Select your language

Suggested languages for you:
Log In Start studying!
StudySmarter - The all-in-one study app.
4.8 • +11k Ratings
More than 3 Million Downloads
Free
|
|

All-in-one learning app

  • Flashcards
  • NotesNotes
  • ExplanationsExplanations
  • Study Planner
  • Textbook solutions
Start studying

Federal Taxes

Federal Taxes

Do you ever wonder how the government makes money to pay for services? If you have to earn money to pay for your own goods and services, surely the government has to as well. You would be correct! The government does need a source of revenue to pay for the goods and services that it provides - whether it's a government service like Medicare or physical infrastructure like highways. The question remains, what is this source of revenue? Continue reading to learn more about federal taxes!

Meaning of Federal Taxes

Let's go over the meaning of federal taxes.

Federal taxes are taxes that you pay to the federal government, rather than to the state or local government. Personal income tax and payroll tax are the most common types of federal taxes that you will likely run into.

What does this mean for the government, the citizens, and the economy? Federal taxes provide revenue for the federal government so that it can provide services to its citizens.

For example, the United States uses its revenue from federal taxes to pay for goods and services that you use! Subsidies for healthcare, education, and public transportation benefit citizens. These are just some parts of the federal government's spending. But what about the economy? How do federal taxes play a role?

If the government does not use the federal tax revenue effectively, it can severely hurt its economy. Without proper investment in infrastructures such as roads and bridges, how will the United States engage in trade? Less trade will lead to less economic growth; thus, hurting the United States' overall economy. Additionally, if investments in education and healthcare are neglected, the economy can suffer as a result. A more educated workforce will be more skilled and productive; a healthy workforce will also ensure labor productivity.

As you can see, federal taxes play a huge role in a government's citizens and economy. Without this revenue, the government cannot properly invest in areas that can bring great benefits to the country.

Federal Tax Rates

At what tax rates do you pay your taxes to the federal government? The federal tax rate depends on the federal tax that you are looking at. We will take a look at the personal income tax and corporate tax rates.

Federal Tax Rates: Personal Income Tax

The current federal personal income tax rates in the United States are the following: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The tax rates alone do not tell us enough about the personal income tax in the United States — how do we know who pays at which tax rate? We also need to know the income that falls under each bracket to determine how much a person will pay in income tax. For simplicity, we will only take a look at the marginal tax rates faced by a single filer.

Marginal Tax RateSingle Filer
10%$0 to $10,275
12%$10,275 to $41,775
22%$41,775 to $89,075
24%$89,075 to $170,050
32%$170,050 to $215,950
35%$170,050 to $215,950
37%$539,900 or more

Table 1 - Marginal Tax Rates in the United States, Source: IRS 1

Federal Tax Rates: Corporate Income Tax

As of 2018, the federal corporate income tax rate is at a flat rate of 21%.2

A flat tax is a tax rate that is universal no matter the income that is made.

For corporations, this means that the amount of income they make is irrelevant to the tax rate that they are subject to. Whether a corporation makes $100,000 a year, or $1,000,000 a year, the tax rate will remain the same at 21%.2 This differs from the personal income tax that we previously looked at, where the income a person made altered the tax rate a person will pay at the end of the year.

Federal Taxes by Income

Let's discuss federal taxes by income. In the United States, federal taxes by income are progressive taxes.

A progressive tax is a tax with tax rates that increase as a person's income increases. Those with a higher income will end up paying a higher tax than those with a lower income.

The opposite of a progressive tax is a regressive tax.

A regressive tax is a tax with tax rates that decrease as a person's income increases. Those with a higher income will end up paying a lower tax rate than those with a lower income.

A progressive tax is meant to be a more equitable form of taxation by shifting more taxes to those who are more capable of paying a higher percentage of taxes.

But where is the line drawn? How does the United States determine the amount a person will pay based on their income? This is where the marginal tax comes in.

A marginal tax rate is the tax rate that taxpayers pay on each additional amount of taxable income.

Are you still a bit confused as to what a marginal tax rate is? No worries, here's an example of how it works. Take a look at the marginal tax rate table below and see how it corresponds to the person's income in the example.

If a person was making $45,000 a year in the United States, the tax rate would go as follows: a 10% tax is paid on each dollar from $0 to $10,275, then a 12% tax is paid on each dollar from $10,275 to $41,775, and finally, a 22% tax is paid on each dollar from $41,775 to $89,075. This is how a marginal tax rate works!

Marginal Tax RateSingle Filers
10%$0 to $10,275
12%$10,275 to $41,775
22%$41,775 to $89,075
24%$89,075 to $170,050
32%$170,050 to $215,950
35%$215,950 to $539,900
37%$539,900 or more

Table 1 - Marginal Tax Rates in the United States. Source: IRS 1

Curious about different forms of taxation and how they affect the economy? You can learn more from our explanations:

- Marginal Tax Rate

- Progressive Tax System

- State and Local Tax

- Incidence of Tax

Federal Taxes Payment

What should we know about federal taxes payment? When we pay federal taxes to the government, it becomes the government's revenue. The government can use federal tax revenue for a variety of things, such as infrastructure, education, and healthcare. In 2021, the United States collected $4.05 trillion in revenue!3 Of that, individual income tax accounted for nearly half — $2 trillion! On a microscale, it can be difficult to see one individual's taxes accounting for anything, but when looking at the entire country, $4 trillion is an enormous amount!

Federal Taxes Examples

Let's look at federal tax examples. We will take a look at personal income tax, payroll taxes, and corporate income tax.

Federal Taxes Examples: Personal Income Tax

Personal income tax is a tax that is paid on the income an individual makes in a given year. But what can income look like? Income can be in the form of wages, salaries, dividends, and many more. A personal income tax can shift the burden on wealthier people (with a progressive tax) or lower-income people (with a regressive tax) depending on how the tax code is structured.

For example, if a country increases the tax rate as incomes increase, this would be a progressive tax; in contrast, if a country has a flat personal income tax rate that everyone pays regardless of the amount of income, then it would be a regressive tax.

Personal income tax is a tax that is paid on the income an individual makes in a given year.

Federal Taxes Examples: Payroll Taxes

Payroll taxes are taxes that are imposed on the employees of a company. The amount that is imposed will generally vary based on a number of factors, such as the salary of the employee or the tips earned by the employee. What do the payroll taxes typically go towards? In the United States, the payroll taxes mainly go to funding Social Security and Medicare. These are government programs that Americans have access to once they reach retirement age.

Payroll taxes are taxes that are imposed on the employees of a company.

Federal Taxes Examples: Corporate Income Tax

Corporate income tax is a tax that is imposed on the income that corporations make. Another way to view this is as an income tax for corporations! Just like you, corporations have to pay a tax on the income that they make — a corporation's income is the goods and services they sell. Currently, in the United States, the corporate income tax rate is at a flat rate of 21%. That means that no matter the profits of a corporation, it will have to pay a 21% corporate income tax rate.

Corporate income tax is a tax that is imposed on the income that corporations make.

Federal Taxes - Key takeaways

  • Federal taxes provide revenue for the federal government so that it can provide for its citizens.
  • The federal tax rates will vary based on the type of tax being looked at.
  • In the United States, personal income tax is a progressive tax.
  • Examples of federal taxes include payroll taxes, income tax, and corporate income tax.

References

  1. Tax Foundation, 2022 Federal Income Tax Brackets and Rates, https://taxfoundation.org/2022-tax-brackets/
  2. Tax Foundation, Historical Corporate Tax Rates and Brackets, 1909 to 2020, https://taxfoundation.org/historical-corporate-tax-rates-brackets/
  3. DataLab, 2021 Revenue Categories, https://datalab.usaspending.gov/americas-finance-guide/revenue/

Frequently Asked Questions about Federal Taxes

A federal tax is a tax paid to the federal government. It's a source of revenue for the federal government. 

Federal taxes can be used to fund healthcare, education, and subsidies for public transportation. 

Personal income tax, payroll tax, corporate income tax, excise tax, and "other" taxes. 

Examples of federal taxes include personal income tax, corporate income tax, and payroll taxes.

Federal taxes can help the economy by providing a source of revenue for the federal government so that it can provide public goods such as physical infrastructure and rule of law, which are inducive to economic development.

Final Federal Taxes Quiz

Question

What do federal taxes do?

Show answer

Answer

Taxes provide revenue for the government so that it can provide public goods and services for its citizens.

Show question

Question

What is a flat tax?

Show answer

Answer

A tax with a flat tax rate despite the income level.

Show question

Question

What is a progressive tax?

Show answer

Answer

A progress tax has a tax rate that increases as a person's income increases.

Show question

Question

What is a regressive tax?

Show answer

Answer

A regressive tax has a tax rate that decreases as a person's income increases.

Show question

Question

What is a marginal tax rate?

Show answer

Answer

A marginal tax rate is the tax rate that taxpayers face for each additional amount of taxable income. 

Show question

Question

True/False: In the US, individuals who earn a higher level of income face a higher marginal tax rate.

Show answer

Answer

True.

Show question

Question

What is a corporate income tax?

Show answer

Answer

A tax on a corporation's income.

Show question

Question

What is a payroll tax?

Show answer

Answer

a tax that is typically imposed on the employees of a company. 

Show question

Question

True or False: Corporate income tax is NOT a source of federal taxes.

Show answer

Answer

False.

Show question

Question

True or False: Federal taxes are collected by local governments.

Show answer

Answer

False.

Show question

Question

True or False: Federal tax revenue is used only for private businesses.

Show answer

Answer

False.

Show question

Question

The United States' income tax is a ____ tax.

Show answer

Answer

progressive.

Show question

Question

For a regressive tax, the more you make, the ______ you pay in taxes as a proportion of your income.

Show answer

Answer

less.

Show question

Question

True or False: For a flat tax, everyone is subject to the same tax rate regardless of income/profits.

Show answer

Answer

True.

Show question

Question

True or False: In the United States, payroll taxes help fund social security and medicare.

Show answer

Answer

True.

Show question

60%

of the users don't pass the Federal Taxes quiz! Will you pass the quiz?

Start Quiz

Discover the right content for your subjects

No need to cheat if you have everything you need to succeed! Packed into one app!

Study Plan

Be perfectly prepared on time with an individual plan.

Quizzes

Test your knowledge with gamified quizzes.

Flashcards

Create and find flashcards in record time.

Notes

Create beautiful notes faster than ever before.

Study Sets

Have all your study materials in one place.

Documents

Upload unlimited documents and save them online.

Study Analytics

Identify your study strength and weaknesses.

Weekly Goals

Set individual study goals and earn points reaching them.

Smart Reminders

Stop procrastinating with our study reminders.

Rewards

Earn points, unlock badges and level up while studying.

Magic Marker

Create flashcards in notes completely automatically.

Smart Formatting

Create the most beautiful study materials using our templates.

Sign up to highlight and take notes. It’s 100% free.