The major sources of federal tax revenue are individual income taxes, Social Security and other payroll taxes, corporate income taxes, excise taxes, and estate and gift taxes. This report describes the federal tax structure, provides some statistics on the tax system as a whole, and presents analysis of selected tax concepts. This step of the process produces adjusted gross income (AGI), which is the basic measure of income under the federal income tax. Federal income taxes are assessed on a taxpayer's taxable income. There are four main filing categories: married filing jointly, married filing separately, head of household, and single individual. After a taxpayer's tax liability has been calculated, tax credits are subtracted from gross tax liability to arrive at a final tax liability. Various tax provisions are available to individuals depending on their level of income. Higher-income individuals with a high ratio of exemptions and deductions to income may be subject to the alternative minimum tax (AMT). Over time, tax credits have become an increasingly popular method of providing tax relief and social benefits. Wages are tax deductible, so labor's contribution to corporate revenue is excluded from the corporate tax base. Neither form of income is generally deductible. Payroll Taxes

Payroll taxes are used to fund specific programs, largely Social Security and Medicare. In 2014, the Social Security part of the tax (6.2% for both employees and employers) was only levied on the first $118,500 of wages, with the cap adjusted annually for increases in average wages in the economy. The Medicare portion (2.9%) is applied to all wages. Federal excise taxes are levied on a variety of products. Tax Statistics

		Composition and Size of the Federal Tax System

The federal tax system relies on several different revenue sources. In FY2013 the individual income tax accounted for 47% of total federal revenue, the social insurance and retirement receipts for just over 34% of total revenue, the corporate income tax for 10% of the total, and excise taxes for approximately 3% of the total. Revenues as a percentage of GDP remained at 15% in 2010. Excise taxes and estate and gift taxes have also decreased in relative importance over time. Using aggregate budget data for all levels of government relative to economic output (budget aggregates as a percentage GDP) as one measure of the size of public sectors, several observations can be made:
Compared with the other major industrialized nations, the public sector (including all levels of government) in the United States is relatively small. Or the tax burden could be distributed progressively such that taxes as a percentage of income increase as incomes increase. As a result, higher income groups paid a larger share of federal tax liabilities in 2011 than in 2001. Selected Tax Concepts

The final sections of this report review a number of important tax concepts. While marriage tax penalties have been reduced (and bonuses increased) in recent years, the possibility that marriage can change a couple's tax liability still exists. Tax Expenditures

Tax expenditures are revenue losses from special tax deductions, credits, and other tax benefits. Capital gains on short-term assets are taxed at regular income tax rates. Tax deferral not only affects the taxation of assets producing capital gains income, but also is of concern in other areas of tax policy, such as the taxation of contributions to retirement accounts, depreciation allowances, and the taxation of foreign source income of U.S. multinational corporations.
The major sources of federal tax revenue are individual income taxes, Social Security and other payroll taxes, corporate income taxes, excise taxes, and estate and gift taxes. This report describes the federal tax structure, provides some statistics on the tax system as a whole, and presents analysis of selected tax concepts.
The federal income tax is levied on an individual's taxable income, which is adjusted gross income (AGI) less deductions and exemptions. Tax rates, based on filing status (e.g., married filing jointly or single individual) determine the level of tax liability. Tax rates in the United States are progressive, such that higher levels of income are taxed at higher rates. Once tax liability is calculated, tax credits can be used to reduce tax liability. Tax deductions and tax credits are tools available to policy makers to increase or decrease the after-tax price of undertaking specific activities. Individuals with high levels of exemptions, deductions, and credits relative to income may be required to file under the alternative minimum tax (AMT).
Corporate taxable income is also subject to varying rates, where those with higher levels of income pay higher levels of taxes. Social Security and Medicare tax rates are, respectively, 12.4% and 2.9%. In 2014, Social Security taxes are levied on the first $117,000 of wages. In 2015, the Social Security wage base is inflation-adjusted to $118,500, reflecting increases in average wages in the economy. Medicare taxes are assessed against all wage income. Federal excise taxes are levied on specific goods, such as transportation fuels, alcohol, tobacco, and telephones.
In FY2013, individual income taxes accounted for 47% of total federal revenue. Social Security taxes accounted for 34%. Corporate income taxes accounted for 10% while excise taxes accounted for 3%. Estate and gift, customs, and miscellaneous taxes accounted for the remaining 6% of total revenue. Over time, the corporate income tax has become much less important as a revenue source while Social Security taxes have provided a larger share of total revenues.
Analysis of tax statistics from the federal tax system as a whole leads to three conclusions: (1) federal revenue as a percentage of GDP is in line with historical trends; (2) the U.S. fiscal position is in line with the fiscal position of other industrialized nations (revenues and expenditures as a percentage of GDP are relatively low); and (3) over the past decade, average tax rates have fallen for individuals at all income levels, but have fallen more for lower-income individuals, reducing their share of overall tax liabilities.
The final sections of this report analyze a number of tax concepts. Tax expenditures are revenue losses from special tax deductions, credits, and other benefits. Capital gains warrant special attention, as there is debate about their being taxed at a lower rate. Marriage tax penalties and bonuses, while reduced following legislation enacted in 2001 and 2003, still pose an inequity in the tax system. Tax deferral, or the timing of taxes, poses problems related to the timing of taxation, specifically with respect to capital gains. Depreciation is important, as accelerated depreciation schemes or expensing can influence firm behavior. Tax liability also depends on form of business organization. Finally, the issue of whether taxes can influence firms' competitiveness is reviewed.
This report will be updated on enactment of major changes in the federal tax system.