The Congressional Budget Office (CBO) released a report earlier this year titled “The Distribution of Household Income, 2014.” The report analyses a mountain of data from 2014, looking for trends in the distribution of income, taxation, transfers from federal government programs, inequality, and so on. Basically, the report looks at the actual data behind every argument brought by a political science major to their first economics class. (Note: the author was just such a student once; the comment is meant to be descriptive, not disparaging.) Many of the report’s findings further the debate on the aforementioned topics. Certain of its findings on the distribution of taxation and income are informative, as is the aggregation of average tax rates by income level over time. However, it is what is buried in the data that is perhaps unprecedented.
Over half of Americans receive more in federal transfer payments than they pay out in federal taxes.
The document itself does not advertise this fact; it is buried in the Excel spreadsheets that contain the data and obscured by the report’s definition of “Income Before Taxes and Transfers.” According to the report, the bottom two quintiles get more in transfer payments than they pay in taxes, while the other three pay anywhere from slightly more to 50% more than they receive in benefits.
However, this finding only holds because the CBO includes more than just “market income” (labor income, business income, capital income, retirement income, and other nongovernmental income sources) in its measure of “Income Before Transfers and Taxes.” The CBO also includes “social insurance benefits” such as income from Social Security (Old Age and SSDI), Medicare, unemployment insurance, and workers’ compensation in its ostensibly pre-transfer measure. Therefore, the CBO chart does not actually say what most readers will think it says.
The truth of the matter is that if we look only at pre-tax and pre-transfer market income, over half of Americans are receiving more from the federal government in transfers than they are paying in taxes. It is only by including some transfers in the definition of income that the proportion shrinks to below 50%. Ryan McMaken of the Mises Institute has sifted through the Excel data and found this result.
Furthermore, McMaken shows the range between how much was paid in federal taxes and how much was received in benefits, for each quintile.
Of note is that these findings incorporate all forms of federal taxation, not just the income tax. Many similar studies have generated popular interpretations of their findings along the lines of “40% of Americans pay no tax.” This statement is true, if we are only talking about the income tax, but most of that 40% pays payroll taxes on their earnings. However, the CBO report does not suffer from this pitfall. The report considers all federal taxes (specifically: income, payroll, corporate, and excise taxes).
The findings of this report have implications that go beyond the federal budget and tax policy; they raise questions about the performance of democracy and the nature of citizenship. What are the long-term effects on a nation’s financial performance when 50% of its earning public experiences no net negative from taxation? Theories abound, but only the future will tell whether such a trend can be sustained.