Taxation Freakonomic

Economics for Managerial Decisions

Topic: Taxation, Freakonomics

1. In percentage terms, what are the main sources of revenue for the federal government? How have these revenue sources changed over time?

The three main sources of federal tax revenue are individual income taxes, payroll taxes, and corporate income taxes; other sources of tax revenue include excise taxes, the estate tax, and other taxes and fees. 

Almost half of all federal revenue (46 percent) comes from individual income taxes.  The income tax is generally progressive:  higher-income households pay a larger share of their income in income taxes than lower-income households do.

Another 35 percent of revenue comes from payroll taxes, which are assessed on the wage or salary paychecks of almost all workers and used to fund Social Security, Medicare Hospital Insurance, and unemployment insurance.  By law, employers and employees split the cost of payroll taxes, but research has shown that employers pass their portion of the cost on to workers in the form of lower wages.

Payroll taxes as a whole are regressive:  they collect a higher percentage of total earnings from lower-income workers than higher-income ones.  One reason is that the Social Security component of the payroll tax applied only to a worker’s first $110,100 of earnings in 2012 ($113,700 in 2013).  Another reason is that payroll taxes do not apply to dividends, capital gains, or other unearned income, which constitutes a much greater portion of higher-income peoples’ earnings.

Corporate income taxes make up about 10 percent of federal revenue, with the remaining 9 percent coming from excise taxes, estate taxes, and other taxes.  Excise taxes are collected on the sale of certain goods (e.g., fuel, alcohol, and tobacco); they are intended to raise revenue and, in some cases, discourage consumption of the taxed product.  These made up about 3 percent of federal receipts in 2012. 

The estate tax is a tax on...