USA Tax Types: Who Pays and Why

The U.S. tax system includes various taxes imposed at the federal, state, and local levels.

Federal taxes

Federal taxes in the U.S. fund essential government services and programs. Key types include federal income tax, paid by individuals and businesses, which supports defense and infrastructure. Payroll taxes fund Social Security and Medicare, collected from employees and matched by employers. Corporate income tax applies to corporate profits, contributing to federal revenue. Capital gains tax is levied on profits from asset sales, encouraging long-term investment. Estate and gift taxes target wealth transfers to reduce concentration. Lastly, excise taxes are applied to specific goods to discourage consumption and generate revenue.

State Taxes

State taxes are essential for funding local services and programs across the U.S. State income tax is paid by individuals and businesses, supporting education and public safety. Sales tax is levied on consumer purchases, providing revenue for state operations. Property tax, based on real estate value, primarily funds local services like schools and emergency response. Excise taxes are applied to specific goods, such as fuel and tobacco, to discourage use and generate funds. Corporate taxes target profits earned by businesses, contributing to state revenue. Lastly, transfer taxes are imposed on real estate transactions to support local government services.

Some of the states making up the United States do not require people to pay state income taxes. For example, there is no state income tax in Florida, Wyoming, Nevada, Washington, Alaska, South Dakota and Texas.