The Composition of Federal Revenue Has Changed Over Time

Lawmakers have recently begun proposing different policy options that would change the U.S. tax system—ranging from wealth taxes to higher marginal income tax rates to increasing the estate tax. When discussing changes like these, it’s important to understand the composition of taxes under the current system.

Using data from the Office of Management and Budget, we can look at how the composition of federal revenue has changed over time. Several trends stand out: the increasing significance of both individual income taxes and payroll taxes as well as the decreasing significance of corporate income taxes and excise taxes.

But before pointing to these trends as proof for the need to raise taxes on a certain group of taxpayers, it’s crucial to know some of the underlying information.

Before 1941, excise taxes, such as gas and tobacco taxes, were the largest source of revenue for the federal government, comprising nearly one-third of government revenue in 1940. Excise taxes were followed by payroll taxes and then corporate income taxes.

Today, payroll taxes remain the second largest source of revenue. However, other sources have shifted in relative importance. Specifically, individual income taxes have become a central pillar of the federal revenue system, now comprising nearly half of all revenue. Following an opposite trend, corporate income and excise taxes have decreased relative to other sources.

Several policy changes contributed to these trends. For example, the growth in payroll taxes as a source of revenue reflects the implementation and expansion of Social Security and Medicare. One factor explaining the changes in individual and corporate income taxes is that more business income is now taxed under the individual income tax rather than the corporate income tax. The majority of companies in the United States are pass-through businesses and are not subject to the corporate income tax; they therefore pay individual income taxes instead.

Past decisions to change the tax code, such as creating payroll taxes or new forms of organizations, have led to changes in the composition of federal revenue. Awareness of these trends are important context for contemporary discussions of who pays taxes and how much.