Search Penny Hill Press

Monday, March 28, 2011

Overview of the Federal Tax System

Molly F. Sherlock
Analyst in Economics

Donald J. Marples
Section Research Manager

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 deduction 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 policymakers 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 2011, Social Security taxes are levied on the first $106,800 of wages, with the wage cap adjusted annually for 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 FY2010, individual income taxes accounted for 42% of total federal revenue. Social Security taxes accounted for 40%. Corporate income taxes accounted for 9% while excise taxes accounted for 3%. Estate and gift, customs, and miscellaneous taxes accounted for the remaining 7% of total revenue. Over time, 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, effective 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.

Date of Report: March 15, 2011
Number of Pages: 30
Order Number: RL32808
Price: $29.95

Follow us on TWITTER at or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail
Penny Hill Press  or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.