The Tax Base, or What Do We Tax?

The Government focuses on several different aspects of wealth for their revenue. Nearly half of the government’s revenue comes from income tax, which assesses a progressive marginal tax on a person’s entire income. The government also collects payroll taxes, which are a regressive marginal tax on a person’s wages. The third category of taxes that individuals will pay are excise taxes, which are usually a flat tax on the taxpayer’s spending.

Income Tax

The three categories of income, active income, passive income, and capital, are taxed two different ways. Active income, like wages, and passive income, like rent from a second property, are taxed with an aggressive progressive rate structure, while capital is taxed with only three different rates.

Income Tax for Active and Passive Income

Income tax for active income and passive income follows progressive marginal rates. The tax brackets (explained in How Much Do We Tax?) for unmarried individuals in 2019 are as follows:

  • $ 0 - 9,700: 10%

  • $ 9,701 - 39,475: 12%

  • $ 39,476 - 84,200: 22%

  • $ 84,201 - 160,725: 24%

  • $ 160,726 - 204,100: 32%

  • $ 204,101 - 510,300: 35%

  • $ 510,301 and up: 37%

Income Tax for Capital Income

Income tax is paid for capital when the asset (for example, a house) is actually sold, because until then the owner doesn’t have money to pay the tax and the asset might lose value the next year. When the asset is finally sold, tax is paid on the capital gains (the increase in value of the house since it was purchased). Capital gains are paid with the following structure:

  • $ 0 - 39,375: 0%

  • $39,376 - 434,550: 15%

  • 434,551 and up: 20%

Payroll Tax

Payroll Taxes are a regressive marginal tax on only wages. This tax is not assessed on passive income or any type of income other than wages. The payroll tax funds social security and medicare programs that provide benefits for retirees and people with disabilities.

The payroll tax is regressive and contains two tax brackets;

  • $0 to $132,900: 15.3% (taxing for both social security and medicare)

  • $132,900 and up: 2.9% (taxing only for medicare)

Most Americans’ entire incomes consist of wages, so most people effectively see an income tax that consists of the income tax and payroll tax combined. Because of the way the brackets are constructed, until a person earns about $62,000, they are actually paying more in payroll taxes than income taxes.

This tax is assessed in two ways; first, as a deduction from an employee’s paycheck and, second, as an additional amount paid by the employer (half of the above rates comes from each). This is a meaningless distinction, however, because the employee’s take-home is what they are ultimately concerned with and the total amount paid is what the employer is ultimately concerned with; whether it is the employee or employer who is taking the money out, it is the employee who is ultimately giving up wages in this tax.

Excise Taxes

Excise taxes are typically flat-rate taxes that are levied against certain goods when sold, like gasoline or tobacco products. Excise taxes consist of a small portion of the federal government’s revenues.

Next: Read What Don’t We Tax?