The Basics
The federal government collects roughly $5.2 trillion per year in revenue, primarily through taxes.
Where the Money Comes From
- Individual Income Taxes
~$2.6 trillion (~50%) - Payroll Taxes (Social Security & Medicare)
~$1.9 trillion (~36%) - Corporate Taxes
~$420 billion (~8%) - Other (excise taxes, tariffs, etc.)
~$300 billion (~6%)
Note that about 85% of all federal revenue comes from income and payroll taxes.
What Is Being Taxed
To understand the system, it is not enough to know who pays. It is also important to know what is being taxed.
1. Wages and Salaries
- Taxed through income taxes and payroll taxes
- Broadest and most stable tax base
- Paid by most working households
2. Investment Income (Capital Gains and Dividends)
- Includes gains from stocks, real estate, and businesses
- Typically taxed at lower rates than wages
- Often taxed only when assets are sold (deferral)
- More concentrated among higher-income households
3. Corporate Profits
- Taxed at the corporate level
- May be taxed again when distributed to individuals (dividends or capital gains)
These categories are taxed differently, which drives both how much revenue is raised and how the burden is distributed.
Who Pays — Income Taxes Only
(This is the statistic most often cited in public discussions)
- Top 1%
- Earn ~20% of income
- Pay ~40% of income taxes
- Top 10%
- Pay ~70% of income taxes
- Top 25%
- Pay ~85–90% of income taxes
- Top 50%
- Pay ~95–97% of income taxes
- Bottom 50%
- Pay ~2–3% of income taxes
This reflects a highly progressive income tax system.
Who Pays — All Federal Taxes
(A more complete picture)
- Top 1%
- Pay ~25–30% of total federal taxes
- Top 10%
- Pay ~55–60%
- Top 50%
- Pay ~95%
- Bottom 50%
- Pay ~5%
The system remains progressive overall, but less extreme than income tax alone suggests.
Why Payroll Taxes Matter
Payroll taxes change the picture in important ways:
- Apply only to wages, not investment income
- Are capped for Social Security
- Are paid by most workers
This makes them less progressive and more broadly shared across the population.
Policy Levers in Payroll Taxes
Payroll taxes are often treated as fixed, but they can be changed:
- Raise or remove the Social Security wage cap.
- Increase payroll tax rates.
- Apply payroll taxes to a broader set of income.
- Shift more of the burden toward higher earners.
These changes could generate meaningful additional revenue, but they directly affect a large share of the population and are politically sensitive.
Corporate Taxes: Scale and Tradeoffs
Corporate taxes generate about 8% of federal revenue, which limits how much they can move the overall deficit on their own.
How the U.S. Compares
- The U.S. federal corporate tax rate is 21%.
- With state taxes, the combined rate is in the mid-20% range.
- This is broadly in line with other advanced economies.
The Core Debate About Corporate Taxes
Arguments for higher corporate taxes:
- Corporations are profitable and can contribute more
- Helps fund government without directly taxing households
- Addresses perceptions of fairness
Arguments against:
- Capital is mobile; higher rates can shift investment
- Part of the burden falls on workers and wages over time
- The tax base can shrink through avoidance and global structuring
There is room to raise revenue—especially by limiting carveouts and tightening international rules—but the overall scale is constrained.
Capital Gains and Investment Income
Investment income plays an outsized role at higher income levels and is treated differently from wages.
Key Features
- Taxed at lower rates than ordinary income
- Taxes can be deferred until assets are sold
- Some gains may never be taxed if assets are held until death
The Core Debate
Arguments for higher capital gains taxes:
- Improves perceived fairness relative to wages
- Targets income concentrated at the top
- Can raise meaningful revenue
Arguments against:
- May discourage investment and risk-taking
- Investors may delay selling assets, reducing taxable gains
- Revenue is volatile and tied to market cycles
This is a meaningful lever, but not a stable or unlimited one.
What The Above Information Means
- The U.S. tax system is progressive overall, but not uniform
- Income taxes drive most of the progressivity
- Payroll taxes broaden the base and reduce that progressivity
- Corporate and investment taxes introduce tradeoffs between revenue, growth, and fairness
Key Context
- Federal revenue is about 18–19% of GDP
- Federal spending is about 23% of GDP
- The gap is the deficit, roughly $1.5–2 trillion per year
Taxes and the Deficit: What Is Possible
Taxes can play a meaningful role in reducing the deficit, but the scale matters.
Policy Levers
- Raise top income tax rates
- Increase taxes on capital gains and dividends
- Limit deductions, credits, and carveouts
- Adjust corporate taxes and international rules
- Reform payroll taxes (cap, rates, or base expansion)
Aggressive vs. Likely Outcomes
- Aggressive versions of these policies could raise hundreds of billions per year, potentially approaching the lower end of a trillion in optimistic scenarios
- More likely, politically feasible versions would raise less, often significantly less, due to compromises and behavioral responses
This gap between theoretical and practical outcomes is critical.
The Bottom Line and Call to Action
Taxes are part of the solution to the deficit—but not the entire solution.
Given the size of the deficits we face, closing the gap will likely require both higher taxes and changes to spending. Claims that the deficit can be closed by targeting a single group, including high earners, do not match the scale of the math. Even with aggressive tax changes, the math points in the same direction: focusing on any single category—whether corporations, high earners, or investment income—does not match the scale of the challenge.