April 17, 2007
Andrew Chamberlain: Policymakers Must Not Overlook the Spending Side of the Fiscal Coin
The political landmines that await most lawmakers attempting to reform the tax code have killed almost all efforts before they ever get started. "Who gets taxed, and how much?" becomes a question that is difficult to solve given the current way of analyzing fairness and distribution.
However, a recent study by the Tax Foundation argues that lawmakers are often looking at just one side of the puzzle. While they debate over who pays, rarely does the question of fairness involve who actually receives government spending—but it should.
"What our study found is that, as everyone knows, the tax system is progressive overall," said Andrew Chamberlain, a staff economist and a co-author of the report. "But what many people don't realize is that the spending side is slightly progressive also. So when you put them together, the fiscal system is a lot more progressive than just the tax side alone."
His comments came in an interview for the Tax Foundation's Tax Policy Podcast, a regular feature on the Tax Foundation's web site, which includes interviews with lawmakers, media, academics and other officials at the forefront of tax policy.
Many argue that a progressive tax structure with graduated rates based on income represents a fair method of taxation because it relies on an individual's ability to pay.
But Chamberlain adds, "What really matters isn't just the tax burden that you pay, it's the net burden or the fiscal burden when you take account of both taxes and the spending side." In other words, progressivity is not just about what you pay, but also what you get.
The study found that those with the lowest incomes receive $8.21 in government spending for every dollar of taxes paid, while those in the middle receive just $1.30. At the highest income level, they receive just $0.41 for every tax dollar.
This disparity on the spending side is largely ignored. Chamberlain argues that taking this redistribution into account, along with taxes, offers many "win-win" possibilities for reform.
For example, the recommendations of the President's 2005 Tax Reform Advisory Panel were constrained by the need to be "distributionally neutral," meaning any changes to the tax code must preserve the current level of progressivity.
"But the problem is that they only meant distributionally neutral on the tax side. And what our study shows is that this is really just missing half the picture," he said.
The current level of progressivity can be maintained, Chamberlain argued, by offsetting tax code changes with adjustments in spending. One example would be to repeal the estate tax and reduce farm subsidies simultaneously since they both affect roughly the same high-income earners. For low-income people, we might cut the earned income tax credit (EITC) and then boost spending on temporary aid to needy families (TANF).
"Now, changes in either one of those programs face strong opposition on fairness grounds. But if you lump them both together and pulled them away, dollar for dollar, the distributional effects basically cancel out," he said. "So, that's one way you can use our study to set aside arguments about fairness and sort of get people talking about efficiency and everybody gets better policy for the nation as a whole."
The interview is Number 25 in the Tax Foundation's Tax Policy Podcast series. It's available online here.
Best known for its annual calculation of Tax Freedom Day®, the Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
Click here to listen to the podcast. Click here to read the transcript.
