The 250th anniversary of the signing of the Declaration of Independence marks a great time to think about taxes.
Many of us learned as kids that excessive British levies on daily essentials like tea, sugar, and paper sparked the American Revolution. But as our TPC colleague Vanessa Williamson has written, that’s only part of the story.
The core issue was not tax amounts, but tax authority: Who has the power to tax, whose interests do tax policies serve, and how can each of us best participate in shaping the nation’s future? These questions endure to this day. Efforts to answer them rely on our shared understanding.
So, we say “Happy Birthday” to the US with this list of ten tax facts, each worth knowing as the country looks back on its first 250 years and ahead to the next 250.
1. The modern federal income tax is relatively new
Until the 20th century, the federal government relied on tariffs, excise taxes, and other sources for its revenue, and not—apart from a few brief periods—income taxes. Differences in tax types affect not only how much money the government collects but who ultimately bears their cost. Since 2025, tariffs, or import taxes that ultimately raise costs or broadly reduce incomes, have returned to the center of tax policy.
2. Payroll taxes are significant for most workers
Federal income taxes get a lot of attention, especially around April 15, but for many households, payroll taxes take a bigger chunk from their paychecks. Payroll taxes also fund Medicare and Social Security trust funds which are quickly approaching insolvency, leading many to propose revenue solutions.
3. Owing no federal income tax does not mean paying no taxes
Some households owe little or no federal income tax in a given year because they earn little or claim credits and deductions that reduce what they owe. But those same households generally still pay payroll taxes, state income taxes, sales taxes, property taxes, and other taxes.
4. Most businesses pay individual income taxes, not corporation taxes
Most US businesses are not corporations; they are largely “pass-through” businesses whose proprietors or partners report taxable income on their individual income tax returns. Pass-throughs represent a growing share of business activity, and their income is concentrated among higher-income taxpayers.
5. The tax code does more than raise revenue
Tax rules can shape choices about housing, health insurance coverage, education, charitable giving, retirement savings, and business investments. Credits, deductions, exclusions, and preferential rates, known as tax expenditures, operate much like spending programs on the tax side of the budget. The largest tax expenditures, like the employer-sponsored health benefits exclusion or preferential treatment of retirement savings, often favor higher-income households. Still, those with higher incomes generally pay higher average federal tax rates.
6. Taxes affect people differently depending on who lives in the household
A household’s tax liabilities or benefits can depend on marriage, children, caregiving responsibilities, and whether income comes from wages or other sources. Two households with similar incomes can face very different tax situations, which can either narrow or widen disparities by race or ethnicity.
7. Tax policies reduce child poverty
One-third of all federal government spending on children happens through the tax code. The earned income tax credit and the child tax credit, in particular, reduce tax bills and boost the incomes of working families with low or moderate incomes. Those two tax credits lifted 3.7 million children above the poverty line in 2024.
8. Tax literacy helps people receive benefits for which they are eligible
Tax credits support many working families, but in order for them to be effective, families must know they exist and be able to easily access them. Eligible households may miss out if they find tax rules too confusing or face barriers to tax filing.
To advance these households’ financial well-being, many states and the federal government are promoting tax literacy. More innovative and creative educational pathways may be necessary to counter tax misinformation on social media and incomplete guidance from AI tools.
9. State and local taxes matter
Federal taxes often show up in headlines, but state and local governments raised more funds until the early 20th century. These governments rely on income, sales, property, and other taxes to pay for schools, roads, public safety, health programs, and other services.
The level and mix of state and local taxes also varies enormously, with implications for fairness, competitiveness, and fiscal sustainability.
10. US taxes are lower than those of its peers
Among high-income nations, the US ranks on the low end in terms of tax revenues as a share of economic activity. Other nations rely more on taxes on goods and services than the US.
Moreover, total US revenues do not cover its total spending: the US has run a budget deficit each year since 2001.
Bonus: Tax knowledge is key to civic engagement
Understanding tax policy empowers each of us to formulate new ideas, weigh tradeoffs, and participate in debates about what we want from our government and how much we are willing to contribute to it. That knowledge—that power—can shape the nation’s next 250 years.
We hope you’ll keep following TPC’s Briefing Book, Fiscal Facts, TaxVox blogs, stories, and short-form videos to explore these questions in more depth. Happy 250th!
