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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Congressional Research Service (CRS)

 

Overview of the Federal Tax System

Molly F. Sherlock, Specialist in Public Finance

Donald J. Marples, Specialist in Public Finance

January 23, 2014

https://www.fas.org/sgp/crs/misc/RL32808.pdf

[full-text, 29 pages]

 

Summary

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 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 2013, Social Security taxes are levied on the first $113,700 of wages. In 2014, the

Social Security wage base is inflation-adjusted to $117,000, 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 FY2012, individual income taxes accounted for 46% of total federal revenue. Social Security

taxes accounted for 35%. 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, 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.

 

This report will be updated on enactment of major changes in the federal tax system.

 

Contents

Federal Taxes: A Description ........................................................................................................... 1

The Structure of the Federal Individual Income Tax ................................................................. 1

Gross Income and Adjustments ........................................................................................... 3

Deductions and Exemptions ................................................................................................ 4

Tax Rates ............................................................................................................................. 5

Tax Credits .......................................................................................................................... 7

Alternative Minimum Tax ................................................................................................... 8

The Corporate Income Tax ........................................................................................................ 9

Payroll Taxes ........................................................................................................................... 11

Estate and Gift Tax .................................................................................................................. 11

Excise Taxes ............................................................................................................................ 13

Tax Statistics .................................................................................................................................. 14

Composition and Size of the Federal Tax System ................................................................... 14

The U.S. Fiscal Position Compared to Other Nations ............................................................. 16

Distribution of the U.S. Federal Tax Burden Across Income Classes ..................................... 17

Selected Tax Concepts ................................................................................................................... 18

Tax Expenditures ..................................................................................................................... 18

Capital Gains ........................................................................................................................... 19

Marriage Penalties and Bonuses .............................................................................................. 20

Tax Deferral ............................................................................................................................. 22

Depreciation ............................................................................................................................ 22

Forms of Business Organization .............................................................................................. 23

Taxes and Competitiveness ..................................................................................................... 24

 

Figures

Figure 1. Computing Taxable Income.............................................................................................. 2

Figure 2. Federal Revenue as a Percentage of GDP ...................................................................... 15

 

Tables

Table 1. Statutory Personal Exemptions and Standard Deductions ................................................ 4

Table 2. Statutory Marginal Tax Rates, 2013 ................................................................................... 6

Table 3. Corporate Tax Rate Schedule ............................................................................................. 9

Table 4. U.S. Fiscal Position Compared to Other Industrialized Nations, 2013 ............................ 16

Table 5. Average Federal Tax Rates for All Households: 2000 and 2010 ...................................... 17

Table 6. Largest Tax Expenditures for Individuals, FY2013 ......................................................... 18

 

 

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