What are the sources of revenue for the federal government?
Roughly 80 percent comes from the individual income tax and the payroll taxes that fund social insurance programs (figure 1). Another 9 percent comes from the corporate income tax, and the rest is from a mix of sources.
Total revenues
In fiscal year (FY) 2016[1] the federal government collected revenues of $3.3 trillion—about 17.8 percent of GDP. Over the past 50 years, federal revenue has averaged 17.4 percent of GDP, ranging from 20.0 percent (in 2000) to 14.6 percent (most recently in 2008 and 2009).
Individual Income Tax
The individual income tax has been the largest single source of federal revenue since 1950, amounting to 47.3 percent of the total and 8.4 percent of gross domestic product (GDP) in 2016. In recent years, individual income tax revenue has climbed as high as 9.9 percent of GDP (in 2000) at the peak of the 1990s economic boom and dropped as low as 6.1 percent (in 2010) following the 2007-2009 Great Recession.
Payroll Taxes
The payroll taxes on wages and earnings that fund Social Security and the hospital insurance portion of Medicare make up the largest portion of social insurance receipts. Other sources include payroll taxes for the railroad retirement system and the unemployment insurance program and federal workers’ pension contributions. All told, social insurance levies represented 34.1 percent of federal revenue in 2016.
The creation of the Medicare program in 1965, combined with periodic increases in Social Security payroll taxes, caused social insurance receipts to grow from 1.6 percent of GDP in 1950 to 6.2 percent in 2009. A temporary reduction in employees’ share of Social Security taxes—part of the stimulus program following the financial meltdown—reduced social insurance receipts to 5.3 percent of GDP in 2011 and 2012. They remained below 6.0 percent of GDP in 2013 and 2014.
Corporate Income Tax
The tax on corporate profits yielded 9.2 percent of government revenue in 2016, a revenue source that has been trending downward. Revenue from the tax has fallen from an average of 3.7 percent of GDP in the late 1960s to an average of just 1.5 percent of GDP over the past five years.
Federal Excise Taxes
Taxes on purchases of a mélange of goods and services, including gasoline, cigarettes, alcoholic beverages, and airline travel, generated 2.9 percent of federal revenue in 2016. But these taxes, too, are on the wane: excise tax revenues have fallen steadily from an average of 1.7 percent of GDP in the late 1960s to an average of 0.5 percent over 2012–16.
Other Revenues
The federal government also collects revenue from estate and gift taxes, customs duties, earnings from the Federal Reserve System, and various fees and charges. Total, these sources generated 6.5 percent of federal revenue in FY 2015. They have averaged between 0.6 and 1.1 percent of GDP since 1965. In recent years, the figure has been on the high end of that range because of unusually high profits of the Federal Reserve Board related to its efforts to stimulate the economy since 2008.
Changes over time
The individual income tax has provided nearly half of total federal revenue since 1950, while other revenue sources have waxed and waned. Excise taxes brought in 19.0 per-cent of total revenue in 1950, but only about 3.0 percent in recent years. The share of revenue coming from the corporate income tax dropped from about a third of the to-tal in the early 1950s to just over a tenth in 2016. In contrast, payroll taxes provided a third of revenue in 2016, more than three times the share in the early 1950s.
[1] All years in entry are fiscal years.
Office of Management and Budget. Budget of the United States Government, Fiscal Year 2018, Historical Tables. Table 2.1. “Receipts by Source: 1934–2022” and Table 2.3. “Receipts by Source as Percentages of GDP: 1934–2022.”
Joint Committee on Taxation. 2014. Overview of the Federal Tax System as in Effect for 2014. JCX-25-14. Washington, DC: Joint Committee on Taxation.