Taxes pay for nearly every U.S. government cost, from the salaries of administrators and elected officials to the roads we drive on every day, national research funding, public health and safety net programs and our national security.
Cutting taxes isn't free. Tax cuts over the past decade, particularly recent cuts for corporations and the wealthiest households, have coincided with a doubling of the national debt. Yet, the economy and stock markets continue to rocket ahead. At least for now.
Research shows that taxes, and what we decide they should be, directly affect our long-term social and economic health as a nation — for better or for worse. While personal income tax rates in the U.S. have remained the same for more than a decade, recent corporate tax cuts and new tax deductions are reshaping how we think about what our government should do and how we fund it.
"A tax is a cost that you impose on someone,” said James Cloyne, a professor of economics in the College of Letters and Science at UC Davis, “so you've got to be careful about assuming that that cost is going to generate the desired benefits, such as lowering inequality or paying for a public program you care about.”
Table of Contents:
- What are the highest and lowest income tax rates?
- How tax cuts — and tax increases — can boost the economy
- How do taxes affect inequality?
- Who pays for tax cuts?
- How state taxes can fund social programs
- What’s the right tax rate?
What are the highest and lowest income tax rates?
For 2026, the highest personal income tax rate is 37% and the lowest is 10%. Both tax rates have been the same since 2013. Since income tax was first signed into law in 1913, the highest earners have had the largest cut in their tax rate, falling from a high of 94% in 1944 and 1945 and 90% throughout most of the 1950s.
However, income tax is not the only type of tax Americans and U.S. residents pay. For example, profits on real estate sales are taxed at a maximum rate of 25%. The federal government also taxes the gains on stocks and other financial investments when they are sold, but at a much lower rate than for earned income.
For example, if you sell stock in a company after holding it for more than a year, the gains are taxed as capital gains at a rate as high as 20% depending on your household income. Individuals also indirectly pay the cost of tariffs, which are taxes businesses pay for imports from other countries.
Income tax in the U.S. is a progressive tax, which means that it taxes households with the highest earned incomes at a higher rate. A regressive tax, by contrast, would tax people who earn the least at a higher rate. Having a progressive tax is a choice.
“Those are not necessarily economic considerations,” said Cloyne, an economist and expert who has extensively studied the impacts of taxes and tax policies in the U.S. and the U.K. “Those can also be more of a political consideration of how unequal you're willing to allow your society to be.”
But not everyone with the highest earnings actually pays the largest share of their income in taxes. A 2025 NBER working paper from UC Berkeley economists found that between 2018 and 2020, the 400 wealthiest Americans paid a rate of 23.8% compared to the average earner’s tax rate of 30.2%. The analysis suggested that wealthiest households paid a smaller share because they could shelter more of their business income.
How tax cuts — and tax increases — can boost the economy
Tax cuts have the potential to expand economic growth. Whether to individuals or to corporations, tax cuts can boost the economy directly or indirectly, but Cloyne said that their impact depends on the incentives they create for spending and business growth.
Tax cuts that put more money in people’s pockets directly stimulate the economy if that money gets spent. Economists call the extra money people spend the “marginal propensity to consume.” However, some people might choose instead to save the extra money for a rainy day.
“With these types of tax cuts, a dollar is a dollar,” said Cloyne, “so the question is whether we spent it or not.”
Corporate tax cuts might also directly stimulate the economy if businesses reinvest the additional capital into hiring and expansion, which also increases how much employees and shareholders have to spend. Corporate tax cuts might indirectly stimulate the economy if they encourage further innovation or if the lower tax rates attract more businesses to the U.S.
Corporate tax cuts also might increase inequality if those who end up with more money as a result of those cuts are the wealthiest households.
It turns out that not every kind of tax cut creates the same spending incentives. In a study on households in Britain, Cloyne and his co-authors found that people with home mortgages end up spending more than what they receive as a tax cut, because the tax cut itself acted like an economic stimulus. People without mortgages did not appear to increase their spending at all.
In a 2025 paper, Cloyne and his co-authors found that different types of businesses spend their corporate tax cuts in different ways. Manufacturing companies and other businesses that produce goods tended to response to lower taxes by expanding their business. Companies in the services sector tended instead to increase dividend payments to their shareholders without expanding the business or hiring.
In another study, Cloyne found that in Britain, tax cuts between 1918 and 1938 did, in fact, grow the economy. Tax cuts also reduced unemployment and increased interest rates. However, economic growth was not always the intention behind those tax cuts, and they were not targeted exclusively to the wealthy. Among them were 1924 tax cuts by Chancellor Philip Snowden that reduced taxes for poor households as part of his efforts to reduce inequality in British society.
Cloyne pointed out that raising taxes can spur economic growth directly if they pay for economic drivers that private companies can’t provide. Major public works projects of the 20th century, including the Hoover Dam and the Bay Bridge, have generated massive economic growth. Both were paid for with taxes paid to the federal government.
How do taxes affect inequality?
While taxes pay for government administration and shared public costs, they also help determine who wins and loses financially. Tax policy also affects funding for federal health and social programs for individuals and families who live in poverty.
Corporate tax cuts were the centerpiece of the 2025 One Big Beautiful Bill Act, which made permanent the corporate tax cuts passed in 2017.
“After this kicks in, our country is going to be a rocket ship, economically,” President Donald Trump told reporters at a White House ceremony to sign the bill into law.
However, there is no evidence this will happen without increasing deficits or federal debt.
“The empirical evidence just does not support the idea that these growth effects could be large enough that you're not going to have increases in deficits and the national debt as a result of these pieces of legislation,” said Monica Singhal, a professor of economics in the College of Letters and Science at UC Davis.
Government data show that past corporate tax cuts have not increased how big a share corporate taxes contribute to all U.S. tax receipts in spite of the nation’s booming economic growth over the past half-century. Corporate tax receipts as a share of all taxes declined sharply from a high of about 40% in the 1940s, and since the 1980s have hovered around 10% even while the share of individual income taxes has steadily grown.
According the Institute on Taxation and Economic Policy, a non-profit and non-partisan tax policy organization, at least 88 of the largest corporations in the U.S. paid no federal corporate income taxes in their most recent fiscal year.
Singhal, an economist who has studied U.S. and international tax policy, noted the dramatic increase in income and wealth inequality in recent decades, a global phenomenon that is particularly pronounced in the U.S.
“What's been particularly notable is that it has been very, very highly skewed at the extreme top of the income distribution,” said Singhal.
A 2024 analysis of wealth inequality from the Urban Institute showed that the wealthiest 1% of U.S. families increased their share of wealth from 36 times that of the average family in 1963 to more than 71 times the average family in 2022.
In 2025, the Congressional Budget Office, or CBO, a non-partisan government policy agency that evaluates the likely impacts of proposed federal laws, estimated that the One Big Beautiful Bill Act would significantly shift the distribution of household resources toward the wealthiest households.
While the wealthiest 10% of households would receive the largest increase in resources mostly as a result of an increase in federal taxes and cash transfers — meaning tax cuts. The poorest 10% of households, who rely on public safety net programs like food stamps or Medicaid, would experience the largest cuts.
It seems obvious that a tax system that levies the highest rates on the highest earners should reduce inequality, but Cloyne said it’s not entirely clear this is true.
By simple math, charging the wealthiest households at the highest tax rates does reduce the difference in after-tax income between the highest and lowest earners, but it might indirectly affect jobs and wages for everyone. Tax rates also might have a smaller impact on inequality than the state or structure of the broader economy.
“There are many things that could affect a country's inequality,” said Cloyne, “so it can be hard to tell whether a country has low inequality because high taxes created a fairer society, or whether inequality was low for some other reason.”
Who pays for tax cuts?
Federal tax cuts are paid for either through cuts to government services and programs or increased borrowing. As of April 2026, the national debt was $38.9 trillion ($38,946,541,987,812.28) compared to $19.2 trillion ten years ago, according to the Department of the Treasury.
In June, before the One Big Beautiful Bill Act was passed, CBO estimated that it would raise the cost of servicing the national debt by $687 billion over the next decade and increase the national budget deficit by $4.5 trillion.
The bill’s cuts in funding to social programs in addition to the tax cuts and new deductions left individual states scrambling to meet shortfalls for public programs like food stamps and Medicaid. For example, the bill cut funding for the Supplemental Nutrition Assistance Program, or SNAP, by $186 billion over the next decade. According to RAND, a non-profit and non-partisan research organization, the bill also reduced state Medicaid budgets by $665 billion over the next decade.
Unlike the federal government, individual states cannot run budget deficits, so they face the choice to either cut those programs and services or to raise their own taxes to replace those lost federal funds.
The increased role of state budgets is part of a larger trend over the past half-century. Singhal co-authored a 2012 paper documenting that state budgets doubled as a share of total government spending in the U.S. between 1952 and 2006. The shift was driven partly by federal mandates or incentives for states to fund their own costs, particularly in education, health and public welfare.
The California Hospital Association estimates that the One Big Beautiful Bill Act will result in between $66 billion and $128 billion in Medicaid and Medicare revenue losses to California hospitals over the next decade. The UC Berkeley Labor Center estimated that by 2028 as many as 2.98 million Californians will lose coverage for Medi-Cal, the state’s federally funded Medicaid health care program for low-income households.
“Either you're going to pay more for health insurance because of subsidies ending, or you're not going to get regular care and you're going to get care at the emergency room for acute things and it's going to cost a lot. That’s essentially a tax,” said Darien Shanske, a professor of political science in the College of Letters and Science and the Martin Luther King Jr. Professor of Law in the UC Davis School of Law.
How state taxes can fund social programs
Singhal said that shifting the costs of government services to states could increase geographic inequality. People who live in states that can afford to support these programs will fare better than people in states that can’t. The difference comes down to whether states can increase their own budgets through taxes.
A majority of states levy sales taxes and all states have property taxes. According to the Urban Institute, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming do not have any individual income tax. California currently has the highest top income tax rate at 13.3%.
Shanske, a tax law expert, is co-author of the “2026 Billionaire Tax Act,” a California ballot initiative, sponsored by the Service Employees International Union-United Healthcare Workers West, that would impose a one-time 5% tax, payable over five years, on the assets of individuals who have a net worth of $1 billion or more. The tax would help fund the state’s health care, public education and food assistance programs.
Taxes on assets instead of income are not unprecedented, Shanske pointed out. While taxes on financial assets like stocks and other investments are not taxed until those assets are sold, homeowners pay property taxes on the assessed value of their properties every year.
The goal with drafting the ballot initiative, said Shanske, was to design a tax that learned from earlier lessons and would raise revenue fairly and efficiently.
“Part of our goal was to understand the empirical research and then think about the loopholes and the things that make these kinds of taxes failures or successes,” said Shanske.
In March, the 2026 SIEPR Economic Summit at Stanford University included a debate on the wealth tax proposal. Stanford economist Josh Rauh was critical of the idea, arguing that estimates of tax revenues were too optimistic, and that some high-profile billionaires have already left the state. Saez, Shanske and their proposal’s co-authors have since posted a reply to Rauh.
What’s the right tax rate?
So what tax rate is the right one? Cloyne said that the answer boils down to what we believe our government should do and the kind of society we want to have.
“In the traditional sense, it's more about how you want the pie to be distributed and then, conditional on that, what's your view of this trade-off between a very productive economy that's very unequal or an economy that's less productive but more equal,” said Cloyne.
Worldwide, income tax rates vary but are similar to the income tax rate in the U.S. According to U.K.-based accounting firm PricewaterhouseCoopers, the top U.S. income tax rate of 37% is lower than the tax rate of the next four countries by GDP, with China, Germany and Japan all at 45% and the U.K. at 40%.
Other countries also use different tax strategies to fund their government services and programs. While the U.S. has no national sales tax, European countries levy a value-added tax. This kind of tax is similar to a sales tax, but a value-added tax is collected at each step of an item’s production process instead of all at once at the final point of sale.
Even if a government’s primary goal with taxes is to increase economic growth as much as possible, the specific mix of taxes needed isn’t entirely clear. Tax strategies to spark economic growth also depend on what it’s possible for a government to achieve compared to the economy working on its own.
“There may be good reasons why you raise taxes in order to do spending which you view as important to grow,” said Cloyne. “Then it's not a tax that's helping the growth, it's the spending that helps growth. Then the goal would be to try and raise the tax in the least costly way.”
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