Tax Reform

Once again, I have written to a staffer for Senator Dan Sullivan, Alaska Republican.  This month's epistle was regarding tax policy, and the ongoing Republican effort to enact tax reform.

Tax reform is deeply needed in the United States, but the direction of Republican reform seems entirely driven by the desire of wealthy political donors for lower taxes.  Representative Chris Collins of New York commented, "My donors are basically saying, 'Get it done or don’t ever call me again."

I believe that the process of reform should be an open process, subject to hearings, testimony, consideration of evidence, and compromise, but the Republican party is pursuing a closed process, without bipartisan input or debate.

And so I wrote to my Senator's staffer again with a sense of futility, despairing of receiving responsible government from Republicans.  But for the reader's consideration, here's my letter, and my priorities for tax reform.  For brevity, I placed my highest priorities in bullet points at the beginning.
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1)       Fully fund the federal government now.  Stop stealing from our children.

2)      Drastically simplify the tax system.

3)      Make everyone pay something.  Make rich people pay more.

4)      Tax unearned income higher than earned income. 

5)      Treat all capital earnings the same.  Eliminate special rules for trusts, S corporations, REITs, limited partnerships, hedge funds.   Treat personal capital earnings (short-term gains, long-term gains and dividends) the same.

6)      Tax foreign business profits in the same year that they are earned.

7)      Eliminate corporate tax loopholes.

8)      Tax unrealized capital gains on financial assets at death.  Keep the estate tax at 40% for estates larger than $10 million per couple.

9)      Place Social Security and Medicare taxes on unearned income at the same rate as wage income.  Eliminate the earning caps on Social Security and Medicare taxes.

10)  Stop lying about how American taxes are higher than other countries.  Correct lies when other people say them. 

Deficit Spending

I ask that you fully fund the Federal Government now.

During Senator Sullivan’s town hall meeting, the Senator expressed serious anxiety regarding the size of the US government debt.  I agree with the Senator on this point.  Debt held by the public is now about $14 trillion, or 76% of GDP.  Gross National Debt is about $20 trillion, or 106% of GDP.  Debt levels over 100% of GDP have been implicated in a number of foreign financial crises, such as Greece, Italy, Portugal, Argentina, and others.  Interest payments are rising as a percentage of the Federal budget, leaving less money for actual beneficial spending. 

Deficit spending is sometimes necessary to stimulate the economy.  But a balance sheet overloaded by debt allows policy makers no flexibility to deal with future crises.  Economic theory says that deficit spending is needed in an economy with high unemployment; an economy at full employment has no need for stimulus.  Deficit spending in an economy at full employment will simply result in inflation.

We’ve been systematically underfunding the Federal government for 40 years.  If this deficit spending was going to produce an economic miracle, it would have happened already.  We should raise taxes to run a surplus until our debt is under control.

Deficit spending, when it is not required for economic stimulus, is immoral.  Like all borrowing, it is taking benefits today, which must be paid for in the future.  The difference with Federal borrowing is that the people who enjoy the benefits of today’s spending will not pay those debts.  These debts will be paid by our children.  By deficit spending, we are literally stealing from our children. 

Any tax plan approved by the Senate should decrease the Federal debt.

Tax Simplification

I agree with Republicans that taxes are too complicated.  I support any reasonable effort to reduce the complexity of taxes, and to ease filing.  It is important that we improve the public perception that our taxes are fair.  I would recommend that the 40% of the population currently not paying income tax pay something, but with corresponding cuts in payroll taxes to mitigate the impact of these taxes on working families.  I would support the phased elimination of many deductions, including the home mortgage interest deduction.  In general, I support changes to reduce the use of the tax code for social engineering, and more to simply fund the government.

Trusts, S Corporations, REITS, limited partnerships and other special kinds of capital ownership should be eliminated, as far as tax law is concerned.  All capital should be treated the same for tax simplification.

I see no reason why unearned income should be exempted from the Social Security and Medicare taxes. 

Earned Income vs. Unearned Income

Work is an American virtue.  Physical productivity is the necessary foundation of our economy and earned wages support American families.  But those wages have decreased for the past two decades, in real terms and as a percentage of the economy (Federal Reserve database, https://fred.stlouisfed.org/ ).  Difficulties faced by young wage-earners are reflected in later marriage ages, later first children, more prevalent emotional difficulties, despair, drug addiction and deaths. 

I would note that any cut in the corporate business tax is implicitly a tax cut on unearned income, as profits pass through to shareholders. 

Changes in our tax law should reduce taxes on wages and increase the taxes on unearned income. 

Estate Tax

Eliminating the estate tax would leave a gaping hole in the taxation of unrealized capital gains.  All unrealized capital gains on financial assets should be taxed at the time of death, and the cost basis re-set for the heirs.  Retain the estate tax for financial assets on estates worth over $10 million per couple.  

Business Taxes

As I document below, American business taxes are already lower than 2/3 of the countries in the OECD.  I have no strong objection to lowering business taxes, but ask that those taxes be replaced by other revenue, so as not to increase the Federal debt.

Corporate tax loopholes (or incentives) should be eliminated, to bring the actual tax paid in line with the nominal tax rate.

I think that foreign business profits should be taxed in the year that they are earned, and not deferred until repatriation. 

I recommend a carbon tax scaled to volume of carbon emitted by each carbon fuel, and acknowledgement that climate change is a major hazard for the United States, and caused primarily by human CO2 emissions.  I would be happy to talk about that in person, to anyone who is not convinced of this point.  A carbon tax should provide additional revenue to allow some of the tax reductions desired by Republicans.

Social Security and Medicare

Tax unearned income at the same rate as earned income.  Remove the earnings caps on Social Security and Medicare taxes.  [Given the opportunity, I would restructure Social Security.  But that is a topic for another post.]

Truth -- American Taxes Compared to Other Countries

I would conclude by noting that the Republican justification for tax reform is based upon outright lies. 

In Donald Trump’s acceptance speech for the Republican nomination, he stated that America is among the most highly taxed countries in the world.  This is the complete opposite of truth.  Anyone with an Internet connection can look at the OECD statistical page (https://data.oecd.org/), and see that the US has almost the lowest Federal tax burden of the industrialized world, and is in the lowest third in terms of total tax burden.   Similarly, you can go to the World Bank database and see that the US Federal tax burden is lower than over 100 countries, and higher than only a handful of third-world countries (http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS).

In Senator Sullivan’s town hall meeting, the Senator said that the US business tax was the highest in the world.  This is deceptive, and since the Senator is a knowledgeable person, I have to conclude that his statement is deliberately deceptive.  It is true that the nominal US business tax rate is higher than other nations, but it is easy enough to check the revenue collected from businesses, and compare to total domestic business profits.  The actual tax paid is far lower than the nominal rate.  Further, you can go again to the OECD database.  The countries with lower business taxes than the United States are Slovenia, Latvia, Turkey, Greece, Germany, Poland, Hungary, Italy, Estonia, France and Finland (2014 & 2015).  The remaining 21 countries – two-thirds of the OECD – have higher business taxes than the United States. https://data.oecd.org/tax/tax-on-corporate-profits.htm

I will judge the Senator’s honor by how well he speaks the truth, and how he speaks out to correct falsehoods when they are used to justify government policies. *

*  You might think me presumptuous to judge the Senator.  I write another blog with the theme that God should be judged according to the standards of reason and justice.  It is not that I have the right to judge.  It is rather that all figures of authority are subject to judgment according to truth, reason and justice.  I think that was the basis of the American Declaration of Independence.  

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The section on Estate Taxes was revised 12/2/2017, returning the proposed estate tax to something similar to current law, but reducing the tax from 55% to 40% of assets over $10 million per couple.

Recommended Goals and Policies for United States Tax Reform

I recently had a phone conversation with a staffer for Senator Murkowski, who specializes in tax issues.  Here are my talking points for the conversation.  A few graphs can be found at the end of this article, showing basic facts regarding American tax policy.

Goals of tax reform, in priority order

1. Increase Federal tax revenue; run a surplus until gross Federal debt is less than 75% of GDP.
2. Simplify the tax code. 
3. Reduce the burden of Social Security and Medicare on young workers and their families.
4. Create a tax system which is generally acknowledged as fair to all.
5. Eliminate subsidies and market-distorting tax incentives.
6. Tax capital that replaces labor.
7. Tax unrealized capital gains, if estate tax is repealed.
8. A tax policy that reduces wealth inequality.

Wish List

1. A greatly simplified tax system.
2. Collect more Federal tax revenues; run a budget surplus.
3. Higher tax rates on the wealthy, to raise total tax revenues.
4. Make investment income subject to Social Security and Medicare taxes.  Eliminate the tax cap, and have a progressive tax to raise rates on the wealthy.
5. Make minimum SS benefits standard for all elderly people. 
6. Broaden the income tax base to include everyone, so that everybody pays some Federal tax.
7. Eliminate the Bush investment income tax exemption, and raise taxes on dividends and capital gains.
8. Reduce Social Security and Medicare taxes for the working poor.
9. Compensate for any revenue lost in reduced business taxes with additional taxes on something else.
10. Stop using rhetoric that suggests that the United States has high personal or business taxes.  It isn’t true.
11. Implement a carbon tax.
12. Eliminate business subsidies, especially agricultural and ethanol subsidies.
13. Institute a tax on businesses which do not provide enough good jobs (full-time, well-paying jobs) relative to the amount of capital employed

Discussion and Talking Points

Sufficient Tax Revenue

Tax rates are too low.  We have undergone a 37-year experiment in underfunding the Federal Government.  In some ways, the experiment has been a success; the American Federal government is arguably the most efficient in the world.  But the consequence of underfunding the government is a gross Federal debt that exceeds GDP.  In a number of other nations (e.g., Greece, Italy, Ireland, Portugal) that level of debt has represented a tipping point marking a breakdown in the economy, markets, and in the ability of the government to govern. 

We now have a national debt that threatens our security and stability.  We might argue whether the reason for the debt is too much military spending or too much social spending, but the spending is now history.  The scale of the problem exceeds any solution through cost cutting, except drastic cuts to the military, which is not going to happen.  To raise more revenue, higher taxes need to be placed on the wealthy (because that's where the money is).  The wealthy have benefitted from 37 years of under-taxation; it is time to pay back some of the gains.

We also have a situation of rising wealth inequality, especially impacting young people.  We shouldn't make problems worse for the next generation -- which is what we are doing by not paying our bills.  We are stealing from our children to leave such a massive government debt.  

There are times when deficit spending is necessary.  Deficit spending is one of the best policies for pulling the economy out of recession.  (The proposed balanced budget amendment is economic stupidity.)  However, the converse to deficit spending is that budget surpluses are necessary during good times, to avoid ratcheting up debt over time.  Deficit spending without ever running surpluses leads to crippling debt, which impairs the ability to deal with future crises. 

Most Republicans argue that low taxes are necessary to stimulate the economy and create jobs, supply-side economics, Laffer Curve, yada, yada, yada.  This can be true when the economy is significantly underperforming, but is not true when the economy is at full employment.  Also, to be successful in stimulating the economy, tax cuts need to apply to the lower middle class, to increase consumption and demand.  Tax cuts for the wealthy are not effective in stimulating the economy; these only produce asset inflation, followed by a crash, as we have seen twice in the last 20 years.  If tax cuts were going to produce an economic miracle, don’t you think it would have happened by now? 

Social Security and Medicare Taxes

Social Security and Medicare taxes have more than tripled since I was a young man, placing an unreasonable burden on young working families and businesses.  Wage-earners pay significant payroll taxes on the first dollar of income; these taxes disprove Mitt Romney’s myth that 47% of Americans pay no tax. 

We should abandon the illusion that the Social Security system is an insurance program with benefits scaled to payments.  The truth is that the program will take from wage-earners whatever it takes to pay the scheduled benefits for retirees.   And those benefits have been too high.  Republican Senator Ben Sasse stated, “There are good and bad reasons to be unpopular. A good reason would be to suffer for waging an honorable fight for the long-term that has near-term political downsides – like telling seniors the sobering truth that they’ve paid in far less for their Social Security and Medicare than they are currently getting back.”

The structure of Social Security taxes is completely backwards.  The first dollar of earnings is taxed, there is a cap on taxable income, and there is no tax on investment income.  Instead, Social Security taxes should be structured so that both wages and investment income should be taxed to support the program, with no cap on taxable income.  A lower tax rate should apply to the working poor.

We should recognize that not everyone has an equal opportunity to earn income, and to pay into Social Security.  Some people are like my sister, who gave up a promising high-paying career, to spend her life caring for disabled relatives: first her severely disabled child, and after the death of her child, cared for our elderly aunt, and now my parents.  We should break the link between taxes paid and benefits.  We should provide a living income to old people, because we respect and honor old people.  Period.

Fairness

I think most people would agree that our tax system is too complex, which leads to widespread perceptions of unfairness.  High-income people think that poor people don’t pay their fair share, largely because of Mitt Romney’s myth that 47% pay no taxes.  Romney is ignoring payroll taxes, excise taxes, and sales taxes, which hit the poor harder than the rich.   Poor people think that rich people do not pay their fair share, because of the $75,000 income exclusion of the Bush tax cuts, low tax rates for investment income, and tax-avoidance strategies available only to the wealthy. 

A persistent belief in the unfairness of the system encourages widespread cheating.  It will be important in tax reform to make sure everybody pays something.  And it will be important to eliminate the low tax rates for investment income and eliminate tax loopholes and avoidance strategies.  

Business Taxes

The nominal tax rate for business taxes is 35%, but actual tax paid is much less. Using the President’s Report on the Economy and data from the Federal Reserve database, I calculated that the actual tax paid in business income tax is only 17.8%.   Looking at the OECD database, the United States has the 10^th lowest business tax rate of the 35 member industrialized countries, as a percentage of GDP (2015).  OECD countries with higher corporate taxes include Greece, Spain, Canada, Austria, Italy, France, Ireland, United Kingdom, Mexico, Netherlands, Portugal, Denmark, Sweden, Japan, Korea, Israel, Belgium, Luxembourg, Slovak Republic, Iceland, Czech Republic, Chile, New Zealand, Australia, and Norway. 

I agree with Republicans that businesses might do better with lower business income taxes.  American companies could be more competitive in international markets, and successful companies could put more of their profits into business growth.  But the loss of these tax revenues must be compensated by raising other taxes.  The Bush tax cuts were justified on the basis of double taxation of business income.  If business income taxes are cut, will personal taxes on investment income be restored?

Carbon Tax

Certain businesses produce externalized costs which are borne by all of society.  It is appropriate to levy specific taxes on those businesses to compensate for the damages and costs they incur for others.  An example of such a tax is a carbon tax.  It is appropriate and timely to implement a carbon tax on fossil fuels and cement manufacturing, directly scaled to the amount of carbon emissions caused by the business.  A carbon tax allows the market to reduce the damaging emissions in the most efficient way, through fuel substitution.  The carbon tax would be much easier to implement than other schemes, such as “cap and trade”, and importantly, easier to repeal or adjust, depending upon results.

Subsidies

Certain subsidies, such as ethanol fuel requirements, make no sense whatsoever.  Congress should work to eliminate market-distorting subsidies as part of any tax reform.

Tax reform should eliminate much of the use of the tax code for social engineering.  The main purpose of the tax system is to raise enough money to fund the government.

Unrealized Capital Gains and Retirement Plan Tax Deferrals

Unrealized capital gains are one of the simplest ways to avoid taxes; compounding of unrealized capital gains contributes to wealth inequality.  If the estate tax is eliminated, how will unrealized gains every be taxed?

Retirement plans, such as 401K plans and IRAs, allow workers to save for retirement.  But these plans discriminate against lower wage workers, who do not have enough discretionary income to save into those plans.  Also, fewer and fewer businesses are offering or supporting such plans.  Given the popularity of the plans, and entrenchment in terms of established value, it would seem impossible to modify or eliminate these plans.  But these plans complicate the tax code, and offer tax advantages that only the wealthy can take advantage of, leaving the rest of the workforce to make up the difference.

Taxing Capital

A few months ago, I undertook an effort to calculate the total Federal tax paid by Capital and Wages.   Capital pays tax through business income taxes; capital gains, dividends and interest, personal income taxes; business’ contribution to payroll taxes; and other (mineral royalties and rents). 

Wages pay taxes through payroll taxes, personal income taxes on wages, and most excise taxes.

Using figures from the Tax Policy Center and the President’s Report on the Economy, I calculated that wages pay about 25% of gross income in Federal tax, and capital pays about 28% in Federal tax.  I expected that capital would be higher. 

In a 27-year career with a major oil company, I saw that capital does not create jobs – capital and technology destroy jobs.  A workstation allows a geologist to do the work of 4 geologists working without the computer, so the number of geologists employed at my company was reduced by two-thirds during my career.  Desktop PCs made secretaries irrelevant and PCs made the entire drafting department obsolete.  Enterprise-wide accounting software allowed us to lay-off hundreds of accountants.  In my department, over five years, the number of accountants was reduced from 27 to 1.  Looking forward, in the transportation industry, self-driving trucks will soon make 1.5 million long-haul truck drivers unemployed, and 2 million other professional drivers soon afterwards. 

Robots have considerable advantages over human workers.  Companies can avoid paying payroll tax, and avoid providing health and retirement benefits.  And yet – people in society still need work, healthcare, and funding for retirement.  After all, the importance of business to society is not to make as much money as possible, but to provide what society needs, not only in terms of products for purchase, but also employment for workers.  Bill Gates proposed taxing robots, just enough to put humans on an even playing field with the robots.  But in a broader sense, the problem is not robots, but capital.  Business Capital should be taxed if it doesn’t provide an appropriate number of good jobs in relation to the amount of working capital.  

Basic Facts

Gross Federal Debt is now about 20 trillion dollars, or 112% of GDP.    Debt held by the public is $14.3 trillion, or 76% of GDP.  The difference ($5.7 trillion) is essentially debt that the government owes to itself, through arrangements between government agencies.  Much of the government-held debt is the trust fund for Social Security.  It might be possible to say that Social Security is in great shape, thanks to the set of IOUs from the Treasury, but then you would have to say that the country is in deep trouble because of the debt load.  Or you might say that the country’s debt load is not so bad, but you would have to say that Social Security is going broke.  You can’t have it both ways.

 Here is a graph of gross Federal debt and GDP.

Federal Deficits have been large and persistent since 1980, in Reagan’s first term.

Federal Tax Comparison to Other Countries

United Stats Federal Taxes are among the lowest in the world.  The government accomplishes a great deal with less revenue than other nations.  The US government is also burdened by the highest rate of military spending in the world, further cutting into other government programs.

The OECD database places the US consistently 34th out of 35 industrialized countries.  The only countries with occasional lower Federal taxes (Japan, Switzerland) have no significant military obligations.  Japan also has a massive debt problem.  US Federal taxes (from all sources) are among the lowest in the OECD.

http://stats.oecd.org/Index.aspx?DataSetCode=REV

US total tax burden is among the lowest of the OECD.

US Federal Taxes are among the lowest in the world.

For the year 2011 (the recent year with the most complete reporting), the United States had the fourteenth-lowest Federal tax rate of 123 countries in the World Bank database.  Countries with lower taxes than the United States are as follows (2011):

Ethiopia, Pakistan, India, Afghanistan, Bangladesh, Central African Republic, West Bank and Gaza, Lithuania, Oman, Nigeria, Bahrain, Estonia, United Arab Emirates.  These countries are the peers of the United States in terms of Federal taxation. 

http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS

Taxes on Wages and Capital Returns

Note:  I have discovered an error in this analysis, and will correct it soon.
Apologies and regards, Doug




The next major domestic policy initiative of the Trump administration and Republican Congress is expected to be tax reform.  Practically everyone would agree that our Federal tax system is hopelessly and needlessly complex, inefficient and unfair.  You might think that reform would be simple.  But the parties are in complete opposition about the direction needed for reform.  I hope that the work below can help inform the discussion of the appropriate direction for tax reform.

This post was originally published on the blog Wonky Thoughts.
http://dougrobbins.blogspot.com/2017/03/taxes-on-wages-and-capital-returns.html

Summary:

The total economic productivity of the United States in 2015 was 18 trillion dollars.  Of this total, $7.7 trillion was paid to workers as wages.  The remaining 10.3 trillion accrued to owners of capital.   Although Federal taxes are paid in several forms, the total tax burden on wages is 25 percent, while Federal taxes paid on capital returns is only 12.5 percent, half of the rate paid by wage-earners.

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Wages and Return on Capital

Economic productivity can be divided into the contributions of Labor and Capital.  More accurately, Labor and Capital, working together, both contribute to productivity.  Labor requires Capital to be productive, and Capital requires Labor to be productive.  But the benefits of productivity are divided – Labor and Capital are allocated different shares in terms of earnings, and carry away different piles of money.  The shares allocated to Labor and Capital are largely determined by actions of the free market, modified somewhat by regulations such as the minimum wage law.   But taxes on earnings of Labor and Capital are entirely arbitrary, determined by the complex rules of the Federal tax law.

The United States produced about 18 trillion dollars of income in 2015.  The measure, Gross Domestic Income (GDI), is roughly equivalent to Gross Domestic Product, (GDP).  Wages and salaries comprised 42.9 percent of GDI, or $7.7 trillion (source: Federal Reserve Database).   Capital returns represent the remainder, or about $10.3 trillion.  It should be noted that capital returns do not include unrealized capital gains.

Labor’s share of Gross Domestic Income has fallen from 51% in 1970 to about 43% today.

Gross Domestic Income ($MM)
Wages	Capital Return
7,758,250	10,326,250

Federal Taxes

Federal taxation is complex.   Wages are subject to individual income taxes and payroll (social insurance) taxes.   Wage earners also pay most excise taxes, such as tobacco, alcohol, gasoline and health insurance taxes.

Capital Returns are taxed as corporate income taxes, and taxed again as individual income taxes on dividends, interest, and capital gains when returns are distributed.  Corporations also pay a share of payroll taxes equal to employee contributions, and pay a variety of Federal taxes and rents such as mineral royalties.  

In 2015, the Federal Government collected 3.25 trillion dollars in taxes, out of 18 trillion dollars in GDI, for a total Federal take of 18 percent.  Of those taxes, about 2 trillion dollars were paid out of wages and salaries, and 1.3 trillion dollars were paid out of capital returns.

Taxes on Wages and Salaries, millions of dollars

Individual Income Taxes	1,325,860
Payroll (Social Insurance) Tax	532,629
Excise Taxes	98,279
Total	1,956,768

Taxes on Capital Returns, millions of dollars

Corporate Income Tax	343,797
Corporate Payroll Tax	532,629
Capital Gains Tax	141,754
Dividends & Interest Tax	73,188
Other	201,751
Total	1,293,119

The Federal Government taxes Capital Returns at 12.5 percent of earnings, on a 57 percent share of GDI, collecting a total of 1.29 trillion dollars.

By contrast, the Federal Government taxes Wages and Salaries at double the rate of Capital Returns.  The government taxes Wages and Salaries at 25.2 percent of earnings, on a 43 percent share of GDI, collecting a total of 1.96 trillion dollars.

Conclusion

Individual workers are receiving a smaller share of the nation’s productivity than owners of capital.  Moreover, Wages and Salaries are taxed at double the rate of Capital Returns.  This disproportional taxation doesn’t seem fair, or in the best interest of the economy.  The distribution of earnings to working-class households is more likely to see those dollars recycled into consumer demand than dollars distributed as investment earnings.  In the interest of economic fairness, economic efficiency, and the reduction of wealth inequality, it makes sense to raise taxes on capital returns, and give tax relief to wage-earners.

Note: This study did not include unrealized capital gains, which allow the owners of capital to roll-over gains from year to year without paying tax.  So, the effective tax rate paid on capital returns is actually less than reported in this post.  Taxes on unrealized gains are effectively never paid if the underlying assets are never sold, unless taxed at death by the estate tax.   I have not yet figured out a clear way to calculate (or efficiently tax) unrealized capital gains. 

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Calculations and Assumptions

Income (Federal Reserve Database)

Income attributed to Wages includes 42.9 % of Gross Domestic Income,

Income attributed to Capital is GDI minus income attributable to wages.

Taxes (Tax Policy Center and JustFacts.com)

     Taxes attributed to Wages include:

• All individual income taxes, minus 9.2 % for capital gains, and 4.75% for dividends and Interest.
• Employee payroll taxes (Social Security and Medicare)
• Federal excise taxes (alcohol, tobacco, fuel and health insurance).

     Taxes attributed to Capital Returns include:

• Business income taxes
• Corporate payroll taxes
• Individual capital gains taxes
• Individual dividends and interest taxes
•  “Other” taxes, representing diverse sources such as mineral royalty payments

 Assumptions

• The 2016 component percentages of individual taxes (wages, capital gains, dividends and interest) were assumed to apply to 2015 taxes.
• The percentage of taxes paid on capital gains was applied to dividends and interest.
• Federal Excise taxes were entirely allocated to Wages.

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References:

http://www.taxpolicycenter.org/

Federal Tax Receipts by Source, 1934 – 2021 (forecast from 2016)

http://www.justfacts.com/taxes.asp

“* In 2015, 9.2% of federal individual income tax receipts came from capital gain taxes.”

“* For 2016, the Joint Committee on Taxation projects that 6.2% of gross income earned by individuals will come from capital gains, 2.2% from dividends, and 1.0% from interest income.”

https://fred.stlouisfed.org

Tables on Gross Domestic Income, and Wages and Salary share of GDI. 

United States Federal Income Tax Breaks

In 2011, the United States received 47 percent of its Federal tax revenue through income taxes on individuals and 8 percent from corporate income tax.  (Payroll taxes, i.e. funds dedicated to Social Security and Medicare, provide 36 percent of Federal receipts.)    Individual income taxes provided 1,090 billion dollars, and corporate income tax provided 181 billion dollars. 

Through the years, the government has established many exclusions (termed "tax expenditures") which permit individuals and corporations to avoid taxes on part of their income.  Congress established these exclusions for reasons of fairness, or as incentives for certain economic or social goals.   The Washington Post reports that there are 172 tax breaks, primarily benefiting individuals, which deprive the treasury of over a trillion dollars of revenue each year.  The table below was created from the Washington Post interactive graphic, and show the top 73 tax breaks, using the threshold of one billion dollars.  The top 73 tax breaks amount to nearly 1.2 trillion dollars of lost annual tax revenue, an amount approximately equal to the 2012 Federal deficit.   Over 200 billion dollars of new tax breaks have been enacted since the year 2000.

Although each of the tax exclusions was designed to create specific benefits to society, the cumulative result is massive complexity in the tax code.  The GAO reported that economic distortions resulting from tax preferences cost the United States between 2% and 5% of GDP annually.

These tax breaks are deeply ingrained in American culture.  Individuals have been promised tax relief on their retirement savings and on their home mortgages.  These tax benefits are critical elements of life-long financial planning for many individuals.  Nevertheless, in the interest of simplicity, transparency, and economic efficiency, many of these tax exclusions should be gradually removed from the tax code.

Tax Break	Year	benefit	Billion $
Exclusion of Employer Contributions for Health Care	< 1975	Individuals	173.8
Mortgage interest deduction	< 1975	Individuals	88.7
401K Plans	2001	Individuals	62.9
Earned Income Tax Credit	1975	Individuals	62.5
Step-up of Capital Gains at Death	1977	Individuals	50.9
Exclusion of Net Imputed Rental Income	2004	Individuals	47.0
Making Work Pay Tax Credit	2009	Individuals	44.0
Child Credit	1997	Individuals	42.5
Employer plans for Income Security	< 1975	Individuals	42.2
Deferral of Income from Controlled Foreign Corporations	1977	Corporate	41.4
Deductibility of charitable contributions *	< 1975	Individuals	39.6
Deductibility of non-business state and local taxes **	< 1975	Individuals	37.7
Capital Gains (except Agriculture, Timber, Iron Ore & Coal)	< 1975	Individuals	37.6
Exclusion of Interest on Municipal Bonds	< 1975	Individuals	31.3
Capital Gains Exclusion on Home Sales	1997	Individuals	27.6
Treatment of qualified dividends	< 1975	Individuals	23.6
Exclusion of Interest on Life-Insurance Savings	< 1975	Individuals	21.2
Social security benefits for retirees	< 1975	Individuals	20.3
Property tax deduction	< 1975	Individuals	19.3
Accelerated Depreciation of machinery	1977	Individuals	17.5
Keogh Plans	1983	Individuals	15.0
American Opportunity Tax Credit	2009	Individuals	14.4
Individual Retirement Accounts	< 1975	Individuals	13.9
Deduction for US Production Activities	2004	Corporate	13.8
Exclusion of benefits and allowances to Armed Service Personnel	< 1975	Individuals	13.3
Exception from Passive Loss Rules for $25,000 of Rental Loss	1987	Individuals	10.9
Credit for Homebuyer	2008	Individuals	10.4
Deductibility of Medical Expenses	< 1975	Individuals	10.0
Social security benefits for disabled workers	< 1975	Individuals	7.2
Exclusion of workers'compensation benefits	< 1975	Individuals	7.0
Expensing of Certain Small Investments	1993	Individuals	6.7
Self-employed Medical Insurance Premiums	1998	Individuals	6.2
Credit for Low-Income Housing Investments	1986	Corporate	6.0
Credit for Energy Efficiency Improvements, existing homes	2005	Individuals	5.5
Exclusion of income earned abroad (citizens)	< 1975	Individuals	5.5
Carryover Basis of Capital Gains on Gifts	1988	Individuals	4.8
Expensing of Research and Experimentation	< 1975	Corporate	4.6
Deductibility of charitable contributions; Education	< 1975	Individuals	4.5
Deductibility of charitable contributions; Health	1977	Individuals	4.5
Exclusion of veteran's death and disability payments	< 1975	Individuals	4.5
Credit for Increasing Research Activities	1981	Corporate	3.9
Lifetime Learning Tax Credit	1997	Individuals	3.9
Exclusion of Interest on Hospital Construction Bonds	1980	Individuals	3.6
Graduated Corporate Income Tax Rates	1978	Corporate	3.3
Social security for spouses & dependents	< 1975	Individuals	3.2
Alcohol Fuel Credits	1980	Corporate	3.1
Exclusion of Employee Reimbursed Parking Expenses	1993	Individuals	3.0
Exclusion of scholarship and fellowship income	< 1975	Individuals	3.0
Parental exclusion for students 19 & older	< 1975	Individuals	3.0
Inventory Property Sales Source Rules Exception	1986	Corporate	2.9
Build America Bonds	2009	Corporate	2.6
Credit for Small Business Health Insurance	2010	Individuals	2.6
Additional Deduction for the Elderly	1986	Individuals	2.5
Exclusion of Interest on Bonds for Private Non-Profit Educational Facilities	1983	Individuals	2.4
Premiums on Group Term Life Insurance	< 1975	Individuals	2.0
Credit for Child and Dependent Care Expenses	< 1975	Individuals	1.9
Medical Savings Accounts/Health Savings Accounts	1996	Individuals	1.9
Energy Production Credit	1978	Corporate	1.6
State Pre-paid Tuition Plans	1997	Individuals	1.6
Special Rules for Employee Stock Ownership Plans	1988	Corporate	1.5
Deductibility of Student Loan Interest	1997	Individuals	1.4
Discharge of Mortgage Indebtedness	2007	Individuals	1.4
Employer Provided Child-Care Exclusion	1983	Individuals	1.4
Low and Moderate Income Savers Credit	2001	Individuals	1.4
Exclusion of Interest on Owner-Occupied Mortgage Subsidy Bonds	1978	Individuals	1.3
Deferral of interest on US Savings Bonds	1975	Individuals	1.2
Exemption of Credit Union Income	< 1975	Corporate	1.2
Excess of Percentage over Cost Depletion Fuels	< 1975	Corporate	1.1
Exclusion of employee meals and lodging	< 1975	Individuals	1.1
Exclusion of Interest on Rental Housing Bonds	1980	Individuals	1.1
Qualified School Construction Bonds	2009	Individuals	1.1
Exclusion of certain allowances for Federal Emp. Abroad	1999	Individuals	1.0
Work Opportunity Tax Credit	1978	Corporate	1.0
Total Tax Expenditures >  $1 billion			1169.5
* non-health or education
** other than owner-occupied homes

Source: 

http://www.washingtonpost.com/wp-srv/special/politics/tax-code-break-by-break/

http://www.gao.gov/assets/250/247539.pdf

http://www.taxpolicycenter.org/briefing-book/background/numbers/revenue.cfm

http://www.heritage.org/federalbudget/federal-revenue-sources

http://www.whitehouse.gov/omb/budget/Historicals