The Congressional Budget Office (CBO) just released its annual report on “
The Distribution of Household Income and Federal Taxes”
analyzing data through 2011 on American household’s: a) “market income”
(a comprehensive measure that includes labor income, business income,
and income from capital gains), b) household transfer payments (payments
and benefits from federal, state and local governments including Social
Security, Medicare and unemployment insurance), and c) federal taxes
paid by households (including income, payroll, corporate, and excise
taxes). Some of the key findings of the CBO analysis are displayed in
the table above, with the data organized by household income quintiles.
The data in the first five rows above appear in the CBO report (from
Tables 1 and 4), and rows 6-8 above have been calculated separately
based on data from the first four rows in the table.
The CBO report received attention and commentary this week from John Merline at Investor’s Business Daily (“
New CBO Report Explodes Tax Fairness Myths”), Reason’s Nick Gillespie (“
3 Charts About Income Inequality, Transfers, and Taxes”), AEI’s Jim Pethokouskis (“
Here is what’s really happening to middle-class incomes and inequality”), Heritage Foundation’s Curtis Dubay (“
The Richest 1 Percent of Americans Pay 24 Percent of Federal Taxes”) and former economist Paul Krugman (“
Why the One Percent Hates Obama”).
Some
additional analysis and commentary will be provided here that reveal a
yet-to-be discovered major implication of the CBO report – almost the
entire burden of: a) all transfer payments made to American households
and b) all non-financed government spending, fall entirely on just one
group of Americans – the top one-fifth of US household by income. That’s
correct, the CBO study shows that the bottom three income quintiles
representing 60% of US households are “net recipients” (they receive
more in transfer payments than they pay in federal taxes), the
second-highest income quintile pays just slightly more in federal taxes
($14,800) that it receives in government transfer payments ($14,100),
while the top 20% of American “net payer” households finance 100% of the
transfer payments to the bottom 60%, as well as almost 100% of the tax
revenue collected to run the federal government. Here are the details of
that analysis.
The
figures in Row 6 in the table above (and displayed in the graph above)
show the amount of federal taxes paid by the average household in each
income quintile
minus the average amount of government
transfers received by those households in 2011. For each of the three
lower income quintiles, their average government transfer payments
exceeded their federal taxes paid by $8,600, $12,500, and $9,100
respectively, and therefore the entire bottom 60% of US households are
“net recipients” of government transfer payments. Averaged across all
three lower income quintiles, we could say that the lowest 60% of
American households by income received an average transfer payment of
about $10,000 in 2011. And because the government has no money of its
own, where did those transfer payments come from to finance the “net
recipient” households? Where else, but from the top two income
quintiles, and realistically almost exclusively from Americans in the
highest quintile.
Specifically, the average household in the
fourth quintile paid slightly more in federal taxes ($14,800) than it
received in transfer payments ($14,100) in 2011, making the average
household in the second-highest income quintile a “net payer” household
in the amount of $700 in 2011. Basically, households in the fourth
income quintile paid enough in taxes to cover their transfer payments,
and then made a minor contribution of $700 on average to help cover the
transfer payments of the “net recipient” households in the bottom 60%
and make a small contribution to the federal government’s other
expenditures.
But the major finding of the CBO report is that the
households in the top income quintile are the real “net payers” of the
US economy. The average household in the top one-fifth of American
households by income paid $57,500 in federal taxes in 2011, received
$11,000 in government transfers, and therefore made a net positive
contribution of $46,500. The second-highest income quintile is basically
just barely covers its transfer payments, so it’s really the top 20% of
“net payer” households that are financing transfer payments to the
entire bottom 60% AND financing the non-financed operations of the
entire federal government.
Here’s another way to think about the
burden of the “net payer” top income quintile. The average household in
that income quintile made a contribution net of transfers in 2011 in the
amount of $46,500. That would be equivalent to the average household in
the top quintile writing four checks: 1) one check in the amount of
$8,600 that would cover the average net transfer payments of a household
in the bottom quintile, 2) another check for $12,500 to cover the
average net transfers of a household in the second lowest quintile, 3) a
third check in the amount of $9,100 to cover the average net transfer
payments to a household in the middle income quintile, and 4) then
finally writing a check for the balance of $16,300 that would go
directly to the federal government, which for the quintile as a whole
would have covered almost 100% the non-financed federal government
spending in 2011. So except for a small contribution net of transfers in
the amount of $700 from each household in the fourth quintile, the
highest income quintile is basically financing the entire system of
transfer payments AND the entire operation of the federal government.
And yet don’t we hear all the time that “the rich” aren’t paying their
fair share of taxes and that they need to shoulder a greater share of
the federal tax burden? Hey, they (the top 20%) are already shouldering
almost the entire federal tax burden along with almost the entire system
of entitlements and transfer payments! And that’s not “fair” enough
already?
The
chart above shows another way that the CBO data reveal an extremely
unequal distribution of government transfer payments and federal taxes
by displaying the ratio of “dollars received in government transfers per
dollar paid in federal tax revenues” by income quintile in 2011 (these
data are from row 8 in the table above). The average household in the
lowest quintile received $9,100 in government transfer payments in 2011
and paid only $500 in federal taxes, for a ratio of $18.20 in transfer
payments for every $1.00 paid in federal taxes that year. In contrast,
the average household in the top income quintile received $11,000 in
government transfers in 2011, but paid $57,500 in federal taxes, for a
ratio of 19 cents in government transfer payments per dollar paid in
federal taxes. This analysis is a further illustration that the bottom
three quintiles are “net recipient” households that received more than
$1 in government transfer payments for every $1 paid in federal taxes in
2011, while households in the fourth quintile were minor “net payers”
in 2011 and received slightly less than a dollar in transfer payments on
average ($0.95) for every $1 paid in federal taxes. “Net payers” in the
top quintile received only $0.19 in government transfer payments per $1
paid in federal taxes in 2011.
This
final chart shows average tax rates by quintile in 2011, both before
and after government transfer payments. The blue bars in the chart show
the average tax rates by income quintile from the CBO report (Table 4)
and are also displayed in the top table above in row 5, calculated by
dividing federal taxes paid (row 4) into “Before Tax Income” (row 3,
Market Income + Government Transfers). Adjusting for government
transfers received, the brown bars in the chart are calculated by
dividing “federal taxes paid minus government transfers received” (row 6
in the table) into Before-Tax Income (row 3), and show average tax
rates by income quintile after government transfers. The average “net
recipient” household in the lowest income quintile received a “negative
tax” payment of $8,600 in 2011, and received before-tax income of
$24,600, for a negative tax rate of 35%.
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