someone else. They may also include real estate taxes and earnings from your inherited assets. So, it would be best to understand why state and federal governments collect taxes and what types you owe.
- WorldBank.Org: Taxes & Government Revenue
- Lumen Learning: Introduction to Taxes
- Datalab.USASpending.Gov: In 2021, the government collected $4.05 trillion in revenue.
- IRS.Gov: SOI Tax Stats - IRS Data Book
- Taxpolicycenter.Org: Briefing Book - A citizen’s guide to the fascinating (though often complex) elements of the US tax system.
- Taxfoundation.Org: 2022 Tax Brackets
- Taxfoundation.Org: Corporate Tax Revenue Hit an All-Time High in 2021
- Taxpolicycenter.Org: How does the corporate income tax work?
- IRS.Gov: Excise Tax
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.