Largest Revenue Sources for the Federal Government

Instructor: Christine Serva

Christine has an M.A. in American Studies. She is an instructional designer, educator, and writer with a particular interest in the social sciences and American studies.

Where does the federal government get its money? In this lesson, you'll learn about the top four source of revenue for the U.S. government. You'll also find out how these sources have fluctuated over time.

Top Sources of Revenue

Let's play a little 'Fiscal Feud.' Here we go. The top four answers are on the board. 'Name a way that the United States government is funded.'

Buzz! A contestant shouts, 'Estate taxes!' Her team claps loudly. It's a good answer - and one way the government brings in dollars - but it's not on the board.

The other contestant guesses, 'Income taxes!' Ding! He picked the number one answer! The audience goes wild.

Let's dig into the top four revenue sources of the federal government, starting with our number one answer. These revenue sources made it to the top of the list, not just by popular opinion, but by the actual numbers.

Individual Income Taxes

When our winning contestant answered 'income taxes,' he probably meant our individual income taxes, the money we pay to the Internal Revenue Service as a percentage of the dollars we earn. If you've got a job, you probably know all about this, even groaning when you see the numbers.

This deduction from your paycheck goes to fund the majority of what the government accomplishes. While your income tax alone might not seem like enough to do such significant work, combine the income tax of everyone who is working and you can see why this revenue source comes out on top.

As of 2016, individual income taxes accounted for about 47% of total revenue of the U.S. Government. While the exact percentage has changed over time, it's been the #1 revenue source since 1950! But stay tuned. Other answers haven't stayed so steady.

Payroll taxes

Back to our 'Feud' contestants. The next guess is, 'Medicare!' Ding! It's the #2 answer, but the actual wording that appears is broader: 'Payroll taxes' is the answer that shows up on the board. The judges also would have accepted 'social insurance tax' or even 'FICA.' Let's talk more about what this means.

If you receive a paycheck, you will notice an itemized list of deductions. Payroll taxes are the portion of your salary that your employer withholds, on your behalf, to pay the government. The revenue is specifically intended for funding social insurance programs, or services provided by the government for the support and protection of the public.

These deductions may include:

  • Medicare (also known as the 'hospital insurance tax')
  • Social Security (also known as Old-age, Survivors, and Disability Insurance (OASDI))
  • Unemployment insurance
  • Pensions for federal employees

Medicare and/or Social Security may be listed on your paystub as FICA, which refers to the tax law known as the Federal Insurance Contributions Act (FICA). When Medicare was enacted in 1965, payroll taxes increased as a percentage of revenue in order to accommodate this change and provide services to Americans in need.

If you're self-employed and don't receive a paystub, you still pay for these social insurance programs through the Self-Employment Contributions Act (SECA).

President Johnson signed Medicare into law in 1965.
Lyndon Johnson signing Medicare into law

Corporate Income Taxes

When they try to guess the next revenue source, our next 'Fiscal Feud' contestant struggle a bit, but finally comes up with: 'taxes paid by businesses.' It's on the board as corporate income tax, money paid to the federal government based on the profit of a business. It's the third largest source of revenue.

As of 2016, the corporate tax rate varies between 15-35%, depending on the income range of the company. You might assume that all businesses pay corporate tax, but that's not the case. Some businesses are structured in such a way that those running the business pay taxes through their individual returns, as individual income tax. This process is called pass-through taxation.

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