The best-known type of income tax is that paid by employees on their salary. However, income tax is also payable by the self-employed and on income from assets and pensions.
Income tax is the most important of the government’s sources of revenues. As a levy on earned income or capital gains, it makes up more than 40 percent of total tax revenues. The amounts collected flow largely into federal and state coffers, with local government receiving only a small percentage.
Every tax-payer is granted a basic tax allowance, which exempts from taxation the amount necessary to ensure a minimum standard of living. How much tax is due on income above that level depends on total earnings. Those who earn more pay more than those with lower incomes. Known as tax progression, this arrangement means that the one-tenth of households with the highest incomes contribute almost half of the total revenue.
The income tax burden increases automatically with time. As prices rise and wages are adjusted to the increased cost of living, workers slip into higher tax rates, although their purchasing power has remained the same. This effect, known as fiscal drag, could be corrected by regularly adjusting the tax scale to account for inflation.