Over the course of 2019, the US government took in $3.5 trillion dollars in federal tax revenues. Have you ever wondered where that money comes from?
Let’s look at the most recent federal tax revenue reports, breaking them down by source and comparing them to historical data.
Sources of Federal Tax Revenue
There are three main sources of federal tax revenue: individual income taxes, payroll taxes, and corporate income taxes. Other sources of federal tax revenue include excise taxes, the estate tax, customs duties, and other fees.
Figure 1: Sources of federal tax revenue in 2019 (in millions of dollars)
Let’s break those data down into percentages:
- Individual income taxes: 49.59%
- Corporate income taxes: 6.65%
- Payroll taxes: 35.89%
- Excise taxes: 2.87%
- Other taxes: 5%
Figure 2: Federal receipts as a percent of GDP (1934-2019)
The tax-to-GDP ratio measures a nation’s tax revenue relative to the size of its economy (measured by gross domestic product). It is one indicator of how much of a country’s economy goes toward sustaining its government. Since World War II US federal tax revenues have averaged around 19.5% of the GDP, regardless of fluctuations in marginal tax rates. Most developed countries have a higher tax-to-GDP ratio than the US: the OECD average is 34.3%.
Federal Individual Income Taxes
Individual income taxes are by far the largest source of federal revenue. They account for 49.59% of total federal tax revenues.
Federal income taxes are progressive: the more you earn, the larger the percentage of your income that you will pay in taxes. Depending on how much you earn you will fall into one of the seven tax brackets, ranging from 10% to 37%.
Table 1: 2021 federal income tax brackets
|Tax rate||Single filers||Married filing jointly||Married filing separately||Head of household|
|37%||$523,601 or more||$628,301 or more||$314,151 or more||$523,601 or more|
Federal Corporate Income Taxes
The corporate income tax is the third-largest source of federal revenue, after individual income taxes and payroll taxes. It accounts for 6.65% of total federal tax revenues.
All corporations that have residency in The United States pay corporate income taxes at a rate of 21%. US-based foreign-owned companies also pay corporate income tax on profits earned from activities in the US.
The importance of the corporate income tax as a source of federal revenue has been steadily declining from the 1950s to the 1980s. It now averages less than 2% of GDP.
Figure 3: Federal Corporation and Individual Income Tax as a % of GDP
Federal Payroll Taxes (Social Insurance and Retirement Receipts)
Payroll taxes are the second-largest source of income of the federal government, accounting for 35.89% of the total federal tax revenues.
Figure 4: Composition of federal payroll taxes in 2019
Most payroll tax revenue is used to fund the two Social Security trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. OASI pays retirement and survivors benefits, while DI pays disability benefits. Social Security taxes are paid into these US Treasury accounts and used to pay benefits.
Federal Excise Taxes
Excise taxes are consumption taxes imposed by the federal government on sales of some goods and services. These include products like fuel, airline tickets, tobacco and alcohol, and health-related goods and services. Excise taxes account for 2.87% of the total federal tax revenues in 2019.
Figure 6: Sources of federal excise tax revenue
The majority of excise taxes came from only 5 categories: tobacco, alcohol, aviation, transportation (highways) and health (health insurance providers). The government also imposes excise taxes on local telephone services, medical devices, indoor tanning services, vaccine injury compensation, black lung disability, oil spill liability and others.
Excise tax revenue as a percent of GDP has declined over time, as GDP has grown faster than average annual excise tax receipts.
Figure 5: Excise tax collection as a percent of GDP has declined over time.
Other Federal Taxes
Oher federal taxes include estate taxes, customs duties, and various other small fees. All these other taxes combined represent 5% of total federal tax revenues.
The estate tax is a tax on assets that are transferred from deceased persons to their heirs after their death. These include assets such as cash, real estate, stocks, etc. The estate tax affects people who are able to pay the most and is considered the most progressive tax. The tax rate ranges from 18% to 40%.
Federal estate taxes are imposed only on relatively large estates. The level at which estate taxes are imposed changes from year to year. The biggest recent change occurred in 2018 when the Tax Cuts and Jobs Act of 2017 more than doubled the exempt amount to $11.18 million per taxpayer (from $5.49 million in 2017). Today roughly two out of 1000 estates are large enough to pay the estate tax.
Figure 5: Federal estate tax exemption (2001-2020)
Why Do We Pay Federal Taxes?
The Constitution grants the US Government the power to collect revenue by taxing its citizens.
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;Article I, Section 8, Clause 1 of the United States Constitution
Just as individuals earn wages for their work, the government taxes its citizens in order to provide services to them. These services include:
- Defense and security,
- Social security,
- Health programs like Medicare and Medicaid,
- Veterans benefits,
- Benefits for federal retirees,
- Safety net programs like unemployment insurance, food stamps, low-income housing and others,
- Environmental, health, safety, and financial regulations,
- Support for State and local education programs.
States and local governments also impose and collect their own taxes in order to pay for the services they provide to their citizens.
Taxes are inevitable. Every government in the world collects them. That doesn’t mean they’re popular. Taxes and tax rates often become political issues and may inspire a great deal of passionate argument. Understanding how taxes are collected and how the money is used can help us to bypass emotion and develop fact-based positions on tax-related issues.
Do you have any questions about federal tax revenues? Let us know in the comments section below!