Financing of Government Expenditures
Taxation is the central part of modern public finance. The importance of taxation arises from the fact that it is by far the most significant source of government revenue and is therefore the primary means of financing government expenditures .
Taxation authority
In the United States the Internal Revenue Service is the regulatory authority empowered by Congress to collect taxes.
Due to the pervasive nature of taxation, taxes can be used as an instrument of attaining certain social objectives. For example, income taxes due to their progressive nature are used to equitably derive revenue by differentiating tax rates by income strata. The income derived in this manner is then used to transfer income to lower income groups, thereby, reducing inequalities related to income and wealth.
Taxation is also used as part of fiscal policy to stabilize the economy. Increasing taxes can reduce consumption and lead to economic slowing when the economy may be growing too quickly. Alternatively, decreasing taxes can be a mechanism to promote economic growth by increasing the funds available for consumption and investment spending. It is important to note that when the government spends more than the tax revenue it collects, the government is operating at a deficit and will have to borrow funds to finance operations until taxes can be increased to return the government spending to a balanced budget.
Types of Taxes
The US government imposes a number of different types of taxes in order to finance its operations. The following is a list of taxes in common use by governmental authorities:
- Excise tax: tax levied on production for sale, or sale, of a certain good.
- Sales tax: tax on business transactions, especially the sale of goods and services.
- Corporate income tax: tax on a company's profits.
- Income tax: tax on an individual's wages or salary.
- Capital gains tax: tax on increases in the value of owned assets.