Overview of the Federal Tax System in 2020




Overview of the Federal Tax System in 2020
Updated November 10, 2020
Congressional Research Service
https://crsreports.congress.gov
R45145




Overview of the Federal Tax System in 2020

Summary
This report describes the federal tax structure and system in effect for 2020. The report also
provides selected statistics on the tax system as a whole. Historical y, the largest component of
the federal tax system, in terms of revenue generated, has been the individual income tax. For
FY2020, an estimated $1.5 tril ion, or 47% of the federal government’s revenue, wil be collected
from the individual income tax. The corporate income tax is estimated to generate another $151
bil ion in revenue in FY2020, or approximately 5% of total revenue. Social insurance or payroll
taxes wil generate an estimated $1.3 tril ion, or 36% of revenue in FY2020. For 2019, it was
estimated that revenues wil be 16.3% of gross domestic product (GDP), slightly below the post-
World War II average of 17.2% of GDP.
The largest source of revenue for the federal government is the individual income tax. The federal
individual income tax is levied on an individual’s taxable income, which is adjusted gross income
(AGI) less deductions. Tax rates based on filing status (e.g., married filing jointly, head of
household, or single individual) determine the amount of tax liability. Income tax rates in the
United States are general y progressive, such that higher levels of income are typical y taxed at
higher rates. Once tentative tax liability is calculated, tax credits can be used to reduce tax
liability. Tax deductions and tax credits are tools available to policymakers to increase or decrease
the after-tax price of undertaking specific activities. Individuals with high levels of deductions
and credits relative to income may be required to pay the alternative minimum tax (AMT).
The federal government also levies taxes on corporations, wage earnings, and certain other goods.
Corporate taxable income is subject to tax at a flat rate of 21%. Social Security and Medicare tax
rates are, respectively, 12.4% and 2.9% of earnings. In 2020, Social Security taxes are levied on
the first $137,700 of wages. Medicare taxes are assessed against al wage income. Federal excise
taxes are levied on specific goods, such as transportation fuels, alcohol, and tobacco.
Looking at the tax system as a whole, several observations can be made. Notably, the composition
of revenues has changed over time. Corporate income tax revenues have become a smal er share
of overal tax revenues over time, while social insurance revenues have trended upward as a share
of total revenues. Social insurance revenues are a sizable component of the overal federal tax
system. Most taxpayers pay more in payroll taxes than income taxes. Many taxpayers pay social
insurance taxes but do not pay individual income taxes, having incomes below the amount that
would generate a positive income tax liability. From an international perspective, the U.S. federal
tax system tends to collect less in federal revenues as a percentage of GDP than other OECD
countries.
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Contents
The Federal Income Tax System ........................................................................................ 1
The Individual Income Tax ......................................................................................... 2
Gross Income and Adjustments............................................................................... 3
Filing Status and Deductions .................................................................................. 4
Tax Rates ............................................................................................................ 6
Tax Credits.......................................................................................................... 8
Alternative Minimum Tax.................................................................................... 10
The Corporate Income Tax ........................................................................................ 11
Corporate Income Earned Abroad ......................................................................... 13
Social Insurance and Retirement Payroll Taxes............................................................. 14
Estate and Gift Taxes ............................................................................................... 16
Excise Taxes ........................................................................................................... 16

Tax Statistics ................................................................................................................ 17
Taxes as a Share of the Economy ............................................................................... 17
Composition of Tax Revenue..................................................................................... 18
The Distribution of the Tax Burden ............................................................................ 19
International Comparisons ........................................................................................ 20
Concluding Remarks ..................................................................................................... 22

Figures
Figure 1. Federal Receipts by Source: 2019 and 2020 ........................................................... 2
Figure 2. Tax Returns Filed with Standard and Itemized Deductions, Estimates for 2017,
2018, and 2019 ............................................................................................................ 5
Figure 3. Visualization of the U.S. Individual Income Tax System .......................................... 9
Figure 4. Share of Taxpayers with Payroll Taxes Greater Than Income Taxes and Average
Payroll and Income Tax Rates, by Income Quintile 2020 .................................................. 15
Figure 5. Federal Revenue as a Percentage of GDP, 1945-2019 ............................................ 18
Figure 6. Composition of Federal Revenue........................................................................ 19
Figure 7. Shares of Income and Individual Income Taxes by Income Level, 2019
Projections ................................................................................................................ 20
Figure 8. Government Tax Revenue as a Percentage of GDP................................................ 21

Tables
Table 1. Statutory Marginal Tax Rates, 2020........................................................................ 7
Table 2. Maximum Tax Rate on Long-Term Capital Gains and Qualified Dividends,
2020........................................................................................................................... 8
Table 3. U.S. Fiscal Position Compared to Other Industrialized Nations, 2019 ........................ 21

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Contacts
Author Information ....................................................................................................... 22


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he U.S. federal tax system includes several elements. Income taxes are the primary
component, and the United States has an income tax that applies to the income of
T individuals and a separate income tax for corporations. Payroll taxes are levied on earned
income, with most of this revenue used to finance social insurance programs. The U.S. tax system
also includes an estate and gift tax, as wel as various excise taxes.
At the end of 2017, President Trump signed into law P.L. 115-97, which substantial y changed the
U.S. federal tax system. Consequently, the federal tax system in effect for 2020 differs from what
was in effect for 2017.1 Most of the changes to the individual income tax system in P.L. 115-97
are temporary and scheduled to expire at the end of 2025. Thus, under current law, after 2025, the
individual income tax system is slated to look like the system that was in effect for 2017. In
contrast, many of the changes made in P.L. 115-97 affecting corporations are permanent.
This report provides an overview of the federal tax system, including the individual income tax,
corporate income tax, payroll taxes, estate and gift taxes, and federal excise taxes, as in effect for
2020. Information on changes to the tax system enacted in the 2017 tax revision (P.L. 115-97) can
be found in CRS Report R45092, The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax
Law, coordinated by Molly F. Sherlock and Donald J. Marples.
The Federal Income Tax System
The federal income tax system has several components. The largest component, in terms of
revenue generated, is the individual income tax. In FY2019, the individual income tax generated
$1.7 tril ion in federal revenue (Figure 1). The Congressional Budget Office (CBO) has projected
that federal income tax revenues in FY2020 wil be $1.5 tril ion, with the decline due to the
economic effects of and policy response to the COVID-19 pandemic.2 In FY2019, nearly 50% of
federal revenue came from the individual income tax. In FY2020, it is projected that about 47%
of federal revenue wil be generated through the individual income tax. Similar to the individual
income tax, corporate tax revenues are expected to decline in FY2020, relative to FY2019 levels.
In FY2019, corporate tax receipts were $230 bil ion, or nearly 7% of federal revenue. In FY2020,
corporate tax receipts are expected to be $151 bil ion, less than 5% of federal revenue.3
The second-largest source of federal revenue is payroll taxes. In FY2019, payroll taxes generated
$1.2 tril ion in federal revenue (36% of the total revenue). This figure is projected to increase in
FY2020, to $1.3 tril ion (40% of total revenue). Receipts from other sources are also projected to
increase in FY2020 to $298 bil ion, from $271 bil ion in FY2019 (rising to 9% of total revenue
from 8%).

1 See CRS Report R45053, The Federal Tax System for the 2017 Tax Year, by Molly F. Sherlock and Donald J.
Marples.
2 Before the COVID-19 pandemic, the Office of Management and Budget estimated that for FY2020, approximately
$1.8 trillion, or 49% of the federal government’s revenue, would come from the individual income tax. It was estimated
the corporate income tax would generate another $264 billion in revenue in FY2020, or just over 7% of total revenue.
Social insurance or payroll taxes were expected generate an estimated $1.3 trillion, or 35% of revenue in FY2020.
Estimates indicate that the remainder of federal revenue collected in FY2020 was expected to come from excise taxes
(3%) or other sources (6%). Other sources include estate and gift taxes, customs duties and fees, and deposits of
earnings by the Federal Reserve System. Historical data on federal receipts by source can be found in T able 2.1 of the
Historical T ables published by the Office of Management and Budget (OMB), available at
https://www.whitehouse.gov/omb/historical-tables/.
3 FY2019 and FY2020 data can be found in Congressional Budget Office (CBO), An Update to the Budget Outlook:
2020 to 2030
, September 2, 2020, available at https://www.cbo.gov/publication/56517.
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Overview of the Federal Tax System in 2020

Figure 1. Federal Receipts by Source: 2019 and 2020

Source: Congressional Budget Office (CBO), An Update to the Budget Outlook: 2020 to 2030, September 2, 2020,
available at https://www.cbo.gov/publication/56517.
Notes: CBO’s projections of FY2020 revenues are based on federal receipts through July 2020. Other receipts
include excise taxes, Federal Reserve deposits, customs duties, estate and gift taxes, and miscel aneous fees.
The Individual Income Tax
The individual income tax is the largest source of revenue in the federal income tax system. Most
of the income reported on individual income tax returns is wages and salaries. CBO projects that
in 2020, 64% of total income reported on individual income tax returns wil be from salaries and
wages.4 A substantial portion of business income in the United States is taxed in the individual
income tax system. Pass-through businesses, including sole proprietorships, partnerships, S
corporations, and limited liability companies, general y pass business income through to the
business’s owners, where that income is taxed at individual income tax rates.5 Projections
indicated that in 2020, 9% of total income reported by individual taxpayers would be net business
income, including pass-through business income, farm, or Schedule E income.6 Another 13% of
taxable income is retirement-related, in the form of taxable pensions, annuities, IRA distributions
or taxable Social Security Benefits.7

4 Congressional Budget Office (CBO), An Update to the Budget Outlook: 2020 to 2030, September 2, 2020, available
at https://www.cbo.gov/publication/56517. See specifically the “ Detailed Individual Income T ax Projections in CBO’s
September 2020 Baseline.”
5 See CRS Report R43104, A Brief Overview of Business Types and Their Tax Treatment, by Mark P. Keightley.
6 In addition to business income, Schedule E income includes income or losses from rental property, royalties, estates,
and trusts.
7 Congressional Budget Office (CBO), An Update to the Budget Outlook: 2020 to 2030, September 2, 2020, available
at https://www.cbo.gov/publication/56517. See specifically the “ Detailed Individual Income T ax Projections in CBO’s
September 2020 Baseline.”
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Gross Income and Adjustments
To levy an income tax, income must first be defined. As a benchmark, economists often turn to
the Haig-Simons comprehensive income definition, which can differ from the measure of income
used in computing a taxpayer’s taxes. Under the Haig-Simons definition, taxable resources are
defined as changes in a taxpayer’s ability to consume during the tax year.8 Using this definition of
income, an employer’s contributions toward employee health insurance, for example, would be
counted toward the employee’s income. This income, however, is not included in the employee’s
taxable income under current tax law.
In practice, the individual income tax is based on gross income individuals accrue from a variety
of sources. Included in the individual income tax base are wages, salaries, tips, taxable interest
and dividend income, business and farm income, realized net capital gains, income from rents,
royalties, trusts, estates, partnerships, and taxable pension and annuity income.
Gross income for tax purposes excludes certain items, which may deviate from the Haig-
Simmons definition of income. For example, employer-provided health insurance, pension
contributions, and certain other employee benefits are excluded from income subject to tax.9
Employer contributions to Social Security are also excluded from wages. Amounts received under
life insurance contracts are excluded from income. Another exclusion from income is the interest
received on certain state and local bonds.10 Some forgiven debts and various other items are also
excluded from income for tax purposes.11
There are special rules for income earned as capital gains or dividends.12 Capital gains (or losses)
are realized when assets are sold.13 The tax base excludes unrealized capital gains.14 There are
reduced tax rates for certain capital gains and dividends (discussed below in the “Tax Rates”
section).15 As with ordinary income, there may be exclusions. For example, certain capital gains
on sales of primary residences are excluded from income.
Income from operating a business through a proprietorship, partnership, or smal business
corporation that elects to be treated similarly to a partnership (Subchapter S corporation), or
income from rental property, is also subject to the individual income tax.16 This income is the net

8 T he Haig-Simons comprehensive income definition was first developed in Robert Murray Haig, “T he Concept of
Income–Economic and Legal Aspects,” in The Federal Incom e Tax, ed. Robert Murray Haig (New York, NY:
Columbia University Press, 1921), pp. 1-28; and Henry C. Simons, Personal Incom e Taxation: The Definition of
Incom e as a Problem of Fiscal Policy
(Chicago, IL: University of Chicago Press, 1938). An overview of the concept
can be found in Jonathan Gruber, Public Finance and Public Policy, 2nd ed. (New York, NY: Worth Publishers, 2007).
9 Exclusions are a form of “tax expenditure.” T ax expenditures are revenue losses associated with targeted provisions
that move the income tax away from a “ theoretical normal” tax system.
10 See CRS Report RL30638, Tax-Exempt Bonds: A Description of State and Local Government Debt, by Grant A.
Driessen.
11 See CRS In Focus IF11535, The Tax Treatment of Canceled Mortgage Debt, by Mark P. Keightley.
12 See CRS Report 96-769, Capital Gains Taxes: An Overview, by Jane G. Gravelle; and CRS Report R43418, The
Taxation of Dividends: Background and Overview
, by Jane G. Gravelle and Molly F. Sherlock.
13 Capital losses are generally deductible against capital gains. T axpayers can also deduct up to $3,000 of capital losses
from ordinary income per tax year (the deduction is limited to $1,500 for married taxpayers filing separately).
14 Unrealized capital gains are also excluded at death. T his is discussed further in the “ Estate and Gift T axes” section
below.
15 Qualified dividends, which are generally dividends that have met certain holding period requirements, are taxed at
the same reduced rate as capital gains.
16 See CRS Report R43104, A Brief Overview of Business Types and Their Tax Treatment, by Mark P. Keightley.
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of gross receipts reduced by such deductible costs as payments to labor, depreciation, costs of
goods acquired for resale and other inputs, interest, and taxes.
A taxpayer’s adjusted gross income (AGI), the basic measure of income under the federal income
tax, is determined by subtracting “above-the-line” deductions from gross income.17 Above-the-
line deductions are available to taxpayers regardless of whether they itemize deductions or claim
the standard deduction. Above-the-line deductions may be claimed for, among other items,
contributions to qualified retirement plans by self-employed individuals, contributions to
individual retirement accounts (IRAs),18 interest paid on student loans, higher education tuition
expenses, and contributions to health savings accounts.19 Temporarily, in 2020, there is a $300
above-the-line deduction for charitable contributions.20
Filing Status and Deductions
Tax liability depends on the filing status of the taxpayer. There are four main filing categories:
married filing jointly, married filing separately, head of household, and single individual. The
computation of taxpayers’ tax liability depends on their filing status, as discussed further below.
The amount of the standard deduction also depends on filing status. Deductions are subtracted
before determining taxable income.
Taxpayers have a choice between claiming the standard deduction or claiming the sum of their
itemized deductions. The standard deduction amount depends on filing status. The 2020 standard
deduction for single filers is $12,400, while the standard deduction for married taxpayers filing
jointly is twice that amount, or $24,800. The standard deduction for a head of household is
$18,650. There is an additional standard deduction for the elderly (taxpayers age 65 and older)
and the blind.21 The standard deduction amount is indexed for inflation.22
When the sum of taxpayers’ itemized deductions exceeds the standard deduction, taxpayers may
choose to itemize. Deductions may be al owed for mortgage interest23 and charitable
contributions.24 Taxpayers may also claim up to $10,000 ($5,000 for married taxpayers filing
separately) in total deductions for state and local taxes (income, sales, or property taxes).25

17 A list of “above the line” deductions can be found in the Internal Revenue Code (IRC) §62.
18 See CRS Report RL34397, Traditional and Roth Individual Retirement Accounts (IRAs): A Primer, by Elizabeth A.
Myers.
19 See CRS Report R45277, Health Savings Accounts (HSAs), by Ryan J. Rosso.
20 See CRS Insight IN11420, Temporary Enhancements to Charitable Contributions Deductions in the CARES Act, by
Jane G. Gravelle.
21 T he additional standard deduction for married taxpayers filing jointly is $1,300 per spouse that is either blind or
elderly (or $2,600 if both blind and elderly). For single and head of household taxpayers, the additional standard
deduction is $1,650 (or $3,300 if both blind and elderly).
22 Beginning after 2018, the standard deduction will be indexed for inflation using the Chained Consumer Price Index
(C-CPI-U). For background information, see CRS Report R43347, Budgetary and Distributional Effects of Adopting
the Chained CPI
, by Donald J. Marples.
23 See CRS In Focus IF11540, The Mortgage Interest Deduction, by Mark P. Keightley.
24 T he Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), for the 2020 tax year, suspends
limits on certain individual cash contributions to charities and allows a $300 deduction for nonitemizers. See CRS In
Focus IF11022, The Charitable Deduction for Individuals, by Margot L. Crandall-Hollick and Molly F. Sherlock; CRS
Insight IN11420, Tem porary Enhancements to Charitable Contributions Deductions in the CARES Act, by Jane G.
Gravelle; and CRS Report R45922, Tax Issues Relating to Charitable Contributions and Organizatio ns, by Jane G.
Gravelle, Donald J. Marples, and Molly F. Sherlock . T he CARES Act also relaxes limitations for corporate charitable
giving in 2020.
25 See CRS Report R46246, The SALT Cap: Overview and Analysis, by Grant A. Driessen and Joseph S. Hughes.
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TCJA Changes in Personal Exemptions and Deductions
The 2017 Tax Revision (P.L. 115-97) substantial y changed the individual income tax system by eliminating
personal exemptions and nearly doubling the standard deduction.
Before 2018, taxpayers deducted personal exemptions from their AGI when calculating taxable income. Personal
exemptions were al owed for taxpayers, their spouse, and any dependents. For 20 20, the personal exemption
amount would have been $4,300 per exemption, had the exemption not been temporarily eliminated in P.L. 115-
97.
Standard deduction amounts for 2018 would have been $6,500 for single filers, and $13,000 for married
taxpayers filing jointly, had P.L. 115-97 not been enacted. Nearly doubling the standard deduction meant that
fewer taxpayers itemized deductions. Additional limitations imposed on the deduction for state and local taxes
and mortgage interest deduction in P.L. 115-97 may have also contributed to fewer taxpayers claiming these
deductions.
The share of taxpayers itemizing deductions fel substantial y between 2017 and 2018, with lower itemization
rates continuing in 2019 (see Figure 2). For 2017, the Joint Committee on Taxation (JCT) estimated that 48.7
mil ion (32%) tax filers would itemize deductions. For 2019, the JCT estimated that 17.9 mil ion (11%) tax filers
would itemize deductions.
Figure 2. Tax Returns Filed with Standard and Itemized Deductions, Estimates
for 2017, 2018, and 2019

Source: CRS and Joint Committee on Taxation.
Some deductions can only be itemized and claimed in excess of a floor. For example, medical
expenses can be deducted to the extent they exceed 7.5% of AGI.26 Casualty and theft losses
attributable to federal y declared disasters can also be deducted in excess of 10% of AGI.27

26 T he T axpayer Certainty and Disaster T ax Relief Act of 2019, enacted as Division Q of the Further Consolidated
Appropriations Act, 2020 (P.L. 116-94), lowered the floor from 10% to 7.5% for all taxpayers for 2019 and 2020. After
2020, under current law, the floor is scheduled to increase to 10% of AGI for all t axpayers, but may be extended as part
of “tax extenders.”
27 T he T axpayer Certainty and Disaster T ax Relief Act of 2019 (P.L. 116-94, Division Q) modified the casualty loss
deduction for losses attributable to 2018 or 2019 disasters. T he modifications (1) waived the 10% of AGI floor; (2)
increased the $100 floor for each casualty to $500; and (3) allowed taxpayers not itemizing deductions to add the
deduction to their standard deduction. See CRS Report R45864, Tax Policy and Disaster Recovery, by Molly F.
Sherlock and Jennifer T eefy.
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Deduction for Qualified Business Income
The deduction for qualified business income is also taken in determining taxable income.28
Individual taxpayers can deduct 20% of qualified business income from a partnership, S
corporation, or sole proprietorship. Individual taxpayers can also deduct 20% of qualified Real
Estate Investment Trust (REIT) dividends, publicly traded partnership income, and cooperative
dividends. For certain taxpayers, the deduction is subject to two limitations. First, above threshold
amounts, the deduction begins to phase out for income from certain services, including health,
law, accounting, actuarial science, performing arts, consulting, athletics, financial services,
brokerage services, or investing and investments management services. These threshold amounts
are $315,000 for married taxpayers filing joint returns (adjusted for inflation to $326,600 in
2020), and $157,500 for al other taxpayers (adjusted for inflation to $163,300 in 2020). Second,
the deduction is also subject to limitation based on the taxpayer’s share of wages paid and
depreciable assets of the associated business. Specifical y, the deduction is limited to the greater
of 50% of W-2 wages, or 25% of W-2 wages plus 2.5% of the cost of qualified property. This
second limitation phases in over the same thresholds as the first limitation.
Tax Rates
The income tax system is designed to be progressive, with statutory marginal tax rates increasing
as income increases.29 At a particular statutory marginal tax rate, al individuals subject to the
regular income tax, regardless of their overal level of earnings, pay the same tax rate on taxable
income within the bracket.30 Once taxpayers’ incomes surpass a threshold level, placing them in a
higher marginal tax bracket, the higher marginal tax rate is only applied on income that exceeds
that threshold value. In 2020, the individual income tax system has seven marginal income tax
rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.31 These marginal income tax rates are applied
to taxable income to arrive at a taxpayer’s gross income tax liability.32 Threshold levels associated
with the rate brackets depend on filing status. Tax rates for 2020 are summarized in Table 1.
For most taxpayers, their average tax rate (individual income taxes paid divided by income) is
less than their statutory tax rate. This is due to the progressive nature of the tax system, coupled
with a variety of tax preference items (credits, deductions, exclusions, etc.). Many taxpayers,
particularly lower-income taxpayers, have negative average tax rates. Refundable tax credits,
such as the earned income tax credit (EITC) (discussed below), can lead to negative average tax
rates.

28 See CRS Report R46402, The Section 199A Deduction: How It Works and Illustrative Examples, by Gary Guenther;
and CRS In Focus IF11122, Section 199A Deduction for Pass-through Business Incom e: An Overview, by Gary
Guenther.
29 A marginal tax rate is the tax rate on the last dollar earned. For a discussion of various tax rate metrics, see CRS
Report R44787, Statutory, Average, and Effective Marginal Tax Rates in the Federal Individual Incom e Tax:
Background and Analysis
, by Molly F. Sherlock.
30 See CRS Insight IN11530, The Federal Income Tax: How Do Marginal Income Tax Rates Work in 2020? , by Margot
L. Crandall-Hollick.
31 For historical perspective on marginal tax rates, see CRS Report RL34498, Individual Income Tax Rates and Other
Key Elem ents of the Federal Individual Incom e Tax: 1988 to 2019 Tax Years
, by Gary Guenther.
32 T ake, for example, a single taxpayer with taxable income of $50,000. T hat taxpayer would fall in the 22% statutory
rate bracket. However, that taxpayer’s tax liability would be the sum of taxes applied to income falling within the first
three bracket s, the 10%, 12%, and 22% brackets. Specifically, the taxpayer would pay $987.50 (or 10%) on the first
$9,875 in taxable income, $3,630 (or 12%) on the next $30,250 in taxable income, and $2,172.50 (or 22%) on the last
$9,875 in income. T hus, the taxpayer’s total tax bill would be $6,790 on $50,000 in taxable income. Even though this
taxpayer is in the 22% tax bracket, their average tax rate is 13.6%.
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Table 1. Statutory Marginal Tax Rates, 2020
Tax Schedules by Filing Status
Married Filing Jointly

If taxable income is:
Then, tax is:
$0
to
$19,750
10% of the amount over $0
$19,750
to
$80,250
$1,975 plus 12% of the amount over $19,750
$80,250
to
$171,050
$9,235 plus 22% of the amount over $80,250
$171,050
to
$326,600
$29,211 plus 24% of the amount over $171,050
$326,600
to
$414,700
$66,543 plus 32% of the amount over $326,600
$414,700
to
$622,050
$94,735 plus 35% of the amount over $414,700
$622,050 plus

$167,307.50 plus 37% of the amount over $622,050
Single
If taxable income is:
Then, tax is:
$0
to
$9,875
10% of the amount over $0
$9,875
to
$40,125
$987.50 plus 12% of the amount over $9,875
$40,125
to
$85,525
$4,617.50 plus 22% of the amount over $40,125
$85,525
to
$163,300
$14,605.50 plus 24% of the amount over $85,525
$163,300
to
$207,350
$33,271.50 plus 32% of the amount over $163,300
$207,350
to
$518,400
$47,367.50 plus 35% of the amount over $207,350
$518,400 plus

$156,235 plus 37% of the amount over $518,400
Heads of Households
If taxable income is:
Then, tax is:
$0
to
$14,100
10% of the amount over $0
$14,100
to
$53,700
$1,410 plus 12% of the amount over $14,100
$53,700
to
$85,500
$6,162 plus 22% of the amount over $53,700
$85,500
to
$163,300
$13,158 plus 24% of the amount over $85,500
$163,300
to
$207,350
$31,830 plus 32% of the amount over $163,300
$207,350
to
$518,400
$45,926 plus 35% of the amount over $207,350
$518,400 plus

$154,793.50 plus 37% of the amount over $518,400
Source: Internal Revenue Code.
Certain higher-income individuals may be subject to the alternative minimum tax (AMT). There
are two marginal tax rates under the AMT, 26% and 28%, that are applied to an expanded income
base. The AMT is discussed in further detail below.
Tax Rates on Capital Gains and Dividends
As was noted above, income earned from long-term capital gains and qualified dividends may be
taxed at lower rates. The rate on long-term capital gains and qualified dividends can be 0%, 15%,
or 20%, depending on the taxpayer’s taxable income and filing status. The rates are linked to the
statutory rate brackets that were in effect before P.L. 115-97 was enacted, such that the 20% rate
applies to taxpayers that would have been in the 39.6% bracket (under the pre-P.L. 115-97 rate
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structure). Taxpayers that would have been in the 25%, 28%, 33%, and 35% tax brackets under
the former rate structure face a 15% tax rate on long-term capital gains and qualified dividends,
whereas the rate is 0% for taxpayers that would have been in the 10% and 15% tax brackets under
the former rate structure. The taxable income thresholds for long-term capital gains and qualified
dividends in 2020 are summarized in Table 2.
Table 2. Maximum Tax Rate on Long-Term Capital Gains
and Qualified Dividends, 2020
Married Filing Jointly
Single
Heads of Households
Taxable Income
Tax Rate
Taxable Income
Tax Rate
Taxable Income
Tax Rate
Less than $80,000
0% Less than $40,000
0% Less than $53,600
0%
$80,000 to $496,600
15% $40,000 to $441,450
15% $53,600 to $469,050
15%
Above $496,600
20% Above $441,450
20% Above $469,050
20%
Source: Internal Revenue Code.
Net Investment Income
Certain higher-income individuals may be subject to an additional 3.8% tax on net investment
income. Specifical y, the tax applies to the lesser of (1) net investment income, or (2) the amount
by which modified AGI exceeds fixed threshold amounts.33 The fixed threshold amounts are
$250,000 for taxpayers filing jointly and $200,000 for other filers.34 The net-investment-income
tax increases the maximum tax rate on capital gains and dividends to 23.8%. The maximum rate
on other investment income, including interest, annuities, royalties, and rent, is 40.8%.
Tax Credits
After a taxpayer’s tax liability has been calculated, tax credits are subtracted from gross tax
liability to arrive at a final tax liability (see Figure 3). Tax credits offset tax liability on a dollar-
for-dollar basis. There are two different types of tax credits: refundable and nonrefundable. If a
tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives the credit
(or a portion of the credit) as a refund. If credits are not refundable, then the credit is limited to
the amount of tax liability. In most cases, unused credits cannot be carried forward to offset tax
liability in future tax years. Some credits are phased out as income rises to limit or eliminate
benefits for higher-income taxpayers.


33 Modified AGI is AGI increased by the amount excluded from income as foreign earned income.
34 T he threshold amount is $125,000 for married taxpayers filing separate returns. T hese threshold amounts are not
adjusted for inflation.
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Figure 3. Visualization of the U.S. Individual Income Tax System

Source: This graphic was previously published as CRS Infographic IG10020, The U.S. Individual Income Tax System, 2020, by Mol y F. Sherlock.
CRS-9

Overview of the Federal Tax System in 2020

Tax credits that are refundable or have a refundable portion include the earned income tax credit
(EITC)35 and the child tax credit (CTC).36 The American Opportunity Tax Credit (AOTC), a tax
credit for tuition expenses, also has a refundable portion.37 The health insurance premium tax
credit is another refundable credit.38 Temporary law enacted as part of the Coronavirus Aid,
Relief, and Economic Security (CARES) Act (P.L. 116-136) created a one-time refundable tax
credit—the 2020 Recovery Rebate.39
A nonrefundable tax credit can be claimed for child and dependent care expenses.40 There are also
tax credits for other purposes, such as education.41
Tax credits add to the complexity of the tax system for various reasons. For one, tax credits can
cause effective marginal tax rates to differ from statutory marginal tax rates for many taxpayers.42
For example, the earned income tax credit (EITC) phases in as income increases, reducing a
taxpayer’s marginal tax rate. At higher income levels, as the credit phases out, the taxpayer faces
a higher marginal tax rate during that phaseout range. Thus, effective marginal tax rates can be
less than or greater than statutory rates. Tax credits can also pose administrative chal enges.43
Alternative Minimum Tax
Individuals may also pay tax under the alternative minimum tax (AMT). The AMT applies lower
tax rates to a broader income base. The policy goal of the AMT is to prevent certain higher-
income taxpayers from using the graduated personal income tax rate structure and tax preferences
to avoid paying sufficient amounts of taxes.44

35 See CRS Report R43805, The Earned Income Tax Credit (EITC): How It Works and Who Receives It, by Margot L.
Crandall-Hollick, Gene Falk, and Conor F. Boyle; CRS Report R44057, The Earned Incom e Tax Credit (EITC): An
Econom ic Analysis
, by Margot L. Crandall-Hollick; CRS Report R44825, The Earned Incom e Tax Credit (EITC): A
Brief Legislative History
, by Margot L. Crandall-Hollick; and CRS Report R43873, The Earned Incom e Tax Credit
(EITC): Adm inistrative and Com pliance Challenges
, by Margot L. Crandall-Hollick.
36 See CRS Report R41873, The Child Tax Credit: Current Law, by Margot L. Crandall-Hollick; CRS In Focus
IF11077, The Child Tax Credit, by Margot L. Crandall-Hollick; and CRS Report R45124, The Child Tax Credit:
Legislative History
, by Margot L. Crandall-Hollick.
37 See CRS Report R42561, The American Opportunity Tax Credit: Overview, Analysis, and Policy Options, by Margot
L. Crandall-Hollick.
38 See CRS Report R44425, Health Insurance Premium Tax Credits and Cost-Sharing Subsidies, by Bernadette
Fernandez.
39 See CRS Insight IN11282, COVID-19 and Direct Payments to Individuals: Summary of the 2020 Recovery
Rebates/Econom ic Im pact Payments in the CARES Act (P.L. 116 -136)
, by Margot L. Crandall-Hollick; and CRS
Insight IN11270, COVID-19 and Direct Paym ents to Individuals: Estim ated Im pact of Recovery Rebates in H.R. 748
on Fam ily Incom es
, by Conor F. Boyle and Jameson A. Carter.
40 See CRS Report R44993, Child and Dependent Care Tax Benefits: How They Work and Who Receives Them , by
Margot L. Crandall-Hollick.
41 See CRS Report R41967, Higher Education Tax Benefits: Brief Overview and Budgetary Effects, by Margot L.
Crandall-Hollick.
42 See CRS Report R44787, Statutory, Average, and Effective Marginal Tax Rates in the Federal Individual Income
Tax: Background and Analysis
, by Molly F. Sherlock.
43 See CRS Report R43873, The Earned Income Tax Credit (EITC): Administrative and Compliance Challenges, by
Margot L. Crandall-Hollick.
44 See CRS Report R44494, The Alternative Minimum Tax for Individuals: In Brief, by Donald J. Marples.
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Overview of the Federal Tax System in 2020

To calculate the AMT, an individual first adds back various tax items, including certain itemized
deductions and business tax preferences, to regular taxable income.45 This grossed-up amount
becomes the income base for the AMT.
The AMT exemption is subtracted from the AMT’s income base. For 2020, the AMT exemption
is $113,400 for married taxpayers filing a joint return, $56,700 for married taxpayers filing
separate returns, and $72,900 for al other individual tax filers.46 These exemption amounts are
indexed for inflation. The AMT exemption is reduced by 25% of the amount by which a
taxpayer’s AMT taxable income exceeds certain threshold amounts. In 2020, the AMT exemption
amount begins to phase out at $1,036,800 for married taxpayers filing a joint return and $518,400
for al other individual tax filers.
A two-tiered rate structure of 26% and 28% is assessed against AMT taxable income.47 The
taxpayer compares his AMT tax liability to his regular tax liability and pays the greater of the
two. Most nonrefundable personal tax credits are al owed against the AMT. Few taxpayers are
subject to the individual AMT. For 2019, JCT estimated that roughly 200,000 tax filers paid the
AMT (nearly 174 mil ion return were filed).48
The Corporate Income Tax
The corporate income tax general y only applies to C corporations (also known as regular
corporations). These corporations—named for Subchapter C of the Internal Revenue Code (IRC),
which details their tax treatment—are general y treated as taxable entities separate from their
shareholders.49 That is, corporate income is taxed once at the corporate level according to the
corporate income tax system. When corporate dividend payments are made or capital gains are
realized, income is taxed again at the individual-shareholder level according to the individual tax
system (discussed above). In contrast, noncorporate businesses, including S corporations50 and
partnerships,51 pass their income through to owners who pay taxes. Collectively, these
noncorporate business entities are referred to as pass-throughs. For these types of entities,
business income is taxed only once, at individual income tax rates. As discussed above, taxpayers
may be al owed to claim a 20% deduction from certain income earned by pass-through
businesses.

45 For example, the income tax base for the AMT does not allow a deduction for state and local taxes paid.
46 Internal Revenue Service, Internal Revenue Procedure 2019-44, November 8, 2019, available at https://www.irs.gov/
pub/irs-drop/rp-19-44.pdf.
47 T he 28% rate bracket threshold for 2019 is $97,400 for married taxpayers filing separate returns and $194,800 for all
other taxpayers.
48 Joint Committee on T axation, Overview Of The Federal Tax System As In Effect For 2019, JCX-9-19, Washington,
DC, March 9, 2019.
49 See CRS Report R43104, A Brief Overview of Business Types and Their Tax Treatment, by Mark P. Keightley.
50 An S corporation is a closely held corporation that elects to be treated as a pass-through entity for tax purposes. S
corporations are named for Subchapter S of the IRC, which details their tax treatment. By electing S corporation status,
a business is able to combine many of the legal and business advantages of a C corporation with the tax advantages of a
partnership. See CRS Report R43104, A Brief Overview of Business Types and Their Tax Treatm ent, by Mark P.
Keightley.
51 A partnership is a joint venture consisting of at least two partners organized to operate a trade or business with each
partner sharing profits, losses, deductions, credits, and the like. T he most common partnerships include general
partnerships, limited liabilit y partnerships, limited partnerships, publicly traded partnerships, and electing large
partnerships. For more information, see CRS Report R43104, A Brief Overview of Business Types and Their Tax
Treatm ent
, by Mark P. Keightley.
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Overview of the Federal Tax System in 2020

The corporate income tax is designed as a tax on corporate profits (also known as net income).
Broadly defined, corporate profit is total income minus the cost associated with generating that
income.52 Business expenses that may be deducted from income include employee compensation;
the decline in value of machines, equipment, and structures (i.e., depreciation); general supplies
and materials; advertising; and interest payments (subject to certain limitations).53 Businesses
may also be al owed 100% first-year depreciation or to expense the costs of certain property.54
The corporate income tax also al ows for a number of other special deductions, credits, and tax
preferences that reduce taxes paid by corporations. Oftentimes, these provisions are intended to
promote particular policy goals (promoting charitable giving or encouraging investment in
renewable energy, for example). A corporation’s tax liability can be calculated as follows:
Taxes = [(Total Income – Deductible Expenses) × Tax Rate] – Tax Credits.
Some corporations experience net operating losses (NOLs), which occur when total income less
expenses is negative.55 Under permanent law, losses arising after 2017 can general y be “carried
forward” indefinitely, and used to offset future tax liability. The NOL deduction is general y
limited to 80% of taxable income.56 Temporary law enacted as part of the Coronavirus Aid,
Relief, and Economic Security (CARES) Act (P.L. 116-136) al ows for NOLs generated in
taxable years beginning after December 31, 2017, and before January 1, 2021, to be carried back
for up five years and suspends the limit to 80% of taxable income for taxable years beginning
before January 1, 2021.57
The corporate income tax rate is a flat 21%. Thus, tax liability before applying tax credits is
general y calculated as 21% of taxable income. Corporate tax liability can be reduced by claiming
corporate tax credits. Credits claimed by corporations include the research credit,58 the low-

52 T he primary components of business income are revenues generated from the sale of goods and services. Other
income sources include investment income, royalties, rents, and capital gains.
53 T he 2017 tax revision (P.L. 115-97) limits interest payments, with the limitation generally set at 30% of adjusted
taxable income. T he limitation does not apply to small businesses with average gross receipts of $25 million or less or
to certain regulated public utilities. T emporary law enacted as part of the Coronavirus Aid, Relief, and Economic
Security (CARES) Act (P.L. 116-136) relaxes the limitation to 50% of adjusted taxable income for tax years 2019 and
2020. See CRS Insight IN11287, Lim its on Business Interest Deductions Under the Coronavirus Aid, Relief, and
Econom ic Security (CARES) Act
, by Jane G. Gravelle.
54 See CRS Report RL31852, The Section 179 and Section 168(k) Expensing Allowances: Current Law and Economic
Effects
, by Gary Guenther.
55 See CRS Report R46377, The Tax Treatment and Economics of Net Operating Losses, by Mark P. Keightley.
56 T here are special rules for farming and insurance company losses.
57 See CRS Insight IN11296, Tax Treatment of Net Operating Losses (NOLs) in the Coronavirus Aid, Relief, and
Econom ic Security (CARES) Act
, by Jane G. Gravelle.
58 See CRS Report RL31181, Research Tax Credit: Current Law and Policy Issues for the 114th Congress, by Gary
Guenther; and CRS In Focus IF10757, The 2017 Tax Law (P.L. 115-97) and Investm ent in Innovation, by Gary
Guenther.
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Overview of the Federal Tax System in 2020

income housing tax credit,59 certain energy credits,60 the new markets tax credit,61 the work
opportunity tax credit,62 and an employer credit for paid family and medical leave.63
In broad economic terms, the base of the corporate income tax is the return to equity capital.
Income produced by corporate capital investment includes that produced by corporate investment
of borrowed funds (debt), and that produced by investment of equity, or funds provided by
stockholders. The deductibility of certain items makes it such that the corporate income tax
applies largely to equity capital. Specifical y, wages are tax deductible, so labor’s contribution to
corporate revenue is excluded from the corporate tax base. Additional y, profits from debt-
financed investment are paid out as interest, which is partial y deductible. To the extent that
interest is deductible, the return to debt capital is excluded from the corporate tax base. Equity
investments are financed by retained earnings and the sale of stock. The income equity
investment generates is paid out as dividends and the capital gains that accrue as stock inc reases
in value. Neither form of equity income is general y deductible. Thus, the base of the corporate
income tax is largely the return to equity capital.
With the base of the corporate tax being largely equity income, the flow of capital out of the
corporate sector and other economic adjustments probably cause the burden of the tax to spread
to al owners of capital: owners of unincorporated business, bondholders, and homeowners. In
analyzing the incidence of the corporate tax, the Congressional Budget Office (CBO) and JCT
general y distribute most of the burden to owners of capital, with a smal er portion fal ing on
labor income.64 Since owners of capital tend to be in higher income groups, and most of the
corporate tax burden fal s on capital, the corporate tax is widely viewed as being progressive.
Corporate Income Earned Abroad65
There are a number of rules governing the taxation of foreign-source income earned by U.S.
corporations. The United States has a quasiterritorial tax system (pure territorial tax systems tax
only income earned within a country’s borders). In general, dividends received by U.S. corporate
shareholders from their controlled foreign corporations (CFCs) are eligible for a 100% dividends-
received deduction. However, certain forms of passive or easily shifted income are taxed in the
year earned—under subpart F. In addition, global intangible low-taxed income (GILTI) is taxed at
10.5%.66 A deduction is al owed for the foreign derived intangible income (FDII)—roughly the
share of intangible income that is attributed to foreign activity.

59 See CRS Report RS22389, An Introduction to the Low-Income Housing Tax Credit, by Mark P. Keightley; and CRS
In Focus IF11335, The Low-Incom e Housing Tax Credit: Policy Issues, by Mark P. Keightley.
60 See CRS Report R43453, The Renewable Electricity Production Tax Credit: In Brief, by Molly F. Sherlock; CRS In
Focus IF10479, The Energy Credit: An Investm ent Tax Credit for Renewable Energy, by Molly F. Sherlock; and CRS
In Focus IF11455, The Tax Credit for Carbon Sequestration (Section 45Q) , by Angela C. Jones and Molly F. Sherlock.
61 See CRS Report RL34402, New Markets Tax Credit: An Introduction, by Donald J. Marples and Sean Lowry.
62 See CRS Report R43729, The Work Opportunity Tax Credit, by Benjamin Collins and Sarah A. Donovan.
63 T his credit is available for wages paid in 2018, 2019, and 2020. See CRS In Focus IF11141, Employer Tax Credit for
Paid Fam ily and Medical Leave
, by Molly F. Sherlock.
64 See CRS In Focus IF10742, Who Pays the Corporate Tax?, by Jane G. Gravelle.
65 See CRS Report R45186, Issues in International Corporate Taxation: The 2017 Revision (P.L. 115 -97), by Jane G.
Gravelle and Donald J. Marples.
66 T he GILT I tax rate is 10.5% in 2018 and through 2025. After 2025, the GILT I tax rate is scheduled to increase to
13.125%.
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Current law also contains a general antiabuse provision whose focus is primarily on U.S.
subsidiaries of foreign parents, although it applies in general to al related parties. Unlike Subpart
F or the GILTI provision, the base erosion and antiavoidance tax (BEAT) is not aimed at
including income but at disal owing deductions for certain “base erosion” payments made by U.S.
parents to their foreign subsidiaries that historical y have been used to shift profits out of the
United States. BEAT imposes a minimum tax which is equal to 10%, in 2020, of the sum of
taxable income and base erosion payments on corporations with average annual gross receipts of
at least $500 mil ion over the past three tax years and with deductions attributable to outbound
payments exceeding 3% of overal deductions.67
Social Insurance and Retirement Payroll Taxes
Payroll taxes are used to fund specific programs, largely Social Security and Medicare.68 Social
Security and Medicare taxes are general y paid at a combined rate of 15.3% of wages, with 7.65%
being paid by the employee and employer alike.69
The Social Security part of the tax, or the old age, survivors, and disability insurance (OASDI)
tax, is 6.2% for both employees and employers (12.4% in total).70 In 2020, the tax applies to the
first $137,700 in wages. This wage base is adjusted annual y for inflation.
The Medicare portion of the tax, or the Medicare hospital insurance (HI) tax, is 1.45% for both
employees and employers (2.9% in total).71 There is no wage cap for the HI tax (the Medicare HI
tax applies to al wage earnings). Certain higher-income taxpayers may be subject to an additional
HI tax of 0.9%. For married taxpayers filing jointly, combined wages above $250,000 are subject
to the additional 0.9% HI tax.72 The threshold for single and head of household filers is $200,000.
These threshold amounts are not indexed for inflation.
Employers may also be subject to a federal unemployment insurance payroll tax.73 This tax is
0.6% on the first $7,000 of wages.74 Federal unemployment insurance payrol taxes are used to
pay for the administrative costs of the unemployment insurance (UI) program. State UI taxes
general y pay for UI benefits.75
Most taxpayers pay more in payroll taxes than income taxes. For 2020, the Tax Policy Center
estimates that 66% of tax filing units wil have a payroll tax liability that exceeds income tax
liability.76 Taxpayers closer to the top of the income distribution are more likely to have an
income tax liability that exceeds payroll tax liability (see Figure 4).

67 T he BEAT tax rate increased from 5% in 2018 to 10% in 2019, and is scheduled to increase to 12.5% after 2025.
68 T he taxes are also known as Federal Insurance Contributions Act (FICA) taxes.
69 Self-employed taxpayers pay both the employer and employee share.
70 See CRS Report R42035, Social Security Primer, by Dawn Nuschler.
71 See CRS Report R40425, Medicare Primer, coordinated by Patricia A. Davis.
72 T he threshold amount for married taxpayers filing separately is $125,000.
73 See CRS In Focus IF10336, The Fundamentals of Unemployment Compensation, by Julie M. Whittaker and Katelin
P. Isaacs; and CRS Report R44527, Unem ployment Com pensation: The Fundamentals of the Federal Unem ploym ent
Tax (FUTA)
, by Julie M. Whittaker.
74 T he tax rate is 6% of total wages for each employee, up to $7,000. However, there is a federal credit of 5.4% for state
unemployment taxes, making the effective federal tax rate 0.6%.
75 See CRS Report RL33362, Unemployment Insurance: Programs and Benefits, by Julie M. Whittaker and Katelin P.
Isaacs.
76 T ax Policy Center, T20-0096 - Distribution of Federal Payroll and Income Taxes by Expanded Cash Income Level,
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Overview of the Federal Tax System in 2020

Figure 4. Share of Taxpayers with Payroll Taxes Greater Than Income Taxes and
Average Payroll and Income Tax Rates, by Income Quintile 2020

Source: CRS graphic using Tax Policy Center Data.
Notes: Income quintile breaks are 20% at $25,800, 40% at $51,500, 60% at $92,700, and 80% at $167,600 in
2019 dol ars. Income groups are determined using expanded cash income.
Most low- and middle-income taxpayers pay more in payroll taxes than in income taxes.77 The
average payroll tax rate across al taxpayers is estimated to be 6.9% for 2020. The average rate is
higher in the middle of the income distribution, and lower at the top of the income distribution.
The lower average payroll tax rate at the top of the income distribution is largely a consequence
of the wage base limit for the OASDI tax. Average income tax rates, in contrast, increase across
the income distribution. Refundable tax credits (discussed above) result in negative average

2020, March 17, 2020, available at https://www.taxpolicycenter.org/model-estimates/distribution-federal-payroll-and-
income-taxes-march-2020/t20-0096-distribution.
77 T ax Policy Center, T20-0103 - Distribution of Federal Payroll and Income Taxes by Expanded Cash Income
percentile, 2020
, March 17, 2020, available at https://www.taxpolicycenter.org/model-estimates/distribution-federal-
payroll-and-income-taxes-march-2020/t20-0103-distribution.
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income tax rates in the lowest two income quintiles. Only in the highest quintile does the average
income tax rate exceed the average payroll tax rate (see Figure 4).
Estate and Gift Taxes
Upon death, an individual’s estate may be subject to tax.78 The base of the federal estate tax is
general y property transferred at death, less al owable deductions and exemptions. An unlimited
marital deduction is al owed for property transferred to a surviving spouse. Other al owable
deductions include estate administration expenses and charitable bequests. The effective estate
tax exemption is $11.58 mil ion for 2020.79 The value of the estate over the exemption amount is
general y taxed at a rate of 40%.80
The federal gift tax operates alongside the estate tax to prevent individuals from avoiding the
estate tax by transferring property to heirs before dying. For 2020, the first $15,000 of gifts from
one individual to another is excluded from taxation and does not apply to the lifetime
exemption.81 Any amount over this annual exclusion lowers the effective lifetime estate tax
exemption.
The gift tax and estate tax are unified in that the same lifetime exemption amount applies to both
taxes ($11.58 mil ion in 2020). Being unified, taxable gifts reduce the exemption amount that is
available for estate tax purposes. The gift tax rate is 40%, the same as the top rate for the estate
tax, for gifts beyond the exemption amount.
Few taxpayers pay the estate tax. Through 2025, an estimated 0.06% of decedents wil pay the
estate tax.82 The estate tax is also progressive, up to the very top of the income distribution. For
taxpayers in the 95th to 99th percentile, the estate tax has been estimated to be 0.2% of cash
income in 2020.83 For taxpayers in the top 1% and top 0.1% of the income distribution, the estate
tax has been estimated to be 0.3% of cash income in 2020.
Excise Taxes
Excise taxes are levied on the consumption of goods and services rather than income. Unlike
sales taxes, they apply to particular commodities, rather than to broad categories. Historical y, the
federal government has levied excise taxes, but not a broad-based sales tax, instead leaving sales
taxes to the states as a revenue source.

78 See CRS Report R42959, Recent Changes in the Estate and Gift Tax Provisions, by Jane G. Gravelle.
79 Although estate tax rates are graduated, the exemption is applied in the form of a credit and offsets taxes applied at
the lower rates.
80 T he exemption amount is adjusted for inflation. For the most recent exemption level, see https://www.irs.gov/
businesses/small-businesses-self-employed/estate-tax.
81 A married couple could each give a child $15,000 for a total gift of $30,000. This $30,000 in gifts would not apply to
the lifetime exemption. Gifts can also be made to more than one child. T he exemption amount is indexed for inflation
in $1,000 increments.
82 T ax Policy Center, T17-0308 - Estate Tax Returns and Liability Under Current Law and the House and Senate
Versions of the Tax Cuts and Jobs Act, 2018-2027
, December 6, 2017, available at http://www.taxpolicycenter.org/
model-estimates/estate-tax-and-tax-cuts-and-jobs-act-dec-2017/t17-0308-estate-tax-returns-and.
83 T ax Policy Center, T20-0039—Average Effective Federal Tax Rates—All Tax Units, By Expanded Cash Income
Percentile, 2020
, February 26, 2020, available at https://www.taxpolicycenter.org/model-estimates/baseline-share-
federal-taxes-february-2020/t20-0039-average-effective-federal-tax.
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Federal excise taxes are levied on a variety of products. The col ection point of the tax varies
across products. For some goods, taxes are collected at the production level. Other excise taxes
are collected on retail sales. In terms of receipts, the single largest tax is the excise tax on
gasoline.84 Other prominent excise taxes are those on diesel and other fuels; trucks, trailers, and
tractors; aviation-related taxes and fees;85 excise taxes on beer, wine, and distil ed spirits;86 taxes
on tobacco products; Affordable Care Act (ACA) taxes and fees87 (e.g., insurance provider fee,88
branded pharmaceuticals fee); and taxes on firearms and ammunition.89
Most federal excise taxes are paid into federal trust funds devoted to specific federal activities, as
opposed to remaining in the federal budget’s general fund. Estimates for 2020 indicate that of the
$95 bil ion in anticipated excise tax revenue, approximately 68% wil support trust funds, with
the remainder being general fund revenue.90 The largest trust fund is the Highway Trust Fund.
Devoted revenue sources include excise taxes on fuels, trucks, and tires. Aviation-related excise
taxes support the Airport and Airway Trust Fund, the second-largest of the excise-tax-supported
trust funds.91 General fund excise taxes include taxes on alcohol and tobacco and ACA-related
excise taxes.
Excise taxes can result in consumers paying higher prices for goods and services. Overal ,
households from the lower part of the income distribution tend to pay a larger share of their
income in excise taxes than higher-income households.92 Thus, taken as a whole, federal excise
taxes are general y believed to be regressive. The degree of regressivity can vary for different
types of excise taxes. For example, tobacco excise taxes are estimated to be more regressive than
aviation-related excise taxes.93
Tax Statistics
Taxes as a Share of the Economy
Federal revenues are derived from several sources and have collectively ranged from roughly
one-fifth to one-seventh the size of the economy. Figure 5 displays total federal tax revenues and
major sources of federal tax revenue as percentages of gross domestic product (GDP) since 1945.

84 Congressional Budget Office, Revenue Projections, by Category, August 2019, available at https://www.cbo.gov/
about/products/budget-economic-data#3.
85 See CRS Report R44749, The Airport and Airway Trust Fund (AATF): An Overview, by Rachel Y. T ang and Bart
Elias.
86 See CRS Report R43350, Alcohol Excise Taxes: Current Law and Economic Analysis, by Sean Lowry.
87 See CRS In Focus IF10591, Taxes and Fees Enacted as Part of the Affordable Care Act, by Sean Lowry.
88 See CRS Report R43225, Patient Protection and Affordable Care Act: Annual Fee on Health Insurers, by Suzanne
M. Kirchhoff.
89 See CRS Report R45123, Guns, Excise Taxes, Wildlife Restoration, and the National Firearms Act, by R. Eliot
Crafton, Jane G. Gravelle, and William J. Krouse.
90 Office of Management and Budget, Historical T ables, T able 2.4, available at https://www.whitehouse.gov/omb/
budget/Historicals.
91 See CRS Report R44749, The Airport and Airway Trust Fund (AATF): An Overview, by Rachel Y. T ang and Bart
Elias.
92 T ax Policy Center Briefing Book, “Who Bears the Burden of Federal Excise T axes?” available at
http://www.taxpolicycenter.org/briefing-book/who-bears-burden-federal-excise-taxes. T he distribution of federal excise
taxes is estimated for the 2018 tax year.
93 Ibid.
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For 2019, it was estimated that revenues would be 16.7% of GDP, slightly below the post-World
War II average of 17.2% of GDP.
Since the mid-1940s, the individual income tax has been the largest single source of federal
revenue (business income may also be taxed under the individual income tax system, as
previously discussed in “The Individual Income Tax”). Between 2000 and 2010, however, the
individual income tax receipts decreased relative to the size of the economy, fal ing from nearly
10% of GDP in 2000 to just over 6% in 2010. Individual income tax receipts have subsequently
increased to 8% of GDP in 2019. Over time, the corporate income tax has fal en from the second-
to the third-largest source of revenue. In the late 1960s, corporate taxes were replaced by social
insurance and retirement taxes as the second-leading revenue source. Corporate receipts as a
share of GDP have fal en further in recent years. Excise taxes have also decreased as a share of
GDP over time.
Figure 5. Federal Revenue as a Percentage of GDP, 1945-2019

Source: CRS calculations using data from U.S. Office of Management and Budget, Budget of the U.S. Government,
Fiscal Year 2021, Historical Tables
(Washington: GPO, 2020).
Composition of Tax Revenue
The changing shares of federal revenues over time are more clearly shown in Figure 6. For
example, the corporate income tax accounted for roughly 28% of federal revenue in 1949, but
less than 7% in 2019.94 Excise tax revenue was roughly 3% of federal receipts in 2019, down
from 19% in 1949. In contrast, receipts for social insurance and retirement taxes have risen post-

94 See CRS Report R42113, Reasons for the Decline in Corporate Tax Revenues, by Mark P. Keightley. Historical data
on federal receipts by source can be found in T able 2.1 of the Historical T ables published by the Office of Management
and Budget (OMB), available at https://www.whitehouse.gov/omb/historical-tables/.
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World War II with the enactment of Social Security and Medicare and are now the second-largest
source of federal receipts at approximately 36% of federal revenue.
Figure 6. Composition of Federal Revenue
(Selected Years 1949-2019)

Source: CRS calculations using data from U.S. Office of Management and Budget, Budget of the U.S. Government,
Fiscal Year 2021, Historical Tables
(Washington: GPO, 2020).
The Distribution of the Tax Burden
The U.S. individual income tax system is general y progressive. As shown in Figure 7, taxpayers
with lower incomes tend to have a proportional y smal er share of the overal individual income
tax burden. JCT projections indicate that in 2019, taxpayers in lower income categories, on
average, had a negative share of individual income taxes.95 Thus, on average, these groups receive
more in refundable tax benefits than they pay in federal individual income taxes.96 For taxpayers
in income groups above $200,000, projections for 2019 show that their share of taxes paid
exceeds their share of income earned. About 50% of taxpayers fal into an income category below
$50,000. In contrast, just over 7% of filers fal into an income category above $200,000. Since
higher-income taxpayers pay a larger share of income taxes relative to their share of income, the

95 Projections of the distribution of income and income taxes in 2019 can be found in T able A-8 of Joint Committee on
T axation, Overview Of The Federal Tax System As In Effect For 201 9, JCX-9-19, Washington, DC, March 20, 2019.
96 Refundable tax benefits are the primary mechanism in the tax code that can reduce poverty. See CRS Report
R45971, The Im pact of the Federal Incom e Tax Code on Poverty, by Margot L. Crandall-Hollick, Gene Falk, and
Jameson A. Carter.
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system is general y progressive, and causes after-tax income to be more equal y distributed than
before-tax income.
The tax system as a whole is progressive, but not as progressive as the individual income tax
system. Payroll taxes and excise taxes tend to be regressive, with higher average tax rates paid by
taxpayers in lower income groups. Thus, taken together in evaluating the federal tax system as a
whole, payroll taxes and excise taxes offset some of the progressivity of the individual income
tax.97
Figure 7. Shares of Income and Individual Income Taxes by Income Level,
2019 Projections

Source: CRS and Joint Committee on Taxation (JCT).
Notes: The income concept used by JCT is AGI adjusted to more closely measure cash income.
International Comparisons
How the U.S. tax system compares to those in other countries is a perennial tax policy question.
Figure 8 shows revenue as a percentage of GDP for OECD countries. The average over the 1987-
2018 time period is shown, inside the band il ustrating the high and low for the period. Total U.S.
taxes as a percentage of GDP have historical y been below the average for OECD countries.98
Four countries have tended to have lower taxes as a percentage of GDP than the United States,
with most others tending to have higher taxes relative to the size of the economy. Note that such a
direct comparison can be difficult to interpret, as it does not take into account government
spending that reflects each country’s policy preferences or deficit/surplus levels that provide more
context.

97 Congressional Budget Office, The Distribution of Household Income, 2016, October 2020, available at
https://www.cbo.gov/publication/56575.
98 Organisation for Economic Co-operation and Development, Revenue Statistics 2019, Tax Revenue Trends in the
OECD
, December 5, 2019.
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Figure 8. Government Tax Revenue as a Percentage of GDP
OECD Countries, 1987-2018

Source: OECD Revenue Statistics.
Note: Government revenue includes al federal, state, and local tax col ections. The bars for each country
il ustrate the range over the 1987 through 2018 time period (range spanning from high to low).
Table 3 provides this additional context for the United States and the other major democratic
countries in the G-7. Among the G-7 countries, the United States has both the lowest revenue and
spending as a percentage of GDP and the highest deficit level in 2020.99
Table 3. U.S. Fiscal Position Compared to Other Industrialized Nations, 2019
Government Revenues as
Government Expenditures
Surplus/Deficit as a % of

a % of GDP
as a % of GDP
GDP
Canada
40.7
40.9
-0.2
France
52.1
54.4
-2.3
Germany
44.9
44.2
0.8
Italy
47.1
50.0
-2.9
Japan
36.1
38.2
-2.0
United Kingdom
39.0
41.0
-2.0
United States
31.4
38.1
-6.7
Source: OECD Economic Outlook Annex Tables.
Note: Government revenue and expenditures includes al federal, state, and local col ections (tax and nontax)
and spending.

99 T he relatively low level of revenue collections in the United States may be part ially explained by the lack of a
federal-level consumption tax (like a Value-Added T ax), which is a feature of the other countries’ tax systems.
Similarly, the level of government spending may be partially explained by the lack of federal provision of heal th care
that occurs in the other G-7 countries.
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Concluding Remarks
The U.S. federal tax system in 2020 looks substantively different than it did in 2017. The changes
enacted in P.L. 115-97 affected most parts of the tax system. Over the longer term, as tax policies
that were temporary in P.L. 115-97 expire, and delayed tax policies begin to phase in, Congress
may choose to consider whether expirations, phase-ins, or other delayed policies in P.L. 115-97
should be modified.
This report provides an overview of the federal tax system, as in effect in 2020. Information on
taxes relative to the size of the economy, the distribution of the tax burden, and how the U.S. tax
system compares to tax systems global y may provide context for consideration of future tax
policy changes.

Author Information

Molly F. Sherlock
Donald J. Marples
Specialist in Public Finance
Specialist in Public Finance



Acknowledgments
Joseph S. Hughes, Research Assistant, assisted in preparing and updating this report.

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
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under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
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