Taxes come in various forms, each with unique impacts on individuals and the economy. From regressive sales taxes to progressive income taxes, the structure determines who bears the burden. Understanding these differences is crucial for grasping how governments raise revenue and influence economic behavior.

Government revenue stems from multiple sources, with individual income taxes being the largest at the federal level. States and localities rely more on sales and property taxes. This diverse revenue stream funds essential services and programs, shaping fiscal policy and economic outcomes across different levels of government.

Types of Taxes and Their Impact

Types of tax structures

• Regressive taxes
  • Tax rate decreases as income increases
  • Lower-income individuals pay a higher percentage of their income in taxes compared to higher-income individuals
  • Examples include sales tax (clothing, groceries), excise tax (gasoline, tobacco), and certain user fees (toll roads, parking meters)
• Proportional taxes
  • Tax rate remains constant regardless of income level
  • All taxpayers pay the same percentage of their income in taxes
  • Example is a flat income tax rate where everyone pays 10% regardless of income
• Progressive taxes
  • Tax rate increases as income increases
  • Higher-income individuals pay a higher percentage of their income in taxes compared to lower-income individuals
  • Examples include federal income tax (higher tax brackets for higher incomes), estate tax (tax on large inheritances), and gift tax (tax on large monetary gifts)

Tax Compliance and Strategies

• Tax deductions: Reduce taxable income, lowering the overall tax liability
• Tax credits: Directly reduce the amount of tax owed, often used to incentivize specific behaviors or support certain groups
• Tax evasion: Illegal practice of not paying taxes owed by concealing income or information from tax authorities
• Tax avoidance: Legal methods of reducing tax liability through careful financial planning and use of tax laws
• Tax incidence: The economic analysis of who ultimately bears the burden of a tax, which may differ from who initially pays it

Sources of Government Revenue

Sources of federal revenue

• Individual income taxes
  • Largest source of federal revenue, making up nearly half of all receipts
  • Collected through payroll withholding (taxes taken out of each paycheck) and annual tax returns (filing taxes each April)
• Payroll taxes
  • Second-largest source of federal revenue, about a third of total receipts
  • Fund Social Security (retirement benefits) and Medicare (health insurance for seniors)
  • Paid by both employees (through payroll deductions) and employers (as a percentage of wages)
• Corporate income taxes
  • Taxes on the profits of corporations, both large and small businesses
  • Represent a smaller share of federal revenue compared to individual income taxes, about 7% of total receipts
• Excise taxes
  • Taxes on specific goods or services, often included in the price of the product
  • Examples include gasoline tax (included in price at the pump), tobacco tax (included in price of cigarettes), and alcohol tax (included in price of beer, wine, spirits)
• Estate and gift taxes
  • Taxes on the transfer of wealth through inheritance (estate tax on large inheritances) or gifts (gift tax on large monetary gifts)
  • Apply to a small percentage of the population due to high exemption thresholds (only estates or gifts above $12 million are taxed)
• Customs duties
  • Taxes on imported goods, also called tariffs
  • Collected by the U.S. Customs and Border Protection agency on products entering the country

State vs federal taxation

• State income taxes
  • Most states have a state income tax in addition to federal income tax
  • Tax rates and brackets vary by state, with some states having a flat tax (one rate for all incomes) and others having progressive brackets (higher rates for higher incomes)
  • Some states have no income tax at all (Florida, Texas, Washington) and rely on other sources like sales tax
• Local income taxes
  • Some cities and counties impose local income taxes on top of state and federal taxes
  • Rates and rules vary by jurisdiction, often used to fund local services like schools and transportation
  • Example is New York City, which has a local income tax in addition to New York state and federal income taxes
• Sales taxes
  • Most states and many local governments impose sales taxes on goods and services
  • Rates vary by state and locality, with some states having rates as high as 7% (Tennessee, Arkansas) and others having no sales tax at all (Oregon, New Hampshire)
  • Often exempt certain necessities like groceries and medications to reduce burden on low-income residents
• Property taxes
  • Imposed by local governments on real estate (land and buildings) and personal property (vehicles, equipment)
  • Rates and assessment methods vary by jurisdiction, with taxes based on a percentage of the assessed value
  • Primary source of revenue for many local governments, used to fund schools, police, fire departments
• Excise taxes
  • States and local governments may impose excise taxes on specific goods or services
  • Examples include cigarette taxes (per pack tax on tobacco), gasoline taxes (per gallon tax on fuel), and hotel occupancy taxes (per night tax on lodging)
  • Often called "sin taxes" as they target goods considered unhealthy or unnecessary