TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

A Member of the Law Professor Blogs Network

Saturday, March 24, 2007

Tax Foundation Publishes Who Pays Taxes and Who Receives Government Spending?

Tax_foundation_2Andrew Chamberlain & Gerald Prante have posted Who Pays Taxes and Who Receives Government Spending? An Analysis of Federal, State and Local Tax and Spending Distributions, 1991-2004 on the Tax Foundation web site.  Here is the abstract:

While the U.S. tax system is progressive, the distribution of government spending makes the overall fiscal system much more progressive than is apparent from tax distributions alone. Using a microdata model we estimate the distribution of federal, state and local taxes and spending between 1991 and 2004. We find households in the lowest quintile of income received roughly $8.21 in federal, state and local government spending for every dollar of taxes paid in 2004, while households in the middle quintile received $1.30, and households in the top quintile received $0.41. Overall, tax payments exceeded government spending received for the top two quintiles of income, resulting in a net fiscal transfer of between $1.031 trillion and $1.527 trillion between quintiles. Both taxes and spending appear to have large distributional effects on households, and these effects have grown since 1991. The results suggest tax distributions alone are an inadequate measure of progressivity, and policymakers should examine both tax and spending distributions when judging the overall fairness of policy toward income groups.

There also is a shorter version, with executive summary, for nontax specialists.  Here are three of the many interesting charts and tables in the 121-page paper:

Tax_foundation_3

Tax_foundation_2_2

Tax_foundation_3_2

http://taxprof.typepad.com/taxprof_blog/2007/03/tax_foundation__4.html

Think Tank Reports | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341c4eab53ef00d8341c500e53ef

Listed below are links to weblogs that reference Tax Foundation Publishes Who Pays Taxes and Who Receives Government Spending?:

» WHO GIVES, WHO GETS from Roth & Company, P.C.
The Tax Foundation has issued a new study that combines spending and tax stats to see both who pays for... [Read More]

Tracked on Mar 26, 2007 5:42:44 AM

» A Tax Parable from Michael Williams -- Master of None
Donald L. Luskin posts a great tax parable from one of his readers named Z. Here's how it starts: Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they... [Read More]

Tracked on Apr 19, 2007 2:53:59 PM

Comments

From a reading of the 12 page summary and a glimpse into a few key sections of the paper itself, I found it to be misleading and not very helpful. I think it would be a shame if it went unchallenged on the prestigious TaxProf blog.

A real analysis would go to greater lengths to ascertain who benefits from government spending on public and quasi-private goods, which together make up 58.2% of government spending (their numbers). In a move of what is better described as intellectually laziness instead of intellectual dishonesty, the authors assume everyone benefits from the former category equally. Of course, this is hardly the case. It doesn’t take much insight to realize that people with accumulated wealth (essentially the same people with high incomes), stand to benefit much more from national defense and the rule of law (as applied in civil cases) than others. They simply have much more to lose, should the federal and state governments not continue to maintain (preferably democratic) law and order.

The authors kind of acknowledge this (pages 61-62) but shy away from further discussion and blame their model (“the cost of service framework”) for being basically incompatible with this observation. Yet they do not want to render their study meaningless or vulnerable to immediate dismissal by excluding public goods, so they reach a bizarre compromise: assume everyone benefits equally from these public goods, namely $8,150 per household.

Also interesting was a particularly naïve sentence from the twelve page “special report”: "whichever group you find yourself in, there are roughly 58 million other American people with similar household incomes to yours who share that group with you." This might be true for the bottom 80% of households but it is wildly inaccurate for the top 20%. The top 20%, as the authors note, commences at income in excess of $99,502. However, a person in that same quintile could have income well in excess of a million dollars. That’s not very similar. It’s especially important to point that out because upper middle class people should not be misled into thinking they are in the same boat as the ridiculously wealthy. Just like real family farmers shouldn’t be misled into thinking the estate tax routinely targets them.

As a result, the paper uses 121 pages and doesn’t tell us anything new. It basically reiterates the straightforward point that transfer payments (comprised basically of Medicare and Medicaid) benefit poor people more than rich people. They do. And yet, it still sucks to be poor in this country. I guess we need more transfer payments! Or we could change reality to better reflect their model: award more military contracts to the impoverished?

Posted by: Philip Cleary | Mar 25, 2007 10:11:30 AM

Philip, that is an old dodge and an invalid one. The rich have more to lose but they also have the means to provide their own security. The wealthy have always been able to hire bodyguards, mercenaries, even small armies, while the poor rely largely on the effectiveness of taxpayer funded organizations such as the military and local police for their security beyond what they can muster physically. Police as a law enforcement tool to all citizens' benefit has only been with us a few centuries.

The wealthy benefit from footing the bill for this because blue collar workers who can sleep soundly without fear of being murdered in their beds are far more likely to show up for work and perform effectively. The cost of effective anti-crime enforcement pays off in the economy.

It will always suck to be poor. That is at the heart of the definition of poverty and why it is undesirable to be in that state. Noting that it still sucks to be poor is akin to noting the continuance of gravity on the planet. Anyone finding either to be a surprise has some explaining to do.

Posted by: epobirs | Mar 25, 2007 11:16:18 AM

"It doesn’t take much insight to realize that people with accumulated wealth (essentially the same people with high incomes), stand to benefit much more from national defense and the rule of law (as applied in civil cases) than others."-Philip Cleary

Um, no they don't. The uber wealthy have less need of rule of law than the poor,just look in any country were the rule of law doesn't exist, the poor there are much more exploited by the rich than they are here. Now if you had made a link between a strong infrastructure and the needs of the wealthy, I might have been inclined to agree with you. Your other points are right on.(IMHO)

Posted by: Adam Bair | Mar 25, 2007 11:21:01 AM

Following the statement that 'it sucks to be poor' with 'we need more transfer payments' implies a causal relationship between the wealth of the rich and the poverty of the poor. It implies that the poor are so because the rich are withholding the money, those meanies.

It is closer to the truth to say the poor are so because they lack the skills or the motivation to become rich. In this country, even the poorest has more FREE or subsidized opportunities for self-improvement than most of the rest of the world combined. Some poor may choose to believe that they cannot improve their lives (and their income) by improving their skillset; for those folks, it is much easier blame their poverty on the rich holding them back. Those armchair bureaucrats who believe that the cure for poverty is to supply 'more transfer payments' are 'enabling' the poor to believe that they have no hope of self-improvement, and that the rich are to blame for their woes.

Armchair bureaucrats, I ask you: how many of the poor remain so after they get some higher education? That is the real cure, and you know it. Do a study on how long the poor stay poor, and then cross-reference that with the poor who are motivated enough to go to night school, then subsequently get out of poverty. Of course, you may then be left with less to whine about, so I doubt you're motivated to get to this truth.

Posted by: P. Lawton | Mar 25, 2007 11:48:07 AM

Phillip -- To be fair the paper presents almost everything including and excluding public goods, so it's not like it's hiding the impact. Besides it says right up front it's not trying to show who gets utility from them, but just where spending is aimed. How else can a non-rivalrous/non-excludable thing like defense be handled?

Posted by: aman4646 | Mar 25, 2007 1:06:29 PM

Let's just get rid of the IRS!!!

http://edgemedia.info/2007/03/25/lets-abolish-the-irs/

Posted by: Edge | Mar 25, 2007 2:56:37 PM

Transfer payments are rewards for not working, and they typically cease once the recipient gets a job or starts a business. The higher the payments, the greater the incentive to not produce and improve one's human capital.

In order for payments to be transferred, they must have a source. In the case of transfer payments to the poor, the source is the wealthy.

In general, there are three reasons for taking something from someone: transaction, restitution, and theft. Transactions are voluntary givings of value by two or more parties to each other. Restitution is taking something from someone and returning it to its rightful owner. Theft is wrongfully taking something from someone.

The debate over welfare and transfer payments is over whether the wealthy are buying a peaceful underclass, paying restitution to the poor, or being robbed by government on behalf of the poor.

This is ultimately a religious debate, in which infinite counterarguments will not disprove infinite arguments in favor of or opposed to any combination of these three views.

Posted by: Anders Chydenius | Mar 25, 2007 3:16:05 PM

Philip Cleary's comment above is surprisingly inflamatory, and pretty uninformed as well, unfortunately. This stuff is all very similar to the past literature here. And it does point the way in the right direction, does it not? It's obviously not enough to just look at taxes, as if people don't get anything from government back.

Posted by: Ben | Mar 25, 2007 5:51:59 PM

label your x and y axis. A friend linked one of the graphs, and it doesn't readily make sense on it's own.

Posted by: H | Mar 26, 2007 9:38:30 AM

The study has a very naive idea of who the recipients of government spending are. According to its authors, the owners of the company that built the space shuttle and the head of NASA each received $135 as their portion of government spending on the space program, and Joe Sixpack who sat at home and watched the launch on TV also got $135 in government spending on the space program. And to think — Joe Sixpack might not have paid as much in taxes for this equal benefit! Lucky Ducky!

Posted by: David Gross | Mar 26, 2007 11:28:26 AM

I detail some additional complaints I have with the study here:

http://sniggle.net/Experiment/index.php?entry=26Mar07

Posted by: David Gross | Mar 26, 2007 2:08:10 PM

Transfer payment to the poor? Don't make me laugh. How do you think the wealthy receive the wealth in their pockets. Owners/investors are transfer babies. Labor creates capital. It is then transferred from the ones who created it(labor) to owners/investors. The wealthy live off labor. People in glass house should keep their mouths shut.

Posted by: reality_check | Jul 25, 2008 7:25:55 AM