Central governments, as well as local authorities, have spending commitments usually stipulated in the annual budget. In order to meet these commitments, these governments need to get revenue that is equivalent to or more than the budget.
The 5 Major Sources of Government Revenue
These are almost synonymous with government revenue as they make up the biggest percentage of government income. There are countless types of taxes levied on individuals and corporations alike. Let’s look at the main types of taxes.
This is the tax every individual pays as a percentage of their income (salaries, profits, capital gains, dividends etc). For those employed (in the public or private sector), the employer deducts the tax and submits it to the central government. Those in business or are self-employed, are required to declare their annual income and remit the appropriate taxes directly to the central government. Failure to remit this tax may lead to penalties or tax investigations.
These are taxes levied on corporate profits. The amount depends on the fiscal policies because different products attract differing percentages of corporation tax.
Social Insurance Taxes
These taxes are charged on specific programs such as health, unemployment, retirement benefits insurance etc. In most cases, these taxes are remitted to the central government from an individual’s earnings. These programs (or funds) are usually (but not always) managed by government bodies.
These are taxes collected on all properties; land, commercial as well as residential properties. Whether it is an estate you just bought, a gift, an inheritance or even your net wealth. The percentage of land rates levied depends on the use of the property as well as the location. Some localities attract more taxes than others.
These taxes are collected on all consumables in form of excise and customs duties, VAT and sales taxes. In most countries, you will find that the value-added tax (VAT) is levied in place of sales, excise and customs taxes. The consumption taxes make a big part of the taxes collected by the government.
Duties and Tariffs
These are taxes levied on products and services. Duties (which is sometimes referred to as value-added tax or excise duty) is a percentage charged on products manufactured in the country such as alcoholic beverages, cigarettes, etc. Tariffs are charges levied on imports of certain goods in order to create a level playing field for local products as well as earn the government some revenue.
Sale of Products and Services
The central government usually provides some services and products to the citizenry at a fee. Most of these services are provided through government bodies. Such services include electricity, water, insurance, social security services etc. Additionally, the government can export services and products and earn profits and foreign exchange.
Licensing and Certification Fees
This is a revenue stream that is mostly under local authorities. They are charged with offering licenses and certifications to small businesses and large corporations alike. The licensing can also be at the individual level, for example, when applying for a driving license, or professional practising license. This is aimed at ensuring the public gets quality services from professionals, as well as earns the local government income to maintain amenities required by the citizenry.
This can be done on a large scale or small scale to fund various projects. The government can issue bonds to the citizenry whereby anyone who invests in the bonds gets the money back with interest after a specified period.
If the central government wants to fund a bigger project and its annual income is not enough, it can borrow from other nations or mega-corporations in form of bonds. The idea is the same; to get investors to buy the bonds (at larger amounts, usually hundreds of millions or billions) and get them back with interest at an agreed-upon time.
There are countless ways through which the government can earn revenue. Apart from the taxes, profits and licensing, the government also has smaller income streams. Such include fines filed against defaulters, passport fees, vehicle registration fees, land grading and tree cutting permits, building permits and fees, tourist site entry fees, fines collected from offenders in court cases, parking fees, business registration fees, etc.
Other sources of revenue include foreign aid and indemnities, especially to lesser power countries. While this may not be a regular revenue stream, it still helps meet the budgetary requirements of the particular fiscal year.
It is important to know that the amount collected differs year after year, and so does the expenditure. At times the budget is way larger than the income, which forces the government to increase borrowing or reduce expenditure. The bottom line is that there is a need for proper fiscal policies to govern both income and expenditure.