What Makes Up Americans’ Incomes?

We all know the federal government taxes income, but income is much more than salaries and wages. The Tax Foundation has a new report by economist Alan Cole that breaks down Americans’ personal income and identifies which sources contribute most to people’s incomes.

In 2012, Americans reported a total of $9.2 trillion in income. By far, the largest source of that income was salaries and wages, which added up to $6.3 trillion and constituted 68.2 percent of the total.

Another big chunk of personal income is actually business income: as Cole notes, 95 percent of all businesses in the United States are “pass-through” businesses that file as individuals, and those businesses were responsible for $839 billion of personal income in 2012.

Cole makes an important point about capital gains and dividend income, which constitutes $883 billion of personal income. Because investment income is significantly smaller than labor income, Cole says increasing taxes on investments would do little to impact the federal budget, yet it would have a major impact on investment, which translates into lower economic growth and reduced saving.

A recent Tax Foundation analysis of President Obama’s plan to raise taxes on capital gains and dividends concluded that it would hurt families in all income brackets, reducing GDP and shrinking wages. Moreover, the tax hike wouldn’t even add to revenues — a dynamic analysis of the tax hike proposal finds that it would cost the federal government $12 billion.

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