"The additional $8 trillion in public debt taken on to try to substitute for the private economy will depress opportunities for generations." - Heather Mac Donald of the Manhattan Institute writing for the Hillsdale College publication Imprimis in June, 2020.
click on photo to enlargeThis post is written to answer what I had hoped would be the second question asked to Biden & Trump during the 2020 presidential debates - What is the maximum amount of a person's income anyone should ever have to pay to the federal government in taxes?
Over the years I have heard conservative media hosts ask this question to Democrat pundits but to no avail. The Democrat pundits never once gave a number & the conservative hosts would rattle off a list of taxes they personally paid & asked if more was needed, fully knowing that it was as America became more & more socialist.
Scott Hodge, President of the Tax Foundation, did a calculation in 2014 to determine a definitive answer to how much taxation was required then to bring everyone to average - i.e., lift up the bottom quintiles by having the upper quintiles pay more. You can follow the methodology I present below & update the calculation yourself.
The calculation is a classic example of redistribution of wealth from the creators of wealth & value to fund people who participate in the 126 welfare programs that have been identified by the Cato Institute.
In gathering the data to perform the calculation Mr. Hodge found that the vast majority of Americans already receive more back from the government in spending than they pay in taxes, but that this already large redistribution from top earners ($1.5 trillion federal redistribution plus another $500 billion from state & local governments) still was far from bringing everyone in America to an average income.
The table below, independently prepared by James R. Hardigan & the great Duquesne economics professor Antony Davies, a few years earlier than the Hodge calculation, also shows (confirmed) that @ least the bottom 60% of income earners, on average, receive more in the form of tax credits & transfers from the federal government than they pay in taxes (income taxes to excise taxes) to the federal government.
click on table to enlargeYes, those in the middle class (third quintile) receive more in benefits than they pay in federal taxes each year. This means a majority, just about a supermajority, have a personal interest in expanded government. The more government spends the more they stand to receive.
The Congressional Budget Office (CBO) was the first in the twenty-first century to report this type of distribution of earnings, federal taxes, & federal transfers when in 2006 they issued a report showing that households in the middle class received $1.19 in government spending for every $1 they paid in federal taxes of all kinds, half of which spending benefited the bottom 60% of non-elderly households.
So three of three studies showed the bottom three income quintiles received more back from the government than they paid in federal taxes.
As indicated in the above table even those families in the fourth quintile pay only a modest 8% net, or effective tax rate, on average, meaning that taken all together 80% of the income earners in the country are not personally interested in tax reform because they don't pay any or much tax @ all but are interested in maintaining the government programs that they benefit from. I have pointed out for years that this is the prime reason the FairTax cannot catch on & for that matter neither can any of the various versions of the flat income tax.
Mr. Hodge determined the average family annual market income for his study in 2012 was $81,600. Similar to the above Hardigan & Davies table & CBO study, but not the exact numbers because the Hodge calculation was for a different year, Mr. Hodge found that families in the lowest quintile had an average annual market income of $9,560 & received $21,158 more in spending than they paid in federal taxes. Accordingly, these families would need $50,882 more in federal transfers to raise their overall income to the $81,600 average. This additional $50,882 would come from families who earned more than the market average.
That middle quintile family had on average an annual market income of $56,885, & yes, this typical American middle class family received $7,376 more in spending than they paid in federal taxes. These families would need an additional $17,339 in government transfer payments to bring them to average.
Now subtractions to incomes start with families in the fourth quintile - probably a lot of readers of this blog. The average annual market income for families in this fourth quintile is $100,240 & these people pay $4,089 more in taxes than they receive in government spending so these families would need to pay an additional $14,551 to bring them down to average. I hope this is becoming interesting to readers looking for equity.
Of course the biggest hit is to families in the top quintile - these families have an average annual market income of $311,400 & already pay $65,573 more in taxes than they receive in spending. They would have to pay an additional 53%, or $164,227 in higher taxes to bring them down to the national average meaning they would pay federal taxes totaling $229,800 ($164,227 + $65,573) on their $311,400 average annual market income.
There are millions of families in each quintile & the actual Hodge calculation is based on the aggregates in each quintile. The government would need to take an additional $2.4 trillion of the aggregate income every year of families in the top two quintiles to bring everyone to an average income. This would bring the total amount of income redistributed from families in the top quintile to almost $4 trillion or 74% of their total income - the number the Democrat pundits do not want known.
The lesson clearly is that the government does not create wealth but redistributes it. Accordingly, government spending does not stimulate the economy because it does not create resources. By taking earnings from the person who works the government reduces their incentive to produce & they will produce less. By giving to people who don't produce the government is providing them with an alternative source of income other than working & they too will produce less, until @ the point of the total redistribution on income, i.e., exact equality of income, there will be no income whatsoever.
Doesn't anyone other than Heather Mac Donald understand this?
Great insight as always. Whenever the issue is taxes, your question is one of the top 2 that I ask those participating in the discussion.
ReplyDeleteThe table gets to the heart of the matter. While most people whine they want to pay lower taxes, there is something else they want.
Either consciously or subconsciously they secretly harbor the knowledge that they are receiving more than they are giving.
They want that truth not to be publicly acknowledged.
So their battle cry is to "tax the rich.” Meanwhile, most “rich” suffer from guilt or don’t want to look “greedy” or “uncaring
Enter the politicians, whose objective is to get re-elected. Naturally they shoot for the lowest hanging fruit, handing out goodies and patronage, while demanding “the rich” pay their fair share, thereby ensuring their re-election. This is known in the private sector as extortion. In politics it is know as public service.
So the politicians, the “one percenter” media types continue the scam, and the general public from the poor to many in the middle class, know they have a winning issue and play it for all its worth.
To answer the question you pose at the end of your article, many people understand it. It is crystal clear.
But those people, while claiming to care about others and future generations, really only care about themselves. The politicians know this, and even the wisdom of Thomas Sowell cannot change it. Their re-election is paramount and trumps all else.
The future be damned.
Enjoyed your latest article. Very interesting. As presented agree with everything
ReplyDeleteNot me! What did fascinate me though was that the 3rd quintile- middle class, receive more benefits than they pay in taxes. I know I definitely do!
ReplyDeleteDoug: You lead a dedicated team promoting the Fair Tax several years ago. It provides all with incentives to maximize earnings. Unfortunately, it did not gain sufficient traction in Congress. Hence, the tax system continued to degrade with politicians seeking voters with little or no regard for the economic consequences of their tax policies.
ReplyDeleteAnd our economic status just got exponentially worse with the $1.9 Trillion spending bill, much of it to Blue states severe debts. But the $1.9 Trillion will be printed $, requiring investors to finance – at what rates? Expect high rates and high inflation as year progresses.
Evidence supporting:
In 2000, Total Debt to GDP as 58.87%. Now it is astounding 129.75%. Total world GDP right now is $83.84 Trillion. US 2020 GDP was $20.93 Trillion. US Debt Held by foreign countries is $7.12 Trillion. Number of additional investors of our debt is shrinking. Those remaining will demand higher rates. Fed, with limited options, may pursue policies to lead to greater inflation to cover this exploding debt. And inflation clobbers our spending power – with severe recession possibility.
We must succinctly tell our politicians that we are playing with fire and demand we must return to sane economic policies or see our economy tank. And I think quite a few politicians need crash courses in Economics – even Economics 101/102. I’d be most happy to offer this at no charge.