Security and Medicare (often referred to as social insurance taxes). Thesethree taxes account for 93 percent of federal revenues. Federal payroll taxesrose rapidly from the 1960s to the 1980s with the expansion of Social Se-curity and the introduction of Medicare, but as a share of GDP they haveleveled off since then. While receipts from the payroll taxes were increas-ing, those from the corporate income tax were declining as a percentage of GDP, leaving total revenues roughly ﬂat. The payroll taxes are earmarked toﬁnance rising current and future health and retirement beneﬁts; corporateincome taxes are not earmarked. Therefore, the ostensibly equal exchangeof corporate income tax for payroll tax receipts—the latter linked to higherhealth and retirement spending—arguably left the federal budget worse off for the long term.
Complexity of the Tax Code
The individual income tax is imposed on wages and salaries, returnsfrom savings, small business proﬁts, and other sources of income under agraduated rate structure.
In 2009, statutory or explicit tax rates rangedfrom 10 to 35 percent. A substantial share of low-income workers andfamilies pay no income tax because, with exemptions and the usual deduc-tions, their modest earnings are not subject to even the lowest rate. Thecorporate income tax imposes a rate of 35 percent on corporate proﬁts,with small corporations paying lower rates.Average tax rates—which are simply taxes paid divided by total income—are almost always lower than the statutory rates because they includethe effects of deductions and exemptions. Yet another important type of tax rate is the “marginal” rate, which is the rate a taxpayer pays on an ad-ditional dollar of income. For example, for a person earning $60,000 whopays $6,000 in federal income tax, the average tax rate is 10 percent. Butif this person is in the 25 percent federal tax bracket (and no other featuresof the tax code affect tax liability) then the rate on any additional incomeearned, the marginal rate, is 25 percent. Because marginal rates determinethe after-tax returns from work, savings, and investment, they affect thewillingness to undertake such activities.
For the typical individual income taxpayer, with moderate amounts of wage income and modest deductions from an owner-occupied home, theincome tax can be relatively simple. But for some taxpayers, particularlysmall business owners, the income tax is often quite complex. Federal taxrules spanned 70,320 pages in 2009—one measure of their complexity—three times more than in the 1970s (CCH Canadian Limited, 2009).In part the income tax is so intricate because “income” is difﬁcult todeﬁne and measure; partly for the same reason, the current income tax basedoes not reﬂect a consistent deﬁnition of income. Indeed, the current income