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How is the US Federal Government Funded?

The US federal government is funded primarily by collecting taxes and selling debt from the US Treasury. The Federal Reserve plays a crucial role in ensuring the US Government is properly funded by borrowing money. Governments around the world must be well funded in order for the country to operate as efficiently as possible. The capitalization of governments is needed to pay for many public services such as roads, schools, and police.  

How Much Revenue from Taxes does the US Government Collect?

In 2022, the US Government collected $4.89 trillion in taxes. Combined with other government sources of revenue, the US Government collected $4.90 trillion in revenue. However, the US Government spent $6.97 trillion, leaving it with a $1.38 trillion deficit. The US has to borrow to pay for the deficit.

What Types of Taxes do the US Federal Government Collect?

The US collects taxes from a variety of sources including:

  1. Income tax – taxes that businesses and individuals pay based on the amount of money they make,
  2. Capital gains tax – based on the profit made when an asset (e.g., stock or real estate) is sold,
  3. Property tax (also known as Ad valorem tax) – based on the value of real estate,
  4. Estate tax – taxes when a person passes on property or assets upon death,
  5. Custom tax – when goods are imported or exported, and
  6. Value-added tax – based on the value that is added during the production of a good or service.

Many countries do not have a strong tax collection strategy, and much of the tax revenue comes from trade tax revenue, according to “Tax revenue and (or?) trade liberalization” from the Journal of Public Economics by Thomas Baunsgaard and Michael Keen. This prevents the countries from properly collecting taxes that can be used for the public good.

How Does the US Federal Government Borrow Money?

federal government capitalized, treasury security, taxes
Governments need to be capitalized in order to function properly.

The US federal government borrows money primarily by selling debt in the form of treasury securities such as treasury bonds, treasury bills, treasury notes, and treasury inflation-protected securities (TIPS). These items are sold to the public where individuals, companies, and countries will buy them. By buying a treasury security, the buyer is entitled to interest payment from the US government. 

What is the Federal Reserve’s Role in Capitalizing the US Federal Government?

The Federal Reserve, the central bank of the US, plays an important role because the Federal Reserve conducts the auctions of the treasury securities. In addition, the Federal Reserve will adjust the interest rate that is paid on the treasury securities, which impacts the interest rate on loans for individuals and businesses. Lastly, the Federal Reserve will buy and sell the US government debt to regulate the supply of treasury securities on the marketplace.

What Happens if a Government is Not Capitalized?

If a government is not capitalized, then it likely will not have the funds to pay for public services such as the maintenance of roads, paying the wages of the police and military, or paying the interest on government debt. Not being able to fund the government will cause the citizens to lose faith in the government and it could potentially cause the country to fail which impacts international law.


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