The federal government’s major expenditures provide 1. Goods and services 2. Social Security and welfare payments 3. Transfers to state and local governments The goods and services provided by the federal government include the legal system, which protects property and enforces contracts, and national defense. Social Security and welfare benefits, which include income for retired people and programs such as Medicare and Medicaid, are transfers from the federal government to households. Federal government transfers to state and local governments are payments designed to provide more equality across the states and regions.

The federal government finances its expenditures by collecting a variety of taxes. The main taxes paid to the federal government are 1. Personal income taxes 2. Corporate (business) income taxes 3. Social Security taxes