Policymakers use the tax system to raise revenue and to promote social policy goals. For example, they may want to encourage desirable behaviors, such as home ownership.
There are two main ways for governments to collect taxes. One is by taxing income directly. This is known as an income tax. The other is taxing only income that is spent.
Currently, some types of income are either taxed at lower rates than ordinary income or are exempt from taxation to some degree.
In general, only cash income is subject to the income tax. In-kind benefits—benefits that are received as goods or services rather than as cash—are not.
Tax credits and deductions are two ways to reduce tax liability. Tax credits directly reduce the amount of taxes owed, dollar-for-dollar.
The federal estate tax was enacted in 1916 in an effort to raise revenues. Its intent was also to reduce the concentration of wealth, thus increasing economic equality.
State and local governments issue bonds to finance important projects that meet social goals and benefit communities.
One indicator of smart fiscal practices is maintaining balance between spending and revenues. Occasionally deficits may be necessary.
At the federal level, there are two categories of budgetary expenditures: entitlement and discretionary spending.
Most states and localities generate a significant portion of state and local revenue from the taxation of retail sales.