Tax and Spend: Who Wins?
(This commentary appeared in the New York Post on March 9, 2007)
FROM property taxes to income taxes, the tax burden for the av erage American household continues to rise. This year, Americans will have to work a full four months before they will pay off all the taxes they owe.
But while the tax burden increases, so, too, does the amount government spends. Where does all that money go? Are Americans getting a good deal?
Countless studies have looked at who pays the most taxes, but very few have examined who ends up getting all the money that federal, state, and local governments hand out. Now, with the most recent data available, we can determine where it goes, who gets it and the value of what they receive for their tax dollar.
In 2004, the total tax burden paid by Americans reached $3 trillion – roughly $27,000 per household. For that, the average U.S. household received more than $31,000 in government services. That includes direct payments from Social Security, Medicare and other programs as well as public goods distributed uniformly, such as defense spending.
But that only tells part of the story.
In a recent report, the Tax Foundation separated American households evenly into five income groups, or “quintiles,” and evaluated taxes and spending at all government levels to see which Americans pay the most in taxes and which ones receive the most in spending.
In 2004, the quintile of households with the lowest income received roughly $8.21 in total government spending for each dollar of taxes paid. Middle-income households got $1.30 per tax dollar, while the highest-earning took in just 41 cents.
The ratio of taxes paid to services received is most stark at the federal level. Those in the lowest quintile received $14.76 in federal spending for every dollar they paid in federal taxes; for middle earners, it was $1.29; top earners, just 32 cents.
In total-dollar terms, low-income families netted over $31,000 each from government taxes and spending, while high-income households lost roughly $48,000.
This analysis shows a massive downward redistribution of over $1 trillion from the top two quintiles to the bottom three. Fully 60 percent of all Americans are net consumers of government services. That is, they receive more from government spending than they pay in taxes.
Most Americans are completely unaware of these facts. In a recent Harris Interactive survey, nine out of 10 respondents said they believed the cost of the government services they received totaled less than $10,000 – just a third of what is actually spent on the average household.
This suggests Americans either have a low opinion of the government services they receive or simply lack any idea about how much those services cost.
And costs are only going to increase.
The onset of retiring baby boomers will drive entitlement spending into the stratosphere – and the imbalance between those who pay and those who consume will make solving these problems extremely difficult. Explosions in spending will have to be paid by a smaller and smaller group of taxpayers.
Needless to say, this is unsustainable.
Unfortunately, these facts escape most lawmakers as they perforate the tax code with special carve-outs for politically favorable groups and pontificate about income inequality in America – all the while ignoring the vast disparities in government spending.
Yes, many believe that tax and spending policies should be vehicles for mitigating income differences – but the facts about how today’s policies massively redistribute from high to low earners should be a vital part of the debate.
Scott Hodge is the president of the Tax Foundation.