Key Concepts and Summary

Key Concepts and Summary

The two main federal taxes are individual income taxes and payroll taxes that provide funds for Social Security and Medicare; these taxes together account for more than 80% of federal revenues. Other federal taxes include the corporate income tax, excise taxes on alcohol, gasoline and tobacco, and the estate and gift tax. A progressive tax is one, like the federal income tax, where those with higher incomes pay a higher share of taxes out of their income than those with lower incomes. A proportional tax is one, like the payroll tax for Medicare, where everyone pays the same share of taxes regardless of income level. A regressive tax is one, like the payroll tax (above a certain threshold) that supports Social Security, where those with high income pay a lower share of income in taxes than those with lower incomes.

Glossary

corporate income tax

a tax imposed on corporate profits

estate and gift tax

a tax on people who pass assets to the next generation—either after death or during life in the form of gifts

excise tax

a tax on a specific good—on gasoline, tobacco, and alcohol

individual income tax

a tax based on the income, of all forms, received by individuals

marginal tax rates

or the tax that must be paid on all yearly income

payroll tax

a tax based on the pay received from employers; the taxes provide funds for Social Security and Medicare

progressive tax

a tax that collects a greater share of income from those with high incomes than from those with lower incomes

proportional tax

a tax that is a flat percentage of income earned, regardless of level of income

regressive tax

a tax in which people with higher incomes pay a smaller share of their income in tax