Written by TaxFoundation.org
As a Group, 70 Percent of Families Will Receive More Benefits Than They Pay in Taxes Under Obama Plan
New Tax Foundation "Fiscal Incidence" Model Measures the Income Redistribution Caused by Federal Spending As Well As Taxes
Washington, DC – New reports from the Tax Foundation show that President Obama’s policy proposals will increase the financial dependence of middle-income Americans on the federal government.
“Attempts to put ‘price tags’ on health care and cap-and-trade proposals vary among government agencies and think tanks,” said Tax Foundation President Scott Hodge, “but one vital question has been left unanswered: Counting all federal taxes and spending, how would these policies affect American families’ financial ties to the government? The foundation’s new ‘fiscal incidence model’ answers that question.”
“Currently the bottom 60 percent of the income spectrum receives more in federal spending than they pay in federal taxes,” said Hodge. “By 2012, if President Obama’s proposals on taxes, health care and climate change become law, 70 percent of American families will, as a group, be receiving more in federal spending than they pay in federal tax.”
Even if none of Obama’s policies becomes law, the extent of current income redistribution is remarkable: The top-earning 40 percent of families will transfer $826 billion to the bottom 60 percent in 2012. If Obama’s policies become law, the federal government will redistribute nearly $1 trillion from the top-earning 30 percent of families to the bottom 70 percent (those earning up to $109,000).
Incorporating new data from the Mid-Session Review of the President’s Budget, as well as recently released aggregate economic data from BEA and new income tax statistics from the IRS, Hodge has authored two new analyses in the Tax Foundation Fiscal Fact series: “Accounting for What Families Pay in Taxes and What They Receive in Government Spending” and “Basic Facts on Redistribution and the Impact of Obama’s Policies.” The two publications are available here and here online respectively.
The Tax Foundation’s “fiscal incidence” project is a long-term research effort to include federal spending along with taxes in calculations of income redistribution. The standard operating procedure in Washington is to analyze only the distributional impact of taxes, ignoring spending because it is more difficult to quantify.
In fiscal year 2010, the lowest-income families will receive $10.44 in federal spending for every dollar in taxes they pay. Middle-income families, who are the targeted beneficiaries of many Obama policies, will receive $1.15 in government spending benefits for every dollar they pay in taxes.
When only taxes are analyzed, Obama’s policies lead to tax increases for a curious mix of rich and poor families. Families earning less than $23,700 are disproportionately affected by regressive cap-and-trade policies and higher tobacco taxes, and those earning more than $280,000 will see their tax payments go up because of higher income tax rates. On net, however, when spending is included, the lowest-income households gain more than $2,200 while the highest-income families lose more than $127,000.
“The taxes paid by the wealthiest families swamp any benefits they receive from government, even when counting national defense as largely benefitting high-income people,” Hodge said. “As lawmakers consider important and far-reaching tax and spending policies such as health care and cap-and-trade, they should have a basic understanding of what might be called a ‘fiscal accounting’ of how government benefits families receive compare to what they pay in taxes. It’s only within this framework that properly informed decisions can be made.”
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.