OVERVIEW OF THE FEDERAL TAX SYSTEM 

AS IN EFFECT FOR 2007 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

 

January 12, 2007 

JCX-2-07 
i 

CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1 

I. SUMMARY OF PRESENT-LAW FEDERAL TAX SYSTEM........................................... 2 

A. Individual Income Tax..................................................................................................... 2 

B. Corporate Income Tax ..................................................................................................... 8 

C. Estate and Gift and Generation-Skipping Transfer Taxes ............................................. 12 

D. Employment Taxes ........................................................................................................ 14 

E. Major Excise Taxes........................................................................................................ 15

II. HISTORICAL RECEIPTS DATA ...................................................................................... 16 
1 

INTRODUCTION 

This document,1

 prepared by the staff of the Joint Committee on Taxation, provides a 

summary of the present-law Federal tax system as in effect for 2007. 

The current Federal tax system has four main elements: (1) an income tax on individuals 

and corporations (which consists of both a “regular” income tax and an alternative minimum 

tax); (2) payroll taxes on wages (and corresponding taxes on self-employment income); (3) 

estate, gift, and generation skipping taxes, and (4) excise taxes on selected goods and services. 

This document provides a broad overview of each of these elements.2 

A number of aspects of the Federal tax laws are subject to change over time. For 

example, some dollar amounts and income thresholds are indexed for inflation. The standard 

deduction, tax rate brackets, and the annual gift tax exclusion are examples of amounts that are 

indexed for inflation. In general, the Internal Revenue Service adjusts these numbers annually 

and publishes the inflation adjusted amounts in effect for a tax year prior to the beginning of that 

year. Where applicable, this document generally includes dollar amounts in effect for 2007 and 

notes whether dollar amounts are indexed for inflation. 

In addition, a number of the provisions in the Federal tax laws have been enacted on a 

temporary basis or have parameters that vary by statute from year to year. For example, the 

recently enacted Tax Relief and Health Care Act of 2006 extended a number of expired or soon 

to expire provisions on a temporary basis. In addition, the provisions of the Economic Growth 

and Tax Relief Reconciliation Act of 2001 were initially generally to expire at the end of 2010; 

some provisions of that Act have subsequently been modified or made permanent. For 

simplicity, this document describes the Federal tax laws in effect in 2007 and generally does not 

include references to provisions as they may be in effect for future years or to termination dates 

for expiring provisions. A list of expiring tax provisions may be found in Joint Committee on 

Taxation, List of Expiring Federal Tax Provisions 2006-2020, (JCX-1-07), January 11, 2007. 

 1

 This document may be cited as follows: Joint Committee on Taxation, Overview of the Federal 

Tax System as in Effect for 2007 (JCX-2-07), January 12, 2007. 

2

 If certain requirements are met, certain entities or organizations are exempt from Federal 

income tax. A description of such organizations is beyond the scope of this document. 
2 

I. SUMMARY OF PRESENT-LAW FEDERAL TAX SYSTEM 

A. Individual Income Tax 

In general

A United States citizen or resident alien generally is subject to the U.S. individual income 

tax on his or her worldwide taxable income.3

 Taxable income equals the taxpayer's total gross 

income less certain exclusions, exemptions, and deductions. Graduated tax rates are then applied 

to a taxpayer’s taxable income to determine his or her individual income tax liability. A 

taxpayer may face additional liability if the alternative minimum tax applies. A taxpayer may 

reduce his or her income tax liability by any applicable tax credits. 

Adjusted gross income

Under the Internal Revenue Code of 1986 (the “Code”), gross income means “income 

from whatever source derived” except for certain items specifically exempt or excluded by 

statute. Sources of income include compensation for services, interest, dividends, capital gains, 

rents, royalties, alimony and separate maintenance payments, annuities, income from life 

insurance and endowment contracts (other than certain death benefits), pensions, gross profits 

from a trade or business, income in respect of a decedent, and income from S corporations, 

partnerships,4

 trusts or estates.5 Statutory exclusions from gross income include death benefits 

payable under a life insurance contract, interest on certain State and local bonds, employerprovided health insurance, employer-provided pension contributions, and certain other employerprovided benefits. 

An individual’s adjusted gross income (“AGI”) is determined by subtracting certain 

“above-the-line” deductions from gross income. These deductions include trade or business 

expenses, capital losses, contributions to a tax-qualified retirement plan by a self-employed 

individual, contributions to individual retirement arrangements (“IRAs”), certain moving 

expenses, and alimony payments. 

 3

 Foreign tax credits generally are available against U.S. income tax imposed on foreign source 

income to the extent of foreign income taxes paid on that income. A nonresident alien generally is subject 

to the U.S. individual income tax only on income with a sufficient nexus to the United States. 

4

 In general, partnerships and S corporations are treated as pass-through entities for Federal 

income tax purposes. Thus, no Federal income tax is imposed at the entity level. Rather, income of such 

entities is passed through and taxed to the owners at the individual level. 

5

 In general, estates and most trusts pay tax on income at the entity level, unless the income is 

distributed or required to be distributed under governing law or under the terms of the governing 

instrument. Such entities determine their tax liability using a special tax rate schedule and are subject to 

the alternative minimum tax. Certain trusts, however, do not pay Federal income tax at the trust level. 

For example, certain trusts that distribute all income currently to beneficiaries are treated as "passthrough" or conduit entities (similar to a partnership). Other trusts are treated as being owned by grantors 

in whole or in part for tax purposes; in such cases, the grantors are taxed on the income of the trust. 
3 

Taxable income

In order to determine taxable income, an individual reduces AGI by any personal 

exemption deductions and either the applicable standard deduction or his or her itemized 

deductions. Personal exemptions generally are allowed for the taxpayer, his or her spouse, and 

any dependents. For 2007, the amount deductible for each personal exemption is $3,400. This 

amount is indexed annually for inflation. The deduction for personal exemptions is reduced or 

eliminated for taxpayers with incomes over certain thresholds, which are indexed annually for 

inflation. The applicable thresholds for 2007 are $156,400 for single individuals, $234,600 for 

married individuals filing a joint return and surviving spouses, $195,500 for heads of households, 

and $117,300 for married individuals filing separate returns. 

A taxpayer also may reduce AGI by the amount of the applicable standard deduction. The 

basic standard deduction varies depending upon a taxpayer's filing status. For 2007, the amount 

of the standard deduction is $5,350 for single individuals and married individuals filing separate 

returns, $7,850 for heads of households, and $10,700 for married individuals filing a joint return 

and surviving spouses. An additional standard deduction is allowed with respect to any 

individual who is elderly or blind.6 The amounts of the basic standard deduction and the 

additional standard deductions are indexed annually for inflation. 

In lieu of taking the applicable standard deductions, an individual may elect to itemize 

deductions. The deductions that may be itemized include State and local income taxes (or, in 

lieu of income, sales), real property and certain personal property taxes, home mortgage interest, 

charitable contributions, certain investment interest, medical expenses (in excess of 7.5 percent 

of AGI), casualty and theft losses (in excess of 10 percent of AGI and in excess of $100 per 

loss), and certain miscellaneous expenses (in excess of two percent of AGI). The total amount of 

itemized deductions allowed is reduced for taxpayers with incomes over a certain threshold 

amount, which is indexed annually for inflation. The threshold amount for 2007 is $156,400 

($78,200 for married individuals filing separate returns). 

Tax liability

In general

A taxpayer’s net income tax liability is the greater of (1) regular individual income tax 

liability reduced by credits allowed against the regular tax, or (2) tentative minimum tax reduced 

by credits allowed against the minimum tax. The amount of income subject to tax is determined 

differently under the regular tax and the alternative minimum tax, and separate rates schedules 

apply. Lower rates apply for long-term capital gains; those rates apply for both the regular tax 

and the alternative minimum tax 

 6

 For 2007, the additional amount is $1,050 for married taxpayers (for each spouse meeting the 

applicable criterion) and surviving spouses. The additional amount for single individuals and heads of 

households is $1,300. If an individual is both blind and aged, the individual is entitled to two additional 

standard deductions, for a total additional amount (for 2007) of $2,100 or $2,600, as applicable. 
4 

Regular tax liability

To determine regular tax liability, a taxpayer generally must apply the tax rate schedules 

(or the tax tables) to his or her regular taxable income. The rate schedules are broken into several 

ranges of income, known as income brackets, and the marginal tax rate increases as a taxpayer's 

income increases. Separate rate schedules apply based on an individual's filing status. For 2007, 

the regular individual income tax rate schedules are as follows: 
5 

Table 1.–Federal Individual Income Tax Rates for 2007 

If taxable income is: Then income tax equals: 

Single Individuals 

Not over $7,825.................................................................. 10% of the taxable income 

Over $7,825 but not over $31,850...................................... $782.50 plus 15% of the excess over $7,825 

Over $31,850 but not over $77,100.................................... $4,386.25 plus 25% of the excess over $31,850 

Over $77,100 but not over $160,850.................................. $15,689.75 plus 28% of the excess over $77,100 

Over $160,850 but not over $349,700 ............................... $39,148.75 plus 33% of the excess over $160,850 

Over $349,700 .................................................................... 

$101,469.25 plus 35% of the excess over 

$349,700 

Heads of Households 

Not over $11,200................................................................ 10% of the taxable income 

Over $11,200 but not over $42,650.................................... $1,120 plus 15% of the excess over $11,200 

Over $42,650 but not over $110,100.................................. $5,837.50 plus 25% of the excess over $42,650 

Over $110,100 but not over $178,350................................ $22,700 plus 28% of the excess over $110,100 

Over $178,350 but not over $349,700................................ $41,810 plus 33% of the excess over $178,350 

Over $349,700 .................................................................... $98,355.50 plus 35% of the excess over $349,700 

Married Individuals Filing Joint Returns and Surviving Spouses 

Not over $15,650................................................................ 10% of the taxable income 

Over $15,650 but not over $63,700.................................... $1,565 plus 15% of the excess over $15,650 

Over $63,700 but not over $128,500.................................. $8,772.50 plus 25% of the excess over $63,700 

Over $128,500 but not over $195,850................................ $24,972.50 plus 28% of the excess over $128,500 

Over $195,850 but not over $349,700................................ $43,830.50 plus 33% of the excess over $195,850 

Over $349,700 .................................................................... $94,601 plus 35% of the excess over $349,700 
6 

Married Individuals Filing Separate Returns 

Not over $7,825.................................................................. 10% of the taxable income 

Over $7,825 but not over $31,850...................................... $782.50 plus 15% of the excess over $7,825 

Over $31,850 but not over $64,250.................................... $4,386.25 plus 25% of the excess over $31,850 

Over $64,250 but not over $97,925.................................... $12,486.25 plus 28% of the excess over $64,250 

Over $97,925 but not over $174,850.................................. $21,915.25 plus 33% of the excess over $97,925 

Over $174,850 .................................................................... $47,300.50 plus 35% of the excess over $174,850 

An individual’s marginal tax rate may be reduced by the allowance of a deduction equal 

to a percentage of income from certain domestic manufacturing activities.7

Alternative minimum tax liability

An alternative minimum tax is imposed on an individual, estate, or trust in an amount by 

which the tentative minimum tax exceeds the regular income tax for the taxable year. The 

tentative minimum tax is the sum of (1) 26 percent of so much of the taxable excess as does not 

exceed $175,000 ($87,500 in the case of a married individual filing a separate return) and (2) 28 

percent of the remaining taxable excess. The taxable excess is so much of the alternative 

minimum taxable income (“AMTI”) as exceeds the exemption amount. The maximum tax rates 

on net capital gain and dividends used in computing the regular tax are used in computing the 

tentative minimum tax. AMTI is the taxpayer’s taxable income increased by the taxpayer’s tax 

preferences and adjusted by determining the tax treatment of certain items in a manner that 

negates the deferral of income resulting from the regular tax treatment of those items. 

The exemption amounts are: (1) $45,000 ($62,550 in taxable years beginning in 2006) in 

the case of married individuals filing a joint return and surviving spouses; (2) $33,750 ($42,500 

in taxable years beginning in 2006) in the case of other unmarried individuals; (3) $22,500 

($31,275 in taxable years beginning in 2006) in the case of married individuals filing separate 

returns; and (4) $22,500 in the case of an estate or trust. The exemption amounts are phased out 

by an amount equal to 25 percent of the amount by which the individual’s AMTI exceeds 

(1) $150,000 in the case of married individuals filing a joint return and surviving spouses, 

(2) $112,500 in the case of other unmarried individuals, and (3) $75,000 in the case of married 

individuals filing separate returns or an estate or a trust. These amounts are not indexed for 

inflation. 

 7

 This deduction is described in more detail below in the summary of the tax rules applicable to 

corporations. 
7 

Among the preferences and adjustments applicable to the individual alternative minimum 

tax are accelerated depreciation on certain property used in a trade or business, circulation 

expenditures, research and experimental expenditures, certain expenses and allowances related to 

oil and gas and mining exploration and development, certain tax-exempt interest income, and a 

portion of the amount of gain excluded with respect to the sale or disposition of certain small 

business stock. In addition, personal exemptions, the standard deduction, and certain itemized 

deductions, such as State and local taxes and miscellaneous deductions items, are not allowed to 

reduce alternative minimum taxable income. 

Special capital gains and dividends rates

In general, gain or loss reflected in the value of an asset is not recognized for income tax 

purposes until a taxpayer disposes of the asset. On the sale or exchange of a capital asset, any 

gain generally is included in income. Any net capital gain of an individual is taxed at maximum 

rates lower than the rates applicable to ordinary income. Net capital gain is the excess of the net 

long-term capital gain for the taxable year over the net short-term capital loss for the year. Gain 

or loss is treated as long-term if the asset is held for more than one year. 

Capital losses generally are deductible in full against capital gains. In addition, 

individual taxpayers may deduct capital losses against up to $3,000 of ordinary income in each 

year. Any remaining unused capital losses may be carried forward indefinitely to another 

taxable year. 

A separate rate structure applies to capital gains and dividends. Under present law, for 

2007, the maximum rate of tax on the adjusted net capital gain of an individual is 15 percent. In 

addition, any adjusted net capital gain otherwise taxed at a 10- or 15-percent rate is taxed at a 

five-percent rate. These rates apply for purposes of both the regular tax and the alternative 

minimum tax. Dividends are generally taxed at the same rate as capital gains. 

Credits against tax

The individual may reduce his or her tax liability by any available tax credits. Tax credits 

are allowed for certain business expenditures, certain foreign income taxes paid or accrued, 

certain education expenditures, certain child care expenditures, and with respect to children 

under 17 and for certain elderly or disabled individuals. In addition, a refundable earned income 

tax credit (“EITC”) is available to low-income workers who satisfy certain requirements. The 

amount of the EITC varies depending upon the taxpayer’s earned income and whether the 

taxpayer has one, more than one, or no qualifying children. In 2007, the maximum EITC is 

$4,716 for taxpayers with more than one qualifying child, $2,853 for taxpayers with one 

qualifying child, and $428 for taxpayers with no qualifying children. Credits allowed against the 

regular tax are not uniformly allowed against the alternative minimum tax. 
8 

B. Corporate Income Tax 

Taxable income

Corporations organized under the laws of any of the 50 States (and the District of 

Columbia) generally are subject to the U.S. corporate income tax on their worldwide taxable 

income.8

The taxable income of a corporation generally is comprised of gross income less 

allowable deductions. Gross income generally is income derived from any source, including 

gross profit from the sale of goods and services to customers, rents, royalties, interest (other than 

interest from certain indebtedness issued by State and local governments), dividends, gains from 

the sale of business and investment assets, and other income. 

Allowable deductions include ordinary and necessary business expenditures, such as 

salaries, wages, contributions to profit-sharing and pension plans and other employee benefit 

programs, repairs, bad debts, taxes (other than Federal income taxes), contributions to charitable 

organizations (subject to an income limitation), advertising, interest expense, certain losses, 

selling expenses, and other expenses. Expenditures that produce benefits in future taxable years 

to a taxpayer’s business or income-producing activities (such as the purchase of plant and 

equipment) generally are capitalized and recovered over time through depreciation, amortization 

or depletion allowances. A net operating loss incurred in one taxable year may be carried back 

two years or carried forward 20 years and allowed as a deduction in another taxable year. 

Deductions are also allowed for certain amounts despite the lack of a direct expenditure by the 

taxpayer. For example, a deduction is allowed for all or a portion of the amount of dividends 

received by a corporation from another corporation (provided certain ownership requirements are 

satisfied). Moreover, a deduction is allowed for a portion of the amount of income attributable to 

certain manufacturing activities. 

The Code also specifies certain expenditures that may not be deducted, such as dividends 

paid to shareholders, expenses associated with earning tax-exempt income,9

 certain 

entertainment expenditures, certain executive compensation in excess of $1,000,000 per year, a 

portion of the interest on certain high-yield debt obligations that resemble equity, and fines, 

penalties, bribes, kickbacks and illegal payments. 

 8

 Foreign tax credits generally are available against U.S. income tax imposed on foreign source 

income to the extent of foreign income taxes paid on that income. A foreign corporation generally is 

subject to the U.S. corporate income tax only on income with a sufficient nexus to the United States. 

A qualified small business corporation may elect, under subchapter S of the Code, not to be 

subject to the corporate income tax. If an S corporation election is made, the income of the corporation 

will flow through to the shareholders and be taxable directly to the shareholders. 

9

 For example, the carrying costs of tax-exempt State and local obligations and the premiums on 

certain life insurance policies are not deductible. 
9 

Tax liability

A corporation’s regular income tax liability generally is determined by applying the 

following tax rate schedule to its taxable income. 

Table 2.–Federal Corporate Income Tax Rates 

If taxable income is: Then the income tax rate is: 

$0-$50,000................................................................ 15 percent of taxable income 

$50,001-$75,000...................................................... 25 percent of taxable income 

$75,001-$10,000,000 .............................................. 34 percent of taxable income 

Over $10,000,000.................................................... 35 percent of taxable income 

The first two graduated rates described above are phased out for corporations with 

taxable income between $100,000 and $335,000. As a result, a corporation with taxable income 

between $335,000 and $10,000,000 effectively is subject to a flat tax rate of 34 percent. Also, the 

application of the 34-percent rate is gradually phased out for corporations with taxable income 

between $15,000,000 and $18,333,333, such that a corporation with taxable income of 

$18,333,333 or more effectively is subject to a flat rate of 35 percent. 

In contrast to the treatment of capital gains in the individual income tax, no separate rate 

structure exists for corporate capital gains. Thus, the maximum rate of tax on the net capital 

gains of a corporation is 35 percent. A corporation may not deduct the amount of capital losses in 

excess of capital gains for any taxable year. Disallowed capital losses may be carried back three 

years or carried forward five years. 

Corporations are taxed at lower rates on income from certain domestic production 

activities. This rate reduction is effected by the allowance of a deduction equal to a percentage 

of qualifying domestic production activities income. For taxable years beginning in 2007, 2008, 

and 2009, the deduction is equal to three percent of the income from manufacturing, 

construction, and certain other activities specified in the Code. Thereafter, the deduction is 

increased to nine percent.10

Like individuals, corporations may reduce their tax liability by any applicable tax credits. 

Tax credits applicable to businesses include credits for producing fuels from nonconventional 

 10 At the fully phased-in nine percent deduction, a corporation is taxed at a rate of 35 percent on 

only 91 percent of qualifying income, resulting in an effective tax rate of 0.91 * 35, or 31.85 percent. A 

similar reduction applies to the graduated rates applicable to individuals with qualifying domestic 

production activities income. 
10 

sources, investment tax credits (applicable to investment in certain renewable energy property 

and the rehabilitation of certain real property), the alcohol fuels credit (applicable to production 

of certain alcohol fuels), the research credit, the low-income housing credit (applicable to 

investment in certain low-income housing projects), the enhanced oil recovery credit (applicable 

to the recovery of certain difficult-to-extract oil reserves), the empowerment zone employment 

credit (applicable to wages paid to certain residents of or employees in empowerment zones), 

and the disabled access credit (applicable to expenditures by certain small businesses to make the 

businesses accessible to disabled individuals). The credits generally are determined based on a 

percentage of the cost associated with the underlying activity and generally are subject to certain 

limitations. 

Affiliated group

Domestic corporations that are affiliated through 80 percent or more corporate ownership 

may elect to file a consolidated return in lieu of filing separate returns. Corporations filing a 

consolidated return generally are treated as a single corporation; thus, the losses (and credits) of 

one corporation can offset the income (and thus reduce the otherwise applicable tax) of other 

affiliated corporations. 

Minimum tax

A corporation is subject to an alternative minimum tax which is payable, in addition to all 

other tax liabilities, to the extent that it exceeds the corporation’s regular income tax liability. 

The tax is imposed at a flat rate of 20 percent on alternative minimum taxable income in excess 

of a $40,000 exemption amount.11 Credits that are allowed to offset a corporation’s regular tax 

liability generally are not allowed to offset its minimum tax liability. If a corporation pays the 

alternative minimum tax, the amount of the tax paid is allowed as a credit against the regular tax 

in future years. 

Alternative minimum taxable income is the corporation’s taxable income increased by 

the corporation’s tax preferences and adjusted by determining the tax treatment of certain items 

in a manner that negates the deferral of income resulting from the regular tax treatment of those 

items. Among the preferences and adjustments applicable to the corporate alternative minimum 

tax are accelerated depreciation on certain property, certain expenses and allowances related to 

oil and gas and mining exploration and development, certain amortization expenses related to 

pollution control facilities, and certain tax-exempt interest income. In addition, corporate 

alternative minimum taxable income is increased by 75 percent of the amount by which the 

corporation’s “adjusted current earnings” exceeds its alternative minimum taxable income 

(determined without regard to this adjustment). Adjusted current earnings generally are 

determined with reference to the rules that apply in determining a corporation’s earnings and 

profits. 

 11 The exemption amount is phased out for corporations with income above certain thresholds, 

and is completely phased out for corporations with alternative minimum taxable income of $310,000 or 

more. 
11 

Treatment of corporate distributions

The taxation of a corporation generally is separate and distinct from the taxation of its 

shareholders. A distribution by a corporation to one of its shareholders generally is taxable as a 

dividend to the shareholder to the extent of the corporation’s current or accumulated earnings 

and profits.12 Thus, the amount of a corporate dividend generally is taxed twice: once when the 

income is earned by the corporation and again when the dividend is distributed to the 

shareholder.13 Conversely, amounts paid as interest to the debtholders of a corporation generally 

are subject to only one level of tax (at the recipient level) since the corporation generally is 

allowed a deduction for the amount of interest expense paid or accrued. 

Amounts received by a shareholder in complete liquidation of a corporation generally are 

treated as full payment in exchange for the shareholder’s stock. A liquidating corporation 

recognizes gain or loss on the distributed property as if such property were sold to the distributee 

for its fair market value. However, if a corporation liquidates a subsidiary corporation of which it 

has 80 percent or more control, no gain or loss generally is recognized by either the parent 

corporation or the subsidiary corporation. 

Accumulated earnings and personal holding company taxes

Taxes at a rate of 15 percent (the top rate generally applicable to dividend income of 

individuals) may be imposed upon the accumulated earnings or personal holding company 

income of a corporation. The accumulated earnings tax may be imposed if a corporation retains 

earnings in excess of reasonable business needs. The personal holding company tax may be 

imposed upon the excessive passive income of a closely held corporation. The accumulated 

earnings tax and the personal holding company tax are designed to ensure that both a corporate 

tax and a shareholder tax are effectively imposed on corporate earnings. 

 12 A distribution in excess of the earnings and profits of a corporation generally is a tax-free 

return of capital to the shareholder to the extent of the shareholder’s adjusted basis (generally, cost) in 

the stock of the corporation; such distribution is a capital gain if in excess of basis. A distribution of 

property other than cash generally is treated as a taxable sale of such property by the corporation and is 

taken into account by the shareholder at the property’s fair market value. A distribution of stock of the 

corporation generally is not a taxable event to either the corporation or the shareholder. 

13 This double taxation is mitigated by a reduced maximum tax rate of 15 percent generally 

applicable to dividend income of individuals. 
12 

C. Estate and Gift and Generation-Skipping Transfer Taxes 

The United States imposes a gift tax on any transfer of property by gift made by a U.S. 

citizen or resident, whether made directly or indirectly and whether made in trust or otherwise. 

Nonresident aliens are subject to the gift tax with respect to transfers of tangible real or personal 

property where the property is located in the United States at the time of the gift. The gift tax is 

imposed on the donor and is based on the fair market value of the property transferred. 

Deductions are allowed for certain gifts to spouses and to charities. Annual gifts of $12,000 (for 

2007) or less per donor per donee generally are not subject to tax. 

An estate tax also is imposed on the taxable estate of any person who was a citizen or 

resident of the United States at the time of death, and on certain property belonging to a 

nonresident of the United States that is located in the United States at the time of death. The 

estate tax is imposed on the estate of the decedent and generally is based on the fair market value 

of the property passing at death.14 The taxable estate generally equals the worldwide gross estate 

less certain allowable deductions, including a marital deduction for certain bequests to the 

surviving spouse of the decedent and a deduction for certain bequests to charities. 

The gift and estate taxes began as separate taxes but were partially unified in 1976 so that 

a single graduated rate schedule applied to an individual’s cumulative taxable gifts and bequests. 

Changes in 2001 decoupled the estate and gift taxes in certain ways, but a single rate schedule 

still applies to gifts and bequests. Under this rate schedule, for 2007 the unified estate and gift 

tax rates begin at 18 percent on the first $10,000 in cumulative taxable transfers and reach 45 

percent on cumulative taxable transfers over $2 million. A unified credit of $345,800 is available 

with respect to taxable transfers by gift, and a unified credit of $780,800 is available with respect 

to taxable transfers at death. These credits effectively exempt a total of $1 million in cumulative 

taxable gifts from gift tax and $2 million in cumulative taxable transfers (by gift and at death) 

from the estate tax. The unified credit also has the effect of rendering all rates below 41 percent 

inapplicable to any taxable transfer by gift or bequest.15

 14 In addition to interests in property owned by the decedent at the time of death, the Federal 

estate tax also is imposed on (1) life insurance that was either payable to the decedent’s estate or in which 

the decedent had an incident of ownership at death, (2) property over which the decedent had a general 

power of appointment at death, (3) annuities purchased by the decedent or his employer that were payable 

to the decedent before death, (4) property held as joint tenants, (5) property transferred by the decedent 

before death in which the decedent retained a life estate or over which the decedent had the power to 

designate who will possess or enjoy the property, (6) property revocably transferred by the decedent 

before death, and (7) certain transfers taking effect at the death of the decedent. 

15 The unified credit against estate tax is scheduled to increase in 2009 (so that the effective 

estate tax exemption in that year will be $3.5 million). As a result of these changes, in 2007 through 2009 

the estate tax exclusion amount equals or exceeds the level at which the highest tax rate begins. 

Effectively, the highest rate is the only estate tax rate. The unified credit against gift tax will remain at 

$345,800 through 2009 (and the effective exemption will therefore remain at $1 million). The estate tax 

is scheduled to be repealed in 2010 but reinstated (under the rules in effect before the 2001 changes) in 

2011. 
13 

A separate transfer tax is imposed on generation-skipping transfers in addition to any 

estate or gift tax that is normally imposed on such transfers. This tax is generally imposed on 

transfers, either directly or through a trust or similar arrangement, to a beneficiary in more than 

one generation below that of the transferor. For 2007, the generation-skipping transfer tax is 

imposed at a flat rate of 45 percent on generation-skipping transfers in excess of $2 million. 
14 

D. Employment Taxes 

Social security benefits and certain Medicare benefits are financed primarily by payroll 

taxes on covered wages. The Federal Insurance Contributions Act (“FICA”) imposes tax on 

employers based on the amount of wages paid to an employee during the year. The tax imposed 

is composed of two parts: (1) the old age, survivors, and disability insurance (“OASDI”) tax 

equal to 6.2 percent of covered wages up to the taxable wage base ($97,500 in 2007); and (2) the 

Medicare hospital insurance (“HI”) tax amount equal to 1.45 percent of covered wages.16 In 

addition to the tax on employers, each employee is subject to FICA taxes equal to the amount of 

tax imposed on the employer. The employee level tax generally must be withheld and remitted to 

the Federal government by the employer. 

As a parallel to FICA taxes, the Self-Employment Contributions Act (“SECA”) imposes 

taxes on the net income from self employment of self employed individuals. The rate of the 

OASDI portion of SECA taxes is equal to the combined employee and employer OASDI FICA 

tax rates and applies to self employment income up to the FICA taxable wage base. Similarly, 

the rate of the HI portion is the same as the combined employer and employee HI rates and there 

is no cap on the amount of self employment income to which the rate applies.17

In addition to FICA taxes, employers are subject to a Federal unemployment insurance 

payroll tax equal to 6.2 percent of the total wages of each employee (up to $7,000) on covered 

employment. Employers are eligible for a Federal credit equal to 5.4 percent for State 

unemployment taxes. The current 0.8 percent effective tax rate is composed of a permanent tax 

rate of 0.6 percent and a temporary surtax rate of 0.2. The temporary surtax is scheduled to 

expire on December 31, 2007. Federal unemployment insurance payroll taxes are used to fund 

programs maintained by the States for the benefit of unemployed workers. 

 16 Since 1994, the HI payroll tax has not been subject to a wage cap. 

17 For purposes of computing net earnings from self employment, taxpayers are permitted a 

deduction equal to the product of the taxpayer’s earnings (determined without regard to this deduction) 

and one-half of the sum of the rates for OASDI (12.4 percent) and HI (2.9 percent), i.e., 7.65 percent of 

net earnings. This deduction reflects the fact that the FICA rates apply to an employee’s wages, which do 

not include FICA taxes paid by the employer, whereas a self-employed individual’s net earnings are 

economically equivalent to an employee’s wages plus the employer share of FICA taxes. 
15 

E. Major Excise Taxes 

The Federal tax system imposes excise taxes on selected goods and services. Generally, 

excise taxes are taxes imposed on a per unit or ad valorem (i.e., percentage of price) basis on the 

production, importation, or sale of a specific good or service. Among the goods and services 

subject to U.S. excise taxes are motor fuels, alcoholic beverages, tobacco products, firearms, air 

and ship transportation, certain environmentally hazardous activities and products, coal, 

telephone communications, certain wagers, and vehicles lacking in fuel efficiency.18 The largest 

excise taxes in terms of revenue (for fiscal year 2005) are those for gasoline motor fuels ($23.7 

billion), diesel motor fuel ($9.4 billion), and domestic cigarettes ($7.2 billion). 

Revenues from certain Federal excise taxes are dedicated to trust funds (e.g., the 

Highway Trust Fund) for designated expenditure programs and revenues from other excise taxes 

(e.g., alcoholic beverages) go to the General Fund for general purpose expenditures. 

 18 See, Joint Committee on Taxation, Study of the Overall State of the Federal Tax System and 

Recommendations for Simplification, Pursuant to Section 8022(3)(B)of the Internal Revenue Code of 

1986, (JCS-3-01), April 2001, pp. 478-516 for a description the various Federal excise taxes. 
16 

II. HISTORICAL RECEIPTS DATA 

Individual Corporate Estate

Income Income Employment[1] Excise and Gift Other[2]

Year Tax Tax Taxes Taxes Taxes Receipts

1950 15,755 10,449 4,338 7,550 698 653 

1951 21,616 14,101 5,674 8,648 708 870 

1952 27,934 21,226 6,445 8,852 818 892 

1953 29,816 21,238 6,820 9,877 881 976 

1954 29,542 21,101 7,208 9,945 934 971 

1955 28,747 17,861 7,862 9,131 924 926 

1956 32,188 20,880 9,320 9,929 1,161 1,109 

1957 35,620 21,167 9,997 10,534 1,365 1,307 

1958 34,724 20,074 11,239 10,638 1,393 1,568 

1959 36,719 17,309 11,722 10,578 1,333 1,588 

1960 40,715 21,494 14,683 11,676 1,606 2,317 

1961 41,338 20,954 16,439 11,860 1,896 1,900 

1962 45,571 20,523 17,046 12,534 2,016 1,985 

1963 47,588 21,579 19,804 13,194 2,167 2,228 

1964 48,697 23,493 21,963 13,731 2,394 2,337 

1965 48,792 25,461 22,242 14,570 2,716 3,037 

1966 55,446 30,073 25,546 13,062 3,066 3,642 

1967 61,526 33,971 32,619 13,719 2,978 4,009 

1968 68,726 28,665 33,923 14,079 3,051 4,529 

1969 87,249 36,678 39,015 15,222 3,491 5,227 

1970 90,412 32,829 44,362 15,705 3,644 5,855 

1971 86,230 26,785 47,325 16,614 3,735 6,450 

1972 94,737 32,166 52,574 15,477 5,436 6,919 

1973 103,246 36,153 63,115 16,260 4,917 7,109 

1974 118,952 38,650 75,071 16,844 5,035 8,702 

1975 122,386 40,621 84,534 16,551 4,611 10,387 

1976 131,603 41,409 90,769 16,963 5,216 12,101 

1977 157,626 54,892 106,485 17,548 7,327 11,681 

1978 180,988 59,952 120,967 18,376 5,285 13,993 

1979 217,841 65,677 138,939 18,745 5,411 16,690 

1980 244,069 64,600 157,803 24,329 6,389 19,922 

1981 285,917 61,137 182,720 40,839 6,787 21,872 

1982 297,744 49,207 201,498 36,311 7,991 25,015 

1983 288,938 37,022 208,994 35,300 6,053 24,256 

1984 298,415 56,893 239,376 37,361 6,010 28,430 

1985 334,531 61,331 265,163 35,992 6,422 30,650 

1986 348,959 63,143 283,901 32,919 6,958 33,334 

1987 392,557 83,926 303,318 32,457 7,493 34,602 

1988 401,181 94,508 334,335 35,227 7,594 36,457 

1989 445,690 103,291 359,416 34,386 8,745 39,662 

1990 466,884 93,507 380,047 35,345 11,500 44,686 

1991 467,827 98,086 396,016 42,402 11,138 39,572 

1992 475,964 100,270 413,689 45,569 11,143 44,644 

1993 509,680 117,520 428,300 48,057 12,577 38,267 

1994 543,055 140,385 461,475 55,225 15,225 43,262 

1995 590,244 157,004 484,473 57,484 14,763 47,862 

1996 656,417 171,824 509,414 54,014 17,189 44,204 

1997 737,466 182,293 539,371 56,924 19,845 43,393 

1998 828,586 188,677 571,831 57,673 24,076 50,955 

1999 879,480 184,680 611,833 70,414 27,782 53,265 

2000 1,004,462 207,289 652,852 68,865 29,010 62,740 

2001 994,339 151,075 693,967 66,232 28,400 57,181 

2002 858,345 148,044 700,760 66,989 26,507 52,528 

2003 793,699 131,778 712,978 67,524 21,959 54,404 

2004 808,959 189,371 733,407 69,855 24,831 53,856 

2005 927,222 278,282 794,125 73,094 24,764 56,372 

[1] Employment taxes comprise old-age and survivors insurance, disability insurance, hospital insurance, railroad

 retirement, railroad social security equivalent account, employment insurance, employee share of Federal employees

 retirement, and certain non-Federal employees retirement.

[2] Other receipts are primarily composed of [1] customs duties and fees, and [2] deposits of earnings by the Federal

 Reserve system.

Source: Office of Management and Budget, Historical Tables, Budget of the U.S. Government, Fiscal Year 2007

Table 1.−Aggregate Federal Receipts by Source, 1950-2005

[millions of dollars]
17 

Figure 1.−Aggregate Receipts by Source, 2005

Excise Taxes

3%

Estate and Gift Taxes

1%

Other Receipts

3%

Individual Inc

43%

Employment Taxes

37%

Corporate Income Tax

13%