Where Does the Federal Government Get Its Revenue?

by Rob Bluey, Heritage Foundation: President Obama and Republicans in Congress continue to wage war over an extension of the payroll tax cut. But missing from the debate is any discussion of comprehensive tax reform that would eliminate payroll taxes altogether.

Social Security and Medicare payroll taxes are the second-largest source of federal revenue, surpassed only by personal income taxes. This week’s chart from Heritage’s 2011 Budget Chart Book depicts federal revenue by source.

That chart would look quite different if Heritage’s tax-reform plan were enacted into law. That plan, part of the Saving the American Dream proposal, prescribes a single, low rate for individuals, replacing all federal income taxes, payroll taxes, the death tax, and most excises.

The business tax code will also be replaced by a new flat business tax, thereby giving all businesses equal treatment and providing the framework for them to compete better in global markets.

This simplified system enables taxpayers to anticipate their tax burden and plan accordingly. The Heritage tax plan encourages economic growth through a lower rate and by removing multiple taxation on the same income. Because the plan taxes income spent on consumption, it eliminates the disincentives families currently face to build savings. Enacting the plan would result in greater economic freedom and opportunity, and it would encourage Americans to be proactive in building financial security for themselves and their families.

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