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Taxes and spending are like yin and yang. The one complements the other. In a balanced budget (rarely seen in government!), revenue is at least equal to expenses. We will consider revenue first, then expenses.
Taxes
In the United States, about half of all federal tax revenue comes from the individual income tax, paid by households under categories like “single” and “married filing jointly.” Another third of the revenue is also paid by workers, in the form of social insurance taxes that fund Social Security and Medicare. Additionally, corporations pay taxes, in the form of a corporate income tax. The remainder of federal tax income is accounted for by miscellaneous taxes, including taxes on gasoline and tobacco.
As discussed in the chapter on Unemployment and Inequality, the individual income tax is progressive, meaning that high-income earners pay a higher percentage rate than low-income earners. In fact, the top quintile of earners (the top 20 percent) pay something like 70 percent of all personal income taxes collected by the government. The top marginal tax rate (the rate paid on the last dollar earned) in the United States has varied quite a bit over the years. In the early 1950s, it was over 90 percent. That is, a millionaire who earned $1 more than the year before paid 90 cents of it to the government as taxes. Today, the top marginal rate is just 37 percent. Is that too low? Still too high? It’s hard to say. Theoretically, there should be a revenue-optimizing level of taxation, one that will lead to more government revenue than any higher or lower level. (The argument is more or less the one discussed in the chapter on Government Involvement.) But there is no strong consensus on what that optimal level is.
States and counties also collect taxes, but practices vary widely from place to place. A few states have income taxes but no sales taxes (in 2025: Delaware, Montana, and Oregon), some have sales taxes but no income taxes (Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming), and two states, Alaska and New Hampshire, have neither income nor sales taxes and rely on for revenue on substantial property taxes.
Government Spending
Government spending is of three basic types: discretionary spending, mandatory spending, and interest on debt. Discretionary spending can be adjusted, year by year, based on policy priorities and on how much money is available. This category includes defense spending, spending on infrastructure, foreign aid, and much, much else, but it accounts for less than 30 percent of the U.S. federal budget, and that percentage has been shrinking over the years.
Mandatory Spending
Mandatory spending is fixed by law and not easily adjusted, because it goes to people who are legally entitled to the money. Social Security and Medicare are prime examples. Mandatory spending at present represents over 60 percent of the total budget, and the percentage continues to grow. When policy analysts speak of “entitlement reform,” they mean a comprehensive effort to revise the relevant laws so as to rein in mandatory spending. Because cuts in government benefits are politically unpopular, entitlement reform is something everyone agrees is necessary but nobody wants to be associated with.
The U.S. government has built up considerable debt by borrowing money to fund its operations. (More on that shortly.) It is constantly taking out new loans, by selling Treasury bonds (see the chapter on The Market for Money), even as it is repaying old loans by retiring Treasury bonds that reach maturity. The interest associated with the bonds is interest on debt. It accounts for somewhat less than 10 percent of the total budget.
