Individual income taxes

Individual income taxes, which are levied on the wages and salaries of individuals, as well as their income from investments, constitute half of total federal revenues. Payroll taxes, which help to finance Social Security, Medicare and unemployment benefits, are the second largest source of federal revenues.

Progressive

The U.S. tax system is progressive, which means that tax rates (as a percent of income) increase with income levels.

One misconception about the U.S. tax code is that high-income Americans pay “less” in taxes because they benefit disproportionately from tax breaks and deductions. While that may be true for certain individuals, in the aggregate the U.S. tax code remains progressive — with higher-income taxpayers paying a larger share of their income in taxes — even after tax breaks have been taken into account. The above chart is based on the “effective” tax rates, which already factor in tax deductions, exemptions, credits, and preferential rates.

False

Even the lowest-income Americans pay federal taxes.

It is true that in a typical year, on average, the lowest 40 percent of income earners do not pay individual income taxes; however, they do face payroll taxes if they are working. In fact, about two-thirds of American taxpayers pay more in payroll taxes than in individual income taxes.

While nearly all Americans pay taxes, the types of taxes they pay are very different for taxpayers at different ends of the income distribution. Affluent Americans pay a larger share of their income in individual income taxes, corporate taxes, and estate taxes than lower-income groups. By contrast, lower-income groups pay a greater portion of their earnings in payroll taxes and excise taxes than those who are wealthier.

Top income earners

The Congressional Budget Office estimates that the top 20 percent of taxpayers receive half of total benefits from tax expenditures. In 2019, the top one percent of taxpayers alone received 19 percent of the value of individual income tax expenditures. The Tax Cuts and Jobs Act, enacted in 2017, made some changes to tax expenditures (most notably by restricting the state and local tax and mortgage interest deductions and increasing the child tax credit); however, tax expenditures are still likely to benefit high-income taxpayers most.

24%

Even after benefiting from substantial tax expenditures, the top one percent of American taxpayers still paid an average effective tax rate of 31 percent in 2022, and they generated 24 percent of tax revenues.

The cost of all tax expenditures (tax breaks)

Tax expenditures in 2022 reduced revenues by $1.7 trillion — significantly more than Social Security, Medicare, or spending on national defense in that year.

Exclusion of pension contributions and earnings

Some of the most expensive tax expenditures are also the most popular. They include tax breaks for pension contributions and earnings, employer-provided health insurance, and capital gains. The Tax Cuts and Jobs Act made some changes to tax expenditures (most notably by restricting the state and local tax and mortgage interest deductions and increasing the child tax credit), but there are still a large number of such tax provisions in the system.

21%

The government collects taxes on the profits earned by U.S. corporations. The Tax Cuts and Jobs Act, enacted in December 2017, reduced the federal tax rate on corporations from 35 percent to 21 percent. When combined with state and local corporate taxes, the tax rate on corporations is approximately 26 percent, which is just above the OECD average of 23 percent.

It is important to note, however, that the U.S. tax code has many preferences that affect the rate actually paid by corporations. Once those preferences are taken into account, corporations generally pay less than the statutory rate.

Individuals

In 2022, the value of individual income tax breaks was about ten times that of corporate income tax breaks. Corporate tax breaks cost about $162 billion, while individual tax breaks cost roughly $1.5 trillion. Reduced rates of tax on dividends and long-term capital gains alone cost the government $239 billion — more than all corporate tax breaks combined.

Lower than in other advanced economies.

The United States has one of the lowest total tax burdens among advanced nations. The tax revenues collected by federal, state, and local governments in the U.S. were just above a quarter of the nation’s gross domestic product (GDP) in 2021, the latest year for which data are available. That is less, relative to GDP, than the revenues collected in several other high-income countries, including Japan, Canada, the United Kingdom, Germany, Italy and France.