Frequently Asked Questions about the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation’s Distributional Analysis of Federal Tax and Spending Policies
- What is the purpose of the Tax Foundation’s distributional analysis project?
The goal of the project is to present to the general public and policymakers a more comprehensive look at the role federal government fiscal policies play in the distribution of income. The distribution of the economic pie was a big issue in the 2008 Presidential campaign, and many policymakers’ proposed tax and spending policies focus on this issue. Our goal is to not only present a comprehensive estimate of how the federal government redistributes the economic pie, but also to show how proposed policy changes, such as President Obama’s new Budget, would affect different income groups.
- How do the distributional tables provided here differ from other often cited distributional tables such as those produced by the Congressional Budget Office, the U.S. Department of the Treasury, and the Urban-Brookings Tax Policy Center?
Traditionally, distributional tables have focused solely on the tax side of the budget while ignoring the spending side, even most government transfers. This one-sided approach to analyzing how government policies affect the distribution of income is a significant shortcoming. In order to get a more complete picture of the federal government’s footprint on the distribution of the economic pie, it is necessary to consider both the tax and spending sides of the budget.
- How are the estimates calculated?
The general idea is to allocate every item in the federal budget to families in proportion to the estimated benefit (or loss) the family receives from the item. This requires assumptions about who benefits from spending policies and who bears the burden of tax policies. This approach also requires that the benefits be allocated across families.
The estimates are produced using the Tax Foundation’s Fiscal Incidence Model (TFFIM), a large microdata set consisting of thousands of variables drawn primarily from Internal Revenue Service and Census Bureau data. These data are also projected through the ten-year budget window (2010 through 2019). The TFFIM includes detailed calculators used to simulate the distributional impact of proposed changes in tax and spending policies.
- What does the Tax Foundation assume about who benefits from national defense, environmental protection, and other “public goods”?
The assumptions made for major budgetary items are detailed on the Tax Foundation’s Fiscal Incidence methodology page. In general, items that are classified as “public goods” (which means that no individual can be prevented from consuming the item, and the incremental cost of another person’s consumption is zero), are distributed based on a combination of the number of persons in a family, the family’s income, and the family’s wealth. National defense, the largest public good, is distributed in proportion to a family’s net worth.
- How does the Tax Foundation handle the notion that some income redistribution may in itself be regarded as a public good? For example, the TANF program (welfare spending) may indirectly benefit high-income families who care about the poor or who receive some positive spillover effects of a more even distribution of the economic pie.
The purpose of this project is to measure the extent to which the federal government is redistributing income through both its tax and spending fiscal policies. In order to measure the amount of redistribution, we assume that there is no public-good benefit associated with the income redistribution itself. This approach focuses on the relevant question: How much income redistribution is occurring through the tax and spending fiscal policies, all else constant? It is left up to policymakers and the political process to determine whether this level of redistribution is appropriate.
- What assumptions are made about who pays taxes?
The incidence assumptions made for the TFFIM are detailed on our methodology page. In general, standard distributional assumptions with regard to who bears the burden of various federal taxes are followed. On the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. , however, we follow the more recent economic research that finds a substantial portion of this tax is borne by workers through lower real wages. In particular, we assume that 70 percent of the corporate income tax is borne by workers in proportion to their overall compensation, while 30 percent is borne by all owners of capital in proportion to their capital income.
- Does the analysis include state and local taxes and spending too?
No. This analysis does not account directly for state and local fiscal policies, but instead focuses on federal tax and spending fiscal policies.
Note, however, that Table 30 in our presentation does give an estimate of the distribution of the overall tax burden (federal, state and local) under both the baseline and policy situations. We do not take into account changes in state and local policy, and those are assumed to be fixed in this table.
- Isn’t much of the redistribution done by the federal government focused on age rather than on income groups?
Age is an important component of the underlying policies and should be kept in mind when interpreting the results. The analysis includes multiple alternative presentations that take age into account. First, Table 2 shows how the results change if we exclude Social Security and Medicare, along with payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es, from the federal budget. Other tables present the results by age group, thereby showing the extent of income redistribution across income groups, holding age constant.
- How do you respond to the claim that the government just wastes our money, making government spending worthless to everyone?
For this analysis, we assume that the factors of production (the resources used to produce goods and services) in government are paid an efficient wage and are not earning what economists call “economic rents.” (In other words, we assume that the factors of production employed by the government, such as labor, could earn just as high an expected return or wage if employed in the private sector.) The analysis simply allocates the budgetary amount spent, assuming the spending level is optimal from a societal perspective (except for the possible income redistribution purpose). Similarly, the analysis does not account for any deadweight loss associated with the taxes when analyzing the revenue side of the budget.
- How does this fiscal incidence project differ from the study conducted in 2007 by the Tax Foundation that looked at the distribution of government tax and spending at all levels of government?
The study conducted in 2007 used a “cost of services” approach to calculating the distribution of government spending, whereas this study uses a benefit approach. Numerous changes have also been made to the incidence assumptions, including most notably national defense, Medicare and the federal deficit. The unit of analysis is different as well. The 2007 study looked at all levels of government, while this project (for now) is focused solely on the federal budget. Finally, the 2009 study uses more detailed categories and is based upon Office of Management and Budget figures, whereas the 2007 study focused on the calendar year 2004 figures by broad functional categories from the Bureau of Economic Analysis.
- Who are the Tax Foundation researchers involved in this project?
Tax Foundation Senior Economist Gerald Prante constructs the matched database, edits the simulators for spending policies, and oversees the ultimate allocation of the items in the federal budget. Tax Foundation Chief Economist Patrick Fleenor oversees the tax policy simulators and the extrapolation (or aging) of the matched database. Tax Foundation Analyst Mark Robyn provides modeling assistance and data research, and works on programming changes to the income tax simulator given proposed changes in tax law. Tax Foundation Senior Research Fellow Robert Carroll supervises the project. All are involved in the methodological decisions, including the economic incidence assumptions made for every tax and spending functional category in the federal budget.
- Are any other research organizations affiliated with this project?
No. The Tax Foundation is solely responsible for the distributional tables and associated analysis presented on its website. Others not affiliated with the Tax Foundation are free to cite the work of this project, but any use (or misuse) of the Tax Foundation’s analysis by others (including blogs, media, or policymakers) is beyond the control of the Tax Foundation.