Chapter 9: Sources of Government Revenue
Chapter 9 explores the sources of government revenue. Each
year governments raise billions of dollars in revenues in
a variety of ways, including taxes, license fees, tuition
fees, and customs duties, to name just a few.
1 explains three criteriaequity, simplicity, and efficiencyused
to judge the effectiveness of a tax. The benefit principle
of taxation and the ability-to-pay principle of taxation are
used to help decide the group or groups that should bear the
burden of the tax. Taxes are proportional, progressive, and
regressive, depending on the way the average tax per dollar
changes as taxable income changes.
2 discusses the main sources of federal government revenues.
The first is the individual income tax, a progressive tax
administered through a payroll withholding system. The second
largest component is FICA. The corporate income tax is the
third largest source. Other sources of federal revenue include
excise taxes, estate taxes, gift taxes, customs duties, and
3 explains how state governments receive revenues in the form
of sales taxes, intergovernmental revenues, individual income
taxes, and employee retirement contributions. Local governments
receive funds from state and federal governments, property
taxes, utility and liquor stores, sales taxes, and other sources.
Section 4 discusses additional tax issues such as the incidence
of a tax, the value added tax, and tax reform. There have
been four major tax revision bills since 1980. The first reduced
the progressiveness of the individual income tax and the second
made it more proportional. The third, passed in 1993, made
it more progressive again. The fourth, passed in 1997, provided
wealthy individuals with significant tax relief for long-term
investments, and provided modest tax relief for child and
educational expenses. Recent talk of tax reform has centered
around a Value Added Tax (VAT), which is a tax on consumption
rather than income, and a flat tax, which would replace all
tax brackets with a single tax rate.