Tax revenue is the income that is collected by governments through taxation. Taxation is the primary source of government revenue. Revenue may be extracted from sources such as individuals, public enterprises, trade, royalties on natural resources and/or foreign aid. An inefficient collection of taxes is greater in countries characterized by poverty, a large agricultural sector and large amounts of foreign aid.

Just as there are different types of tax, the form in which tax revenue is collected also differs; furthermore, the agency that collects the tax may not be part of central government, but may be a third party licensed to collect tax which they themselves will use. For example, in the UK, the Driver and Vehicle Licensing Agency (DVLA) collects vehicle excise duty, which is then passed on to HM Treasury.

Tax revenues on purchases come in two forms: "tax" itself is a percentage of the price added to the purchase (such as sales tax in U.S. states, or VAT in the UK), while "duties" are a fixed amount added to the purchase price (e.g., for cigarettes). In order to calculate the total tax raised from these sales, we must work out the effective tax rate multiplied by the quantity supplied.

Taxation was a key task in any country as it advances state capacity and accountability. Charles Tilly identifies taxation as a form of extraction that allows the state to execute its primary functions: public policies (education, infrastructures, health care), state making, and protection. Taxation became indispensable in western Europe, when countries needed to fund wars in order to survive. This European model was later exported all around the world. Today, the level of taxation is used as an indicator of state capacity. Developed countries raise more taxes and therefore are able to provide better services. At the same time, the high taxation forces them to become accountable with their citizens, which strengthens the democracy.

Tax revenue from individual income tax is a greater percentage of tax revenues in developed countries than in developing countries. Tax revenues in developing countries rely more on taxes on goods and services than do tax revenues in developed countries.

The effect of a change in taxation level on total tax revenue depends on the good being investigated, and in particular on its price elasticity of demand. Where goods have a low elasticity of demand (they are price inelastic), an increase in tax or duty will lead to a small decrease in demand—not enough to offset the higher tax raised from each unit. Overall tax revenue will therefore rise. Conversely, for price-elastic goods, an increase in tax rate or duty would lead to a fall in tax revenue.

The Laffer curve theorises that, even for price-inelastic goods (such as addictive necessary items), there will be a tax revenue maximising point, beyond which total tax revenue will fall as taxes increase. This may be due to:

The Laffer curve, however, is not universally accepted; Paul Krugman referred to it as "junk economics".