Income tax is one of the major ways of taxation to raise revenues for governments. While the origins of the income tax in the U.S. can be found in the time of the Civil War, it entered the U.S. Constitution with the 16th Amendment in 1913. Individual income tax is a tax on a broadly defined income of an individual. Corporate income tax is typically a tax on the net income of businesses organized as corporations. Payroll tax is similar to an income tax but it is imposed only on labor earnings (or labor income) and has both employee and employer portions. Taxes on income are imposed by federal, state and in some cases even local governments.
Individual income tax is the most important tax instrument for the federal government. It makes up almost half of all federal tax revenue. Corporate income tax is much smaller with less than 10% contribution to total federal tax revenue.
Composition of federal tax revenues by source in 2017 (from the Office of Management and Budget):
- 48% Individual income tax
- 35% Social insurance and retirement contributions
- 9% Corporate income tax
- 2% Excise taxes
- 6% Other
States may have separate individual income, or corporate income taxes. Seven states including Nevada do not have a state income tax. In addition, New Hampshire and Tennessee limit their state income tax to only dividend and interest income.
Federal individual income tax has a graduated rate structure, which means that tax rates on higher income levels are higher than the ones for the lower income levels. This makes the individual income tax a progressive tax. A tax is progressive when people with higher incomes pay a greater percentage of their incomes towards that tax than people with lower incomes. The top marginal individual income tax rate was 39.6% in 2017, but it was reduced to 37% in 2018 due to the Tax Cuts and Jobs Act of 2017.
Dr. Tosun is a Professor of Economics and Chair of the Department of Economics at the University of Nevada, Reno. He is also the Barbara Smith Campbell Distinguished Professor of Nevada Tax Policy. Dr. Tosun received his Ph.D. in Economics from the Maxwell School at Syracuse University. His main research and teaching expertise is in public finance.