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How the Government Makes Money

How the Government Makes Money

What Are the Government’s Revenue Sources? Different sources of revenue for the U.S. Government

Taxation is the main source of revenue for the American government. The first article of the Constitution’s Section 8 grants the U.S. Congress the authority to assign and collect taxes. Tax money comes from a variety of sources. The federal government’s tax revenue is divided up as follows.

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  • 45% comes from individual income taxes
  • 39% comes from Social Security and Medicare taxes
  • 12% comes from corporate income taxes
  • 4% comes from estate, gift, and other miscellaneous taxation

The fact that half of Social Security and Medicare taxes are deducted from an individual’s salary directly means that the government receives 65% of its tax revenue from people, it should be highlighted.

Debt Revenue

The annual budget of the government specifies the expenditures that must be made in order to cover them. As was already mentioned, it aims to achieve its goal primarily through tax revenue collection. The nation achieves a budget surplus if the government raises more money in taxes during a given year than is required to cover its expenses. However, the federal government runs a deficit if tax revenue does not equal annual expenses.

It is crucial to remember that the United States has been running a deficit for the past 45 years, or roughly since former President Richard Nixon removed the nation from the gold standard. A deficit is normally equal to around 3% of the country’s overall economy. By the conclusion of the decade, there was hyperinflation after the Bretton Woods Agreement and the gold standard were abandoned in 1971.

By 2020, having a federal deficit is almost an inevitability, partly because of the enormous national debt. Under former President George W. Bush, the debt quadrupled in size (from $5 trillion to $10 trillion), and then again (from $10 trillion to $20 trillion) under former president Barack Obama. As of 2019, just paying the interest on the national debt required more than half a trillion dollars’ worth of funding, or over $590 billion.

Government spending rises to pay for need-based programmes like unemployment compensation, Medicaid, and food stamps during extremely difficult years, like during the Global Financial Crisis of 2008 (and perhaps what’s shaping up to be the recession of 2020). Since people are working fewer hours and paying less in income taxes during a recession, the government often receives less overall tax revenue.

The government raises money through debt, borrowing money by issuing financial instruments like Treasury bonds, to make up for any shortage. In essence, the bonds are risk-free solutions for people, organisations, and other nations to diversify their investment portfolios while also assisting the government in funding its spending.

The U.S. government can use four different types of debt instruments. It may also use Treasury bills, Treasury notes, and Treasury Inflation-Protected Securities in addition to Treasury Bonds (TIPS).

Japan is now the largest holder of U.S. securities, surpassing China, which is currently in second position, in 2019. Japan owned about $1.2 trillion in U.S. Treasuries as of the end of 2019. China, the UK, and Brazil are the other major owners of US Treasury securities, in that order.

The “Printed Money” Tax

The Federal Reserve effectively just creates more money, thus the US government has another less conventional way to make money. But how does it make money? Consider the fact that, before to 1933, the U.S. economy was based on the gold standard, making it impossible for the government to issue money at will. As all Federal Reserve notes were at the time redeemable for gold, it could only print money that was roughly equal to the amount of genuine gold it had on hand.

The former president Nixon’s decision to abolish the gold standard effectively eliminated that restriction on the government’s capacity to issue money. The government is now able to impose an inflation tax. Inflation arises from the Federal Reserve’s increased money printing, which increases the total amount of money in circulation and reduces the purchase power of each U.S. dollar. It holds true whether the money is in a person’s bank account or actual bills in their wallet.

The worth of each person’s money is diminished as a result of the government printing money to be used for purchases. It implies that the person has essentially been charged by the government for goods that it had printed money to pay for.

The Crash of 2020

The Federal Reserve has issued an unprecedented quantity of money as a result of the Economic Crash of 2020, which was caused by the coronavirus outbreak. The U.S. government’s financial assistance and rescue initiatives related to the pandemic were already greater than the $4.4 trillion total budget for the prior year as of May 1, 2020. Many analysts worry that uncontrolled inflation could eventually result from the Fed’s huge growth of the money supply.

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