Individual income taxes

Individual income taxes, which are levied on the wages and salaries of individuals, as well as their income from investments, constitute approximately 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.

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.

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.

The cost of all tax expenditures (tax breaks)

Individuals

In 2024, the value of individual income tax breaks was almost ten times that of corporate income tax breaks. Corporate tax breaks cost approximately $188 billion, while individual tax breaks cost approximately $1.7 trillion.

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 expensive tax breaks 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.

False

While tax collection increased from $2,087 billion in 2008–2010 to $3,164 billion in 2017–2019, the net tax gap also grew from $344 billion to $480 billion over the same period. Despite increasing tax revenue, the IRS consistently fails to collect a significant amount of taxes legally owed, with the uncollected gap growing larger over time. Closing the tax gap could be a meaningful part of reducing America’s fiscal imbalance.

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 2022, 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.