Income Taxes Account for the Largest Share of Federal Revenue

October 24, 2013

Andrew Lundeen
Scott Hodge

Andrew Lundeen, Scott Hodge

In 1940, the year before America entered World War II, excise taxes—such as gas and cigarette taxes—were the largest source of revenues for the federal government, followed by Social Security payroll taxes, then corporate income taxes.

Today, payroll taxes are still the second largest share of tax revenues while excise taxes would hardly fund two weeks’ worth of federal spending. Collections from individual income taxes are now the number one source of revenues for Uncle Sam. Corporate income taxes have declined as a source of revenues since the 1950s for many reasons—including the fact that more business income is now taxed on individual tax returns than on corporate returns.

For more charts like the one below, see the second edition of our chart book, Putting a Face on America's Tax Returns.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

A payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue.

An excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.

A corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.