The Top Ten Sources of Personal Income

February 2, 2015

Alan Cole

Alan Cole

One thing I notice about the debates on both tax policy and income inequality is that a lot of people seem to have relatively hazy ideas about how income is earned in America, and how much of each kind of income there is. For example, if someone is earning $300,000 a year, where is their income likely to be coming from? How much revenue is drawn from capital gains taxes? And how is income distributed between corporate shareholders and workers? People don't tend to have very strong priors about the answers to these questions, because they simply haven't yet learned what the relative sizes of different sources of income actually are.

That's odd, because lot of these questions are actually pretty easy to answer. The IRS is good about publishing the data. Given that – and given the recent interest in personal income inequality, I decided to write a little bit about the different kinds of income people report on their tax returns. A longer paper – Sources of Personal Income – is here, but for a brief overview, you might want to check out the top ten sources of income:

Top Ten Sources of Total Income on U.S. Individual Income Tax Returns, 2012

Income Type

Amount (billions)

Salaries and Wages

$6,301

Capital Gains Less Losses

$623

Taxable Pensions and Annuities

$612

Partnerships and S-Corporation Net Income

$535

Business Net Income

$304

Dividends

$260

Taxable IRA Distributions

$231

Taxable Social Security Benefits

$224

Taxable Interest

$112

Unemployment Compensation

$71

Source: IRS SOI Table 1.3

The main essence of things is that we are mostly a nation of workers, and we earn – by far – the most income from salaries and wages. And then, loosely speaking, there are three other areas that play minor roles of about $800 billion to $900 billion each: retirement income, investment income, and business income.

For more on these sources of income, take a look at the paper.

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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.

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 capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment.