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Monday, July 16, 2012

Mankiw: Middle Class Receives More in Government Benefits Than They Pay in Taxes

N. Gregory Mankiw (Harvard University, Department of Economics), The Progressivity of Taxes and Transfers:

Because transfer payments are, in effect, the opposite of taxes, it makes sense to look not just at taxes paid, but at taxes paid minus transfers received. For 2009, the most recent year available, here are taxes less transfers as a percentage of market income (income that households earned from their work and savings):

Bottom quintile: -301%
Second quintile: -42%
Middle quintile: -5%
Fourth quintile: 10%
Highest quintile: 22%

Top one percent: 28%

The negative 301% means that a typical family in the bottom quintile receives about $3 in transfer payments for every dollar earned.

The most surprising fact to me was that the effective tax rate is negative for the middle quintile.  According to the CBO data, this number was +14 percent in 1979 (when the data begin) and remained positive through 2007.  It was negative 0.5 percent in 2008, and negative 5% in 2009.  That is, the middle class, having long been a net contributor to the funding of government, is now a net recipient of government largess.

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Comments

An interesting statistic that raises some interesting questions:

First, is the change in the status of the middle quintile (from net transferor to net transferee) caused by a shift in policy? Or is it the result of a deterioration--relative or absolute--in the economic position of the middle quintile against the backdrop of progressive policies that, as intended, increase net transfers as economic position (relative or absolute) suffers? Note that the middle quintile's income level may be (and is) below in the "middle" of the distribution of income.

Second, if the shift in the transferor/ee status of the middle quintile is to some extent caused by a shift in policy, is that shift motivated by redistribution or by something else? In the rest of his post, Mankiw says "I recognize that part of this change [in the transferor/ee status of the middle quintile] is attributable to temporary measures to deal with the deep recession."

Posted by: Chris Sanchirico | Jul 16, 2012 9:13:32 PM

"But it is noteworthy nonetheless, as other deep recessions, such as that in 1982, did not produce a similar policy response."

What is he smoking??? "Policy response"??? More like a terminal LACK of policy by our deadlocked Congress. It simply illustrates the depth of the recession, and suggests the size of the policy response that is required, but not being taken.

Posted by: GaryD | Jul 17, 2012 4:06:40 AM

GaryD, you obviously failed to notice that this started in 2007, which just happens to be when the Congress fell under Democrat control. What divided Congress? You had it all for 4 years and only made things worse.

Posted by: SDN | Jul 17, 2012 8:59:39 AM

Those are averages per quintile, not all 60%. The transfers are very, very heavily weighted toward households with children, through refundable tax credits, Medicaid, and food stamps. So within each of the bottom three quintiles, households with children have even steeper negative income tax rates thus defined, while many households without children have positive income tax rates.

Posted by: Jeff Vanke | Jul 17, 2012 9:16:57 AM

Starting to look like a collectivist paradise after all. Obama, Timmy and The Bernank should be proud.

Posted by: TaxDudeSC | Jul 17, 2012 1:03:57 PM

Interesting analysis and an illustration of the median voter theorem (in short, pols only need to bribe 50.1% of the population, screwing 49.9% if necessary).

This increasingly rattle-trap, decaying approxi-democracy (gerrymandered districts, skull-scr*wing MSM, 6 *year* terms for Senators who can filibuster, etc.) has "evolved" to a point that poli sci and econ theory suggested they would (co-opting the middle quintile and crucifying the upper 40%-45%).

Good to know that analytical projections proved right as the lights go out over the West.

Posted by: cas127 | Jul 17, 2012 1:29:00 PM

"What is he smoking??? "Policy response"??? More like a terminal LACK of policy by our deadlocked Congress. It simply illustrates the depth of the recession, and suggests the size of the policy response that is required, but not being taken.

Posted by: GaryD | Jul 17, 2012 4:06:40 AM"

2007, D House, D Senate... not deadlocked.
2008, D House, D Senate... not deadlocked.
2009, D House, D Senate... not deadlocked.
2010, D House, D Senate... not deadlocked.

I guess FOUR YEARS wasn't enough time to get anything done? So we shouldn't elect Obama, he'll only have 4 more years in office and Democrats can't get anything done in a measly four years; right?

Or should we pretend you meant something else?

Posted by: ertdfg | Jul 17, 2012 3:45:52 PM

I wonder if he included tax expenditures, such as the mortgage and charity deductions.

Posted by: Larry | Jul 17, 2012 9:14:52 PM

Poor SDN and ertfgn. It must be nice living in their little cocoons, far away from evil facts. Have they never heard of the filibuster, or the Senate Republicans' leader's promise to block everything Obama proposes?

Posted by: GaryD | Jul 18, 2012 4:10:55 AM

As a non American, I don't understand much about the transfers that middle-income Americans are eligible for. Welfare and social security I think I understand, but they couldn't possibly explain how those in the middle quintile could be net negative on taxes. What transfers make up the difference for the middle quintile?

Posted by: Tedd | Jul 18, 2012 10:05:27 AM

This illustrates the socialist death spiral. The number of net moochers increases, while net contributors decreases. Once the 4th quintile goes negative as well, the top quintile gets fed up, moves out of the country or just sits on their assets and stops innovating, we run out of other peoples money, and become Greece. This election is a very delicate tipping point, since the middle is now net moochres, but I think they still have enough morality left that they dont want to be. Thus there is still a change they will vote the dems out, and return to a society where people earn things, instead of getting them from the gov. But this is the last chance, once the middle gets used to being moochers, then the moochers have a permanent majority, and the death spiral is ireversable.

Posted by: richard40 | Jul 18, 2012 11:31:29 AM