Where Does Federal Revenue Come From?
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Abstract
The past 75 years have seen marked changes in the sources of federal revenue. In 1934 excise taxes
accounted for almost half of all revenue, and income taxes were about one-fourth; payroll taxes
barely registered on the scale. Individual income taxes and payroll taxes now account for nearly
80 percent of federal revenue and corporate income tax revenue makes up about two-thirds of the
rest. This article discusses these changes in the shares of federal tax receipts by source from
1934 to 2006.
Introduction
The past 75 years have seen marked changes in the sources of federal revenue. In 1934 excise taxes
accounted for almost half of all revenue, and income taxes were about one-fourth; payroll taxes
barely registered on the scale. Social Security began collecting taxes in 1937 and quickly grew
to one-fourth of revenue in three years. By 1940, income taxes and excise taxes each accounted
for about one-third of tax receipts. The individual income tax’s share of revenue more than
tripled during World War II, and the corporate income tax’s share doubled. In 1945 the two
combined to bring in three-fourths of all federal revenue; excise taxes had fallen to 14 percent
of revenue, and payroll taxes were half that.
The share of revenue from individual income taxes has changed little since then, fluctuating between
40 percent and 50 percent. Meanwhile payroll taxes soared, while excise taxes plummeted and corporate
taxes became less important. The share of taxes coming from payroll taxes more than quadrupled
to between 35 percent and 40 percent, in large part because of periodic increases in Social Security
taxes and the 1965 creation of Medicare. After a brief resurgence in the 1950s, excise taxes steadily
waned, dropping to just 3 percent of all federal tax receipts in 2006. Corporate income taxes followed
a more erratic course, drifting downward from roughly one-third of revenue in the late 1940s and
early 1950s to less than half that in the 1970s. Since then corporate taxes have hovered around
10 percent of federal tax receipts, with marked dips during recessions in 1983, 1990, and 2001.
Other than those temporary fluctuations, however, the shares of taxes have been stable for two
decades.
Individual income taxes and payroll taxes now account for nearly 80 percent of federal revenue
and corporate income tax revenue makes up about two-thirds of the rest. Excise taxes, estate and
gift taxes, customs duties, and miscellaneous receipts bring in just 7 percent of federal revenue.
(End of excerpt. The complete report is available in PDF format.)
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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
