Tax Trends and Federal Receipts for 2018

A recent report by the Joint Committee on Taxation (JCT) highlights some interesting tax trends over the last 75 years and makes important projections about federal tax receipts for 2018.[i]

For starters, the individual income tax is expected to account for 50.0% of Federal receipts in 2018.  This means, despite the many modifications made by the Tax Cuts and Jobs Act, the individual income tax will continue to be the largest source of revenue for the Federal government.

Historical tables maintained by the Office of Management and Budget show that the individual income tax represented 40% of Federal receipts in 1950 and has remained between 40-50% of Federal revenue for the last 75 years.

In contrast, corporate income taxes are projected to represent just 7.2% of Federal receipts in 2018. This is a drastic decline from 1950, when corporate income taxes accounted for over 30% of federal receipts.

This can partly be explained by looking at the type of business tax returns filed with the IRS over the last several decades.  In 1986, the last time a major overhaul of the tax code took place, the number of C corporation returns filed with the IRS was 2,602,301.  By 2015, that number was just 1,632,229.

Across the same time frame, S corporation returns went from 826,214 in 1986 to 4,487,336 in 2015 and non-farm sole proprietorship returns more than doubled.

Year C Corporations S Corporations Sole Proprietorship’s
1986 2,602,301 826,214 12,393,700
2000 2,184,795 2,860,478 17,902,791
2015 1,632,229 4,487,336 25,226,245

Graph showing types of business returns filed with IRS

With the new section 199A business deduction provided to S corporations and sole proprietors under the Tax Cuts and Jobs Act, we can expect the number of flow-through entity returns to continue to increase over the coming years.

The sharp decline in corporate income tax revenue has been offset by a significant increase in employment taxes over the last several decades.  Between 1950 and 2010, employment taxes increased from just 10% to over 40% of Federal receipts.

Perhaps the most interesting statistic is the fact that Federal receipts as a percentage of GDP have remained between 16-18% over the last 75 years, regardless of changes in the economic environment and fluctuations in marginal tax rates.

On the deduction side, the JCT projects the largest number of tax returns claiming itemized deductions to come from households earning $100,000-$200,000. That category of filer is expected to claim $60,163,000 in state and local tax deductions, $80,597,000 in mortgage interest deductions, and $37,559,000 in charitable contributions. Based on projections, the total amount of itemized deductions taken by this category of filer ($100,000-$200,000 in earnings) will be larger than any other income category for 2018.

These statistics offer some insight into the distributional impact of the new tax reform legislation, while providing an in-depth perspective on past economic trends that got us to where we are today.

Tara Fisher has been practicing international tax for over 15 years. Her professional background includes working for the U.S. Congress Joint Committee on Taxation, the national tax practice of PricewaterhouseCoopers, the University of Pittsburgh, and American University in Washington D.C.

 

[i] The reported is titled “Overview of the Federal Tax System as in Effect for 2018” and can be found at www.jct.gov.

 

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Tara Fisher