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The key fact here is that the federal income tax is designed so that tax rates increase as income increases, up to a certain level. The payroll taxes that support Social Security and Medicare are designed in a different way. First, the payroll taxes for Social Security are imposed at a rate of 12.4% up to a certain wage limit, set at $118,500 in 2015. Medicare, on the other hand, pays for elderly healthcare, and is fixed at 2.9%, with no upper ceiling.

In both cases, the employer and the employee split the payroll taxes. An employee only sees 6.2% deducted from his paycheck for Social Security, and 1.45% from Medicare. However, as economists are quick to point out, the employer’s half of the taxes are probably passed along to the employees in the form of lower wages, so in reality, the worker pays all of the payroll taxes.

The Medicare payroll tax is also called a proportional tax    ; that is, a flat percentage of all wages earned. The Social Security payroll tax is proportional up to the wage limit, but above that level it becomes a regressive tax    , meaning that people with higher incomes pay a smaller share of their income in tax.

The third-largest source of federal tax revenue, as shown in [link] is the corporate income tax    . The common name for corporate income is “profits.” Over time, corporate income tax receipts have declined as a share of GDP, from about 4% in the 1960s to an average of 1% to 2% of GDP in the first decade of the 2000s.

The federal government has a few other, smaller sources of revenue. It imposes an excise tax    —that is, a tax on a particular good—on gasoline, tobacco, and alcohol. As a share of GDP, the amount collected by these taxes has stayed nearly constant over time, from about 2% of GDP in the 1960s to roughly 3% by 2014, according to the nonpartisan Congressional Budget Office. The government also imposes an estate and gift tax    on people who pass large amounts of assets to the next generation—either after death or during life in the form of gifts. These estate and gift taxes collected about 0.2% of GDP in the first decade of the 2000s. By a quirk of legislation, the estate and gift tax was repealed in 2010, but reinstated in 2011. Other federal taxes, which are also relatively small in magnitude, include tariffs collected on imported goods and charges for inspections of goods entering the country.

State and local taxes

At the state and local level, taxes have been rising as a share of GDP over the last few decades to match the gradual rise in spending, as [link] illustrates. The main revenue sources for state and local governments are sales taxes, property taxes, and revenue passed along from the federal government, but many state and local governments also levy personal and corporate income taxes, as well as impose a wide variety of fees and charges. The specific sources of tax revenue vary widely across state and local governments. Some states rely more on property taxes, some on sales taxes, some on income taxes, and some more on revenues from the federal government.

State and local tax revenue as a share of gdp, 1960–2014

The graph shows that total state and local revenue (as a percentage of GDP) was less than 8% in 1960. It has decreased a bit since 2013.
State and local tax revenues have increased to match the rise in state and local spending. (Source: Economic Report of the President, 2015. Table B-21, https://www.whitehouse.gov/administration/eop/cea/economic-report-of-the-President/2015)

Key concepts and summary

The two main federal taxes are individual income taxes and payroll taxes that provide funds for Social Security and Medicare; these taxes together account for more than 80% of federal revenues. Other federal taxes include the corporate income tax, excise taxes on alcohol, gasoline and tobacco, and the estate and gift tax. A progressive tax is one, like the federal income tax, where those with higher incomes pay a higher share of taxes out of their income than those with lower incomes. A proportional tax is one, like the payroll tax for Medicare, where everyone pays the same share of taxes regardless of income level. A regressive tax is one, like the payroll tax (above a certain threshold) that supports Social Security, where those with high income pay a lower share of income in taxes than those with lower incomes.

References

Burman, Leonard E., and Joel Selmrod. Taxes in America: What Everyone Needs to Know . New York: Oxford University Press, 2012.

Hall, Robert E., and Alvin Rabushka. The Flat Tax (Hoover Classics) . Stanford: Hoover Institution Press, 2007.

Kliff, Sarah. “How Congress Paid for Obamacare (in Two Charts).” The Washington Post: WonkBlog (blog), August 30, 2012. http://www.washingtonpost.com/blogs/wonkblog/wp/2012/08/30/how-congress-paid-for-obamacare-in-two-charts/.

Matthews, Dylan. “America’s Taxes are the Most Progressive in the World. Its Government is Among the Least.” The Washington Post: WonkBlog (blog). April 5, 2013. http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/05/americas-taxes-are-the-most-progressive-in-the-world-its-government-is-among-the-least/.

Questions & Answers

what does it indicate when there is an increase in supply
Sisanda Reply
cost of production might have decreased whereas price must have been increased also interest rate might have been lowered
kazim
it indicates that the demand for goods in the market is lesser than the supply caused by an increase in prices thereby leading to inflation
Angel
what is the the strength of using GDP
KEJI Reply
what is macro economics
Sana Reply
the branch of economics that focuses on board issue such as growth unemployment inflation and trade balance.
Ghazi
money in a modern economic
Vishal Reply
Use the table below answer questions the following question Variables R millions Current consumption expenditure by the general government 15 000 Indirect Taxes on products 5 000 Private consumption expenditure by households 10 000 Exports of goods and services to the rest of the world 5 0
Aphiwe Reply
an economy starts off with a GDP per capita of $5000. How large will the GDP per capita be if it grow at an annual rate of 2% for 20years
King Reply
5000*(1+0.02)*20=7,450 USD
Modek
Nice
Mike
how have total output abd output
_Mohd Reply
what are the different types of unemployment
Nina Reply
what is leakage
abdulkadir Reply
comprehensive examine the macro economic of the government
Divine
comprehensive examine the macro economic of the government and show graphically, algebraically and other how this objective compete with each other
Divine
economy of Bangladesh
Ajay Reply
join
Keshab
what do you know about the jaban economy
Goleen
the country is still poor but growing rapidly , the textile industry one of the most growing industry in this country also they are heavy dependence on agriculture, after pandemic don't know what happen there but I think their problems are the high number of population and corruption.
Modek
But Japan does not have corruption and its population is not large
Goleen
I was talking about Bangladesh.
Modek
oh sorry 😂 do you know any thing about japan economy
Goleen
Japanese economy one of the Grand 7 economy, highly developed free-market economy and the third largest in the world by nominal GDP, and GDP growth rate is not high less than 1%, they are facing difficulties during this pandemic and lacking in labour market because of population aging.
Modek
what about the GDP per capita? and how is the inflation rate of Japan and the economic policy which makes its economy strong
MICHAEL
thats great are you a student or a prof
Goleen
i am doing Master in Economic.
Modek
great iam a student for a second year of bach
Goleen
In 2020, the estimated gross domestic product per capita in Japan was around 40,146.07 U.S. dollars.(Statista) Inflation rate was in 2020( -0.2%) comparing to previous year so we can say they r suffering from Deflation.
Modek
discuss the fourth pillar of wages and price stability
NDERITU Reply
enlighten me please
Bongani
Do we have calculation in macroeconomics
Wilberforce Reply
yes
Nina
What will be the multiplier, when MPS is 0, 0.4, 0.6, and 1? What will it be when the MPC is 1, 0.90, 0.67, 0.50, and 0? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is 0.80? And If the MPC is 0.67?
Ayesha Reply
what are the side effects of government policies
narayan Reply
Government policy can influence interest rates, a rise in which increases the cost of borrowing in the business community. Higher rates also lead to decreased consumer spending. Lower interest rates attract investment as businesses increase production.
REHMA
if there is a negative technology shock to the economy in short run the firms production cost will go up and labor goes down and thus consumption and production will be lower than before. the government can spend to create jobs and central Bank can lower the interest rates
Dine
what are marlet prices
Jaheim Reply
price which includes net indirect taxes
Anish

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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