What’s the proper way to tax personal saving and investment? It’s a great question, and under current tax law, we have lots of different answers! Specifically, we have four of them, which I’ll get to in a moment. But...
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How Much More Redistribution is Needed to Make Every Family "Equal"?
Inequality persists in America despite the federal government redistributing more than $1.5 trillion per year from the top 40 percent of families to the bottom 60 percent. So how much more redistribution would be needed to make every American family equal?
That is the subject of my op-ed in today’s Wall Street Journal (found here). Our baseline for finding the answer can be found in two separate studies released in November 2013 by the Congressional Budget Office (here) and the Tax Foundation (here).
Both studies compared the amount of federal taxes we pay of all kinds (income taxes to excise taxes) to the amount of federal spending that we receive of all kinds (from welfare programs to national defense). From that simple family “fiscal accounting” we can then measure how much the federal government is redistributing from some Americans to other Americans.
The CBO study looked at prerecession 2006 data for non-elderly households. Not surprisingly, they found that households in the lowest fifth, or quintile, received more back from government than they paid in taxes—in fact, $9.62 for every $1 they paid in taxes. At the other end of the income spectrum it is also not surprising that households in the top quintile received 17 cents in government spending for every $1 they paid in taxes.
It is surprising, however, that CBO found that households in the middle quintile, the so-called middle-class, received $1.19 in federal spending for every $1 they paid in total taxes. What this means is that as a group, the bottom three quintiles—comprising 60 percent of the population—receive more back in government spending than they pay in taxes.
The Tax Foundation study analyzed postrecession 2012 data for all American families (as opposed to the CBO’s households) and determined that federal tax and spending policies redistributed more than $1.5 trillion that year from the top 40 percent of households to the bottom 60 percent. The study also found that state and local governments contributed another $500 billion worth of redistribution from the top to the bottom earners.
Yet, with all of this redistribution inequality persists.
So to figure out how much more redistribution would be needed to make every family equal, we start with the Tax Foundation’s estimate for the average “market income” for the 150 million American families in 2012, $81,600 (market income is a broader measure than AGI and includes some employee benefits, but not transfers).
To figure out how much additional transfers we need to bring the market income of low-income families up to the national average, we need to add their current income to the net amount of government they are already receiving. For families in the bottom quintile, they have an average market income of $9,560 and receive $21,158 in federal spending. So this means they need an additional $50,882 in transfers to bring them up to the average market income.
At the other end of the income scale, in order to make high-income families “average,” we need to take even more of their income away beyond what government is already redistributing. As I outline in the WSJ piece, “Families in the top fifth have an average market income of $311,400 and pay $65,573 more in taxes than they receive in spending. Thus we need to take an additional $164,227 from them in higher taxes to lower their market incomes to the national average.”
When we reconcile these figures for the millions of families in each quintile, we would need to redistribute an additional $2.4 trillion in income from the top 40 percent of families to the bottom 60 percent in order to give every family an average market income.
This brings the total amount of redistribution to nearly $4 trillion—per year—to close the income gap.
The questions I ask readers who believe that more should be done to narrow the income gap are: “Where on that continuum should we aim, and what policies would achieve these goals without bringing the economy to its knees?”
If you are interested in reading more on government redistribution, I encourage you to read Gerald Prante’s White Paper, A Distributional Analysis of Fiscal Policies in the United States, 2000-2012 November 05, 2013
Also, Tax Foundation economists first began conducting this fiscal accounting in 1967 with a landmark study showing how much households at various income levels received in government spending compared to how much they paid in taxes. We updated that research in 1981, 2007, 2009, and 2013. The most recent studies have also measured the amount of income redistributed from some groups of Americans to others.
We hope this research contributes to an honest debate over tax and spending policies in Washington.
Video: Sally, redistribution, taxes and the deficit
- October 8, 2010
How Much Does President Obama's Budget Redistribute Income? By Gerald Prante, Patrick Fleenor September 21, 2009
Basic Facts on Redistribution and the Impact of Obama's Policies By Scott A. Hodge September 21, 2009
Allocating Tax Burdens and Government Benefits by Income Class, 1972-73 and 1977 By TF Staff February 01, 1981
Allocating Tax Burdens and Government Benefits by Income Class By TF Staff January 01, 1967
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The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.