"To update one of the tables for the next edition of my favorite textbook, I have been looking at the new CBO report on
the distribution of income and taxes. I found the following
calculations, based on the numbers in the CBO's Table 7, illuminating.
payments are, in effect, the opposite of taxes, it makes sense to look
not just at taxes paid, but at taxes paid minus transfers received. For
2009, the most recent year available, here are taxes less transfers as a
percentage of market income (income that households earned from their
work and savings):
Bottom quintile: -301 percent
Second quintile: -42 percent
Middle quintile: -5 percent
Fourth quintile: 10 percent
Highest quintile: 22 percent
Top one percent: 28 percent
negative 301 percent means that a typical family in the bottom quintile
receives about $3 in transfer payments for every dollar earned.
most surprising fact to me was that the effective tax rate is negative
for the middle quintile. According to the CBO data, this number was
positive from 1979 (when the data begins) to 2007. It was negative 0.5
percent in 2008, and negative 5 percent in 2009. That is, the middle
class, having long been a net contributor to the funding of government,
is now a net recipient of government largess."
The exercise is fine, in my opinion. He's exactly right that payments are like negative taxes. But why focus on transfer payments when assessing net contributions? I don't see the justification for that. There are lots of things the government spends revenue on besides transfer programs that provide real benefits to people across the income distribution. Simply spending on security and the maintenance of property rights confers huge benefits on the upper quintiles, as does the provision of general education and training and a dependable infrastructure. Of course everyone along the income distribution benefits from this, but this also happens to be where the benefits accruing to higher quintiles primarily come from. In certain cases, like security spending and spending on the justice system, the benefits of the spending increase with income. To the extent that the criminal justice system is slanted against low income populations, one could even argue that spending on the justice system is regressive.
So why focus just on direct transfer payments?
I think this sort of analysis is useful for thinking about the direct impact of tax and transfer programs on disposable income, but I don't think it's good for saying things like "the middle class, having long been a net contributor to the funding of government, is now a net recipient of government largess."
Friday Night Music: Hotel California
2 hours ago