March 26, 2007
When it comes to debates about taxes, politicians usually quarrel over who should be taxed and how much. But an important component that should be a part of that debate is almost always left out: government spending.
A new report from the Tax Foundation intends to inject the question of government spending into that debate: where does the money currently go and who receives it? If how we should tax becomes a question of "fairness," it is essential to know both where the money comes from and where it ends up.
The study reveals that America's lowest-earning one-fifth of households, or quintile, received roughly $8.21 in government spending for each dollar of taxes paid in 2004. Middle-income households received $1.30 per tax dollar, and America's highest-earning households received $0.41.
"It is important to measure the overall progressivity of the entire fiscal system, not just the tax side," says co-author and Tax Foundation President Scott Hodge. "Taking spending into account, lawmakers can make fundamental changes to the tax code, moving toward a more neutral and fair system of raising revenue, and still preserve the desired level of progressivity."
In 2004, total taxes paid by Americans reached almost $27,000 per household. In contrast, the average household received over $31,000 in total government spending - almost two-thirds coming from the federal level. Sources of government spending include programs that provide direct payments such as Social Security and Medicare as well as public goods distributed uniformly such as defense spending.
"Most people will be shocked to hear how much government spends per household, probably because they are unaware of the cost of government services," says Hodge. "Whether they find the service beneficial or not can certainly be argued, but we cannot begin to have that debate without knowing how much the government spends and who gets it."
More important, argues Hodge, is the effect this information will have on how we decide to handle future challenges, such as the enormous growth in entitlement spending.
"Already, 60 percent of Americans receive more in federal government services than what they paid in federal taxes. When the baby boomers retire, the cost of those services is going to explode," says Hodge. "Because of the politics surrounding those issues today, we are going to have a serious problem paying for those services down the road."
"This report says ‘here's where we are now; here's what the whole thing looks like'," he added. "The question for lawmakers is whether or not they think we can continue down this path, whether they think it can be sustained."
Click here for the full report