Federal Budget 101 Where Does the Money Come From?

The federal government raises trillions of dollars in tax revenue each year, though there are many different kinds of taxes. 

Some taxes fund specific government programs, while other taxes fund the government in general. When all taxes for a given year are insufficient to cover all of the government’s expenses—which is often the case — the U.S. Treasury borrows money to make up the difference.

Corporate Taxes

Corporations pay income taxes similar to those paid by workers. Depending on how much profit a corporation makes, it pays a marginal tax rate anywhere from 15 to 35 percent.4 The top marginal tax rate for corporations, 35 percent, applies to taxable income over $18.3 million. As you can see in this line chart, individual income taxes make up a much larger share of all federal tax revenues than corporate taxes do, in part because the wages and salaries of all Americans are much larger than profits of all U.S. corporations. The share of federal tax revenue paid by corporations has also declined substantially over time.

While the official tax rate for most corporations is 35 percent, the effective tax rate—that’s the percentage of profits a corporation actually pays in taxes—varies enormously from one corporation to the next.

That variation is the result of incredible complexity in the tax code as well as corporations’ varying exploitation of “loopholes” to avoid tax liability. Loopholes refer to provisions in the tax code that exempt certain activities from regular taxation. For example, multinational corporations can allocate profits to overseas operations and reduce their tax liability by doing so.