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Why is $1 Trillion in Redistribution Not Enough?

1 min readBy: Scott Hodge

In an essay in today’s Wall Street Journal titled “Obama and 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. Tipping Point,” economist Adam Lerrick wonders “what happens when the voter in the exact middle of the earnings spectrum receives in benefits from Washington than he pays in taxes?”

Lerrick suggests that Obama’s “gift-wrapped packets of money in the form of refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). s” will push the balance past the tipping point where the majority of Americans will receive more in government benefits than they pay in taxes.

Lerrick is right to be worried, but a 2007 Tax Foundation report showed that America is already past the tipping point. Economists Gerald Prante and Andrew Chamberlain showed that governments at all levels are redistributing more than $1 trillion from the top 40 percent of households to the bottom 60 percent.

As the chart below shows, the typical low income person received $8.21 for every dollar they paid in taxes while the typical upper income household received .41 cents for every dollar of taxes paid. More remarkably, the study showed that households in the “forgotten” middle-income group received $1.30 in spending for every dollar they paid in taxes.

Clearly, Obama’s tax and spending plans will make the overall federal system more “progressive” or pro-poor. His tax plan alone would redistribute more than $140 billion per year from the top 1 percent of taxpayers to everyone else.

Obama did come clean on this issue when he said recently that he would “spread the wealth around,” but the facts show that government tax and spending policy is already designed to redistribute vast sums of wealth from upper-income households to low-income households.

The question for Obama is “why is $1 trillion in redistribution not enough?”