Net Federal Tax Payers

While it’s true that almost everyone pays some kind of tax every year, even if “just” payroll, property, or sales/excise taxes, a small and shrinking share of the country are actually “net tax” payers.  In other words, they recieve more in direct transfers every year (excluding the costs of their share of public goods like roads, military, police, etc) than they pay in taxes each year.

Although this has to be true for some fraction of the population in order to give meaningful subsidy to, say, the poor or a meaningful safety net for those in temporary need, the size and scope of this issue makes it a very real fiscal problem at a federal, state, and local level.

Organizations like the Tax Foundation have studied analyzed this issue at a total governmental level (federal, state, and local) and provided figures to show the net impact.

See:  WHO PAYS TAXES AND WHO RECEIVES GOVERNMENT SPENDING? AN ANALYSIS OF FEDERAL, STATE AND LOCAL TAX AND SPENDING DISTRIBUTIONS, 1991-2004

[See page 31 – Figure 8 and 9]

Including Public Good

Excluding public goods

However, since some people may think the Tax Foundation is simply putting a partisan spin on this issue I thought it’d be worthwhile to investigate this using the Congressional Budget Office (CBO) data for a relatively impartial perspective.

 

CBO data: 1979-2009

This measure isn’t perfect, since they do not include state/local taxes, however it does provide a pretty good perspective on what is happening at the federal level (where most spending and taxing occurs) and it has the additional advantage of allowing us to see the evolution of this change over 30 some years.

Comments: Notice the 2nd, 3rd, and even 4th quintiles are moving from paying into the system to being significant net beneficiaries.   Meanwhile the 1st quintile holds relatively steady and the top (Q5) shows, if anything, a trend towards paying more in.

Some thoughts on income growth

Some comments on this issue from Brookings (left-leaning)

People who think middle-income living standards have stopped rising, if they are well informed, are thinking of living standards over a fairly brief period – say, the last five or ten years, when living standards have been affected by a steep recession and anemic recovery. Alternatively, if they’re thinking about living standards over two or three decades, they are only thinking about the trend in living standards within fairly narrow slices of the population – unmarried men in their 20s and early 30s who have below-average schooling, for example, or groups that have been particularly hard hit in the recent slump.

Americans in the broad middle and at the bottom of the distribution have, on average, seen their real incomes and consumption improve over the past three decades.

Why is this claim so controversial? There are four main reasons:

– A defective price index, which makes unwary observers think real incomes are climbing more slowly than they really are.

– Household income measures that fail to account for shrinking household size. If median household
income has remained unchanged (and I’m not saying it has), then shrinking household size means there is an increase in the amount of income per household member.

– Incomplete measures of income, in other words, definitions that exclude or undercount sources of income particularly important at the bottom and in the middle of the income distribution than they are at the top.

– Finally, inequality has unquestionably increased over the past 30 years (and in the past 10 years and 20 years). This means that average living standards have improved faster than median living standards. More of the economy-wide income gains have been enjoyed by Americans with a high perch in the income distribution; smaller fractions have been received by people in the middle and at the bottom.

Improvements in median living standards are nonetheless continuing, at least if we take a long enough perspective.

US Census Personal earning data

Note: This data is from the US Census CPS on people (actual earners), not households and not families.  This also excludes non-cash benefits like healthcare (which is significantly larger today than it was in the 60s, 70s, and 80s.  It also is pre-tax so real disposable income would be even larger relative to earlier decades.