Facts at a Glance |
- By the end of 2011, the federal government is projected to receive in revenues $2.3 trillion, or 15.3 percent of the economy– well below the historical average of 18 percent of GDP.
- 1913 – First year the United States government collected federal income taxes (from all eligible citizens earning $3,000 or higher annually)
- $1.3 trillion – Cost of tax expenditures in the United States in 2011.
- 18 percent of Americans will not owe payroll or income taxes this year
- The average American taxpayer pays 18 percent of income in federal taxes
|
I. Where does the money come from?
II. Distribution of Tax Burdens
III. Trends and Projections
I. Where does the money come from?
By the end of 2011, the federal government is expected to receive about $2.3 trillion (just over 15 percent of GDP, or the total economy) in revenues from taxpayers. This helped pay for some of the $3.6 trillion the government spent this year on programs such as Social Security, health care, defense, and education. Each year, revenues are collected in the form of various taxes:
1. Federal Individual Income Tax: Individual income taxes have been the largest source of tax revenue since 1950— averaging about 45 percent of total revenues over that time. In 2011, the most recent year for which data are available, revenue from individual income taxes will total $1 trillion, or 7 percent of GDP. In 2007, the average taxpayer paid $2,100 in income taxes, but tax burdens vary considerably. Some people owe no taxes, while the top 10 percent of income earners owed an average of $63,900.
2. Corporate Income taxes: The government collects taxes on the income earned by corporations each year. In 2011, corporate taxes will amount to about $190 billion—that’s about 9 percent of tax revenue, and just over 1 percent of GDP. This is down from 2 percent of GDP in 2008, a decline caused by the recession’s effect on business earnings. Historically, corporate taxes were much higher—in the 1950s, they made up about a quarter of government revenues, averaging about 5 percent of GDP. This shift of composition has resulted largely from policies that have moved away from taxing income at the corporate level.
3. Payroll Taxes: Employers and employees contribute payroll taxes, also known as social insurance taxes. Payroll taxes are the second largest component of federal revenues (after individual income taxes), accounting for 37 percent of total revenues. In 2011, payroll taxes will amount to about $800 billion, or 5.4 percent of GDP. The largest of these taxes are Social Security and Medicare taxes. These two payroll taxes total 15.3 percent of wages and salaries. For Social Security, employers and employees each pay 6.2 percent, for a total of 12.4 percent, on wage income up to a maximum amount—$106,800 in 2011. (The payroll tax rate on employees was temporarily reduced for 2011 in an effort to stimulate economic recovery.) For Medicare, both employers and employees also pay 1.45 percent of their earnings, with no upper limit. The unemployment tax, another, smaller type of payroll tax, is paid only by employers and varies by the firm’s size.
4. Excise Taxes:The government taxes certain goods such as tobacco, alcohol, and fuel; these excise taxes are usually reflected in the higher prices consumers pay for these goods. Excise taxes have fallen in relative terms over the past 60 years, from 2.8 percent of GDP in 1950 to an estimated 0.5 percent of GDP in 2011.
5. Estate and Gift Taxes:Total estate and gift taxes for 2011 are projected to amount to about $12 billion, or less than one tenth of one percent of GDP. The estates of wealthy individuals are taxed upon their deaths. Currently, only estates over $5 million are taxed, at a maximum rate of 35 percent. Individuals must also pay taxes on monetary gifts greater than $13,000.
The tax code also contains provisions that reduce the revenue the government collects. These special provisions—such as deductions, credits, and exclusions—are collectively called tax expenditures. Each year, these tax expenditures cost about $1.3 trillion. For a more detailed explanation on tax expenditures, click here.
Figure 1. Composition of Federal Revenues, 2011
The composition of tax revenue has changed over the past 50 years, with payroll taxes accounting for a larger share, and corporate and excise taxes becoming smaller share. Individual income taxes have remained relatively constant over that period.
II. Distribution of Tax Burdens
The income tax system is progressive, meaning that high-income households are taxed at a higher rate than low-income households. (By contrast, payroll taxes are regressive because wage earnings above $106,800 are not taxed, high-income earners pay a lower percentage of their wages than do low-income earners.)
The Congressional Budget Office estimates that, in 2007 (the most recent year for which data is available) the top income quintile or the highest earning 20 percent of American households made up 56 percent of total pre-tax income, and paid 69 percent of all federal taxes. By contrast, taxpayers in the lowest income quintile earned only 4 percent of total income, and paid less than 1 percent of total taxes.
Not everyone pays taxes to the federal government. Some individuals may have income that is too low to incur income taxes, or have no liabilities at all because of tax deductions, exemptions, and credits. While payroll taxes remain a large component of the tax liability—especially for lower income workers—the Tax Policy Center estimates that about 46 percent of households will owe no individual income taxes in 2011. 18 percent of American households, mostly the low-income elderly and very poor families with children, owe neither federal individual nor payroll taxes.
To figure out what tax bracket you fall under, try this online calculator.
Figure 2. Share of Pre-Tax Income and Total Federal Taxes by Income Quintile
III. Trends and Projections
During the Great Depression, tax revenues averaged only between 3 and 7 percent of the total economy. They rose sharply at the beginning of World War II, and, since then, have fluctuated between 16 and 21 percent of GDP, with an average of about 18 percent of GDP. In 2009, they dropped to 15 percent of the economy, as a result of both tax rate decreases and lower economic output resulting from the recent economic downturn.
The chart below (Figure 3) shows what will happen to revenues if the tax cuts that were enacted in 2001 and 2003 and extended in 2010 expire on schedule at the end of 2012. The Congressional Budget Office projects that future revenues will rise to 21 percent of GDP in this case.
Figure 3. Federal Revenues as a Percentage of the Economy, 1970-2021
Related Topics
PGPF Charts Archive: Taxes
PGPF Articles Archive: A Closer Look At Individual Areas of the Budget
Tax Expenditures: How the Government loses $1 trillion in Revenue Each Year
The 2001 and 2003 “Bush” Tax Cuts: Past, Present, and Future
Other Helpful Resources:
Tax Policy Center
Joint Committee on Taxation
Tax History Museum
The Internal Revenue Service
Other Resources
Historical Payroll Tax Rates (Tax Policy Center)
State Income Tax Rates, 2000-2011 (Tax Policy Center)
OECD Taxes as a Share of GDP, 1999-2008 (Tax Policy Center)
OECD Income Tax Rates 2000-2006 (Tax Policy Center)