What We Tax

Taxes pay for roads, schools, and the military. But where do the taxes come from?

Mostly, we tax work. Payroll taxes take fifteen point three percent starting with your very first dollar — no deductions, no exemptions. Income tax comes on top of that. If your money comes from a paycheck, the system is built to collect.

Wealth is a different story. Stocks that grow in value are never taxed until they're sold — and if they're passed down at death, often never taxed at all. Inheritances under thirty million dollars per couple: untaxed.

America has exactly one true wealth tax: the property tax. For a typical family, it falls on their biggest asset — their home, every year. The biggest assets of the wealthy — stocks and bonds — get no annual bill.

We tax what working families have. We barely touch what wealthy families hold. We argue constantly about how much to tax. We almost never ask what to tax.

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The payroll tax: first dollar, no deductions. The Congressional Research Service describes the structure plainly: payroll taxes apply "to the first dollar of wages" with "no deductions and limited credits." The combined rate is 15.3% — 7.65% withheld from the employee and 7.65% paid by the employer (self-employed workers pay the full 15.3% directly). Economists, including the Congressional Budget Office in its standard convention, attribute the employer share to workers in the form of lower wages. There is no standard deduction, no personal exemption, and no zero bracket: a worker earning $8,000 a year pays the same payroll rate on those dollars as one earning $80,000. The Social Security portion stops entirely at $184,500 (2026) — income above the cap is exempt. Payroll taxes are the second-largest federal revenue source, and roughly two-thirds of American households pay more in payroll taxes than in federal income tax. (CRS R47062; Tax Policy Center)

Wealth: taxed on realization, or never. Capital gains are taxed only when assets are sold (the "realization principle"). Assets held until death receive a stepped-up basis (IRC §1014): the accumulated lifetime gain is erased for tax purposes, and heirs inherit at current market value. Combined with borrowing against appreciating assets, this is the "buy, borrow, die" strategy documented by ProPublica's IRS Files. The federal estate tax applies only above $15 million per person / $30 million per married couple (made permanent by the OBBBA, July 2025) — 99.9%+ of estates owe nothing. Six states levy inheritance taxes at lower thresholds; there is no federal tax on inheritances below the exemption. (ProPublica; Tax Foundation on OBBBA)

The property tax as America's only wealth tax. A wealth tax is an annual levy on the value of what you own, not what you earn. No U.S. jurisdiction taxes net worth — but every state taxes real property annually on its assessed value. That makes the property tax the one true wealth tax in the American system. For the middle class, it lands on their principal asset: Federal Reserve Survey of Consumer Finances data show home equity constitutes the majority of middle-income families' net worth, with the bottom three income quintiles holding roughly half their wealth in their primary residence. The wealthy hold their fortunes differently: the top 10% own roughly 78% of business equity and 75% of directly held stocks, and for top earners only about a fifth of assets are in their homes. Stocks, bonds, and business equity face no annual value-based tax — only taxes on realization or dividends. (Fed SCF via Richmond Fed; NBER)

Important precision: who pays property taxes in aggregate. Residential property accounts for about 44% of total property tax collections nationwide; non-residential (commercial and industrial) pays roughly 56%, because commercial property is typically taxed at higher rates (about 1.7x the homestead rate on average, higher in 39 states) even though residential property makes up over 60% of assessed valuation. This is why the script frames the point from the household's perspective — the property tax hits the typical family's biggest asset annually, while the wealthy family's biggest assets face no annual levy — rather than claiming homes fund most collections. Note also that renters bear property taxes indirectly through rent, so the tax reaches households that own nothing at all. (Tax Foundation; Lincoln Institute)

The composition is the choice. Stepping back: the American revenue system collects heavily from labor (payroll + income tax on wages, withheld automatically), moderately from consumption (state/local sales taxes), annually from middle-class housing wealth (property tax), and lightly-to-never from financial wealth (realization-only, stepped-up basis, high estate exemption). None of this is a law of nature — other wealthy democracies weight the mix differently. What a society taxes reflects what it has chosen to reach — and what it has chosen to leave alone.

Related Civic Minute segments: One Direction, Same Dollar Different Tax, The Ledger, The Napkin (Tax History arc). Related PM scripts: You Already Pay a Wealth Tax (the property-tax argument from the advocacy angle — this CM script is its descriptive cousin), Buy Borrow Die, The Stepped-Up Basis, Social Security & the Wage Cap.