July 6, 2007

Who?s Paying for Low-Income Transfer Payments?

This commentary appeared in the Summer 2007 issue of Tax Watch.

On April 26, the House Ways and Means Subcommittee on Income Security and Family Support held a hearing to discuss ways of reducing poverty. A recent report from the Census Bureau shows the poverty level remained stable between 2006 and 2007, but there has been a slight increase in the poverty rate since 2000.

Before the committee can answer the question, “How do we reduce poverty?” lawmakers first must have some basic facts on the amount of taxes paid by low-income Americans and the amount of spending they currently get from government.

A new Tax Foundation study, “Who Pays America’s Tax Burden, and Who Gets the Most Government Spending?” shows that the typical low-income household pays $1,684 in total federal taxes, yet receives $17,724 in federal transfer payments alone, not to mention other federal programs such as education and public transportation. In other words, the typical low-income household receives $10.53 in transfer payments for every dollar it pays in federal taxes.

Not much more can be done through the tax system to help these households because the vast majority of low-income households pay little or no income taxes and only a modest amount of other federal taxes such as payroll and excise taxes. Indeed, some 44 million Americans file a tax return but have no income tax liability after taking advantage of their credits and deductions.

Many of those who pay no income taxes still get generous subsidies from the IRS through the Earned Income Tax Credit. Indeed, the IRS sends out some $36 billion each year in “refundable” checks to low-income households. In many cases, these subsidies more than offset the amount these workers pay in payroll and excise taxes.

On the spending side, the federal government uses a vast array of programs to provide direct transfer payments as its primary vehicles for poverty reduction. In 2004, transfer programs such as Social Security, Temporary Assistance for Needy Families, Food Stamps, Medicare, and disability payments amounted to more than $1.25 trillion.

The lowest-income Americans are not the only recipients of such transfer payments. Indeed, the typical household in the top 20 percent receives more than $6,600 in transfer payments. However, $538 billion, or 43 percent, of all transfer spending flows to the bottom income group. Net of taxes, the typical low-income household receives $16,040 annually in federal transfer payments.

These figures should raise a number of questions for lawmakers. If the poverty rate remains in double digits with massive government spending, will more money solve the problem? Why is some of this spending not counted as income in the official poverty measure? Is the tax system and the IRS the proper agent for delivering social welfare benefits?

To be sure, most Americans support efforts to reduce poverty. But any additional measures to “solve” the problem must begin with an accurate assessment of what the government is already doing for low-income households through both spending and tax programs.