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By the end of this section, you will be able to:

  • Differentiate among a regressive tax, a proportional tax, and a progressive tax
  • Identify the major sources of revenue for the U.S. federal budget

There are two main categories of taxes: those collected by the federal government and those collected by state and local governments. What percentage is collected and what that revenue is used for varies greatly. The following sections will briefly explain the taxation system in the United States.

Federal taxes

Just as many Americans erroneously think that federal spending has grown considerably, many also believe that taxes have increased substantially. The top line of [link] shows total federal taxes as a share of GDP since 1960. Although the line rises and falls, it typically remains within the range of 17% to 20% of GDP, except for 2009, when taxes fell substantially below this level, due to recession.

Federal taxes, 1960–2014

The graph shows five lines that represent federal taxes (as a percentage of GDP). Total federal tax receipts was around 17% in 1960 and dropped to around 17.5% in 2014. Individual income taxes were consistently between 7% and 10%, but rose to 8% in 2014. Payroll taxes rose from under 5% in 1960 to around 6% in the 1980s. It has remained virtually consistent since then. Corporate income taxes has always remained below 5%. Excise taxes were highest in 1960 at around 2%; in 2009, it was less than 1%.
Federal tax revenues have been about 17–20% of GDP during most periods in recent decades. The primary sources of federal taxes are individual income taxes and the payroll taxes that finance Social Security and Medicare. Corporate income taxes and social insurance taxes provide smaller shares of revenue. (Source: Economic Report of the President, 2015. Table B-21, https://www.whitehouse.gov/administration/eop/cea/economic-report-of-the-President/2015)

[link] also shows the patterns of taxation for the main categories of taxes levied by the federal government: individual income taxes, corporate income taxes, and social insurance and retirement receipts. When most people think of taxes levied by the federal government, the first tax that comes to mind is the individual income tax    that is due every year on April 15 (or the first business day after). The personal income tax is the largest single source of federal government revenue, but it still represents less than half of federal tax revenue.

The second largest source of federal revenue is the payroll tax    (captured in social insurance and retirement receipts), which provides funds for Social Security and Medicare. Payroll taxes have increased steadily over time. Together, the personal income tax and the payroll tax accounted for about 80% of federal tax revenues in 2014. Although personal income tax revenues account for more total revenue than the payroll tax, nearly three-quarters of households pay more in payroll taxes than in income taxes.

The income tax is a progressive tax    , which means that the tax rates increase as a household’s income increases. Taxes also vary with marital status, family size, and other factors. The marginal tax rates    (the tax that must be paid on all yearly income) for a single taxpayer range from 10% to 35%, depending on income, as the following Clear It Up feature explains.

How does the marginal rate work?

Suppose that a single taxpayer’s income is $35,000 per year. Also suppose that income from $0 to $9,075 is taxed at 10%, income from $9,075 to $36,900 is taxed at 15%, and, finally, income from $36,900 and beyond is taxed at 25%. Since this person earns $35,000, their marginal tax rate is 15%.

Questions & Answers

price elasticity of demand is the degree of responsiveness of a quantity demanded to the change in price of the commodity in question.
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it helps firm to produce products that will bring more profit
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When you make a Scedule of the demand you made
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It's one of the two branches of Economics that deal with the aggregate economy.
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alberto
What is differences between Microeconomics and Macroeconomic?
Bethrand
microeconomics focuses on the action of individual agents in the economy such as businesses, workers and household. while macroeconomics looks at the economy as a whole. it focuses on broad issues in the economy such as government deficit, economy growth, levels of exports and imports, and
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inflationary increase in prices
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a price floor of 24 imposed
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Fixed Costs per week Variable Costs per bear Rent & Rates of Factory Hire & machines Heating & Lighting Repayment of Bank Loan K100.00 K45.00 K5.00 K50.00 Materials Foam Wages K6.00 K1.00 K1.00 Total K200.00 K8.00
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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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