Editorial pages in recent weeks have featured numerous commentaries on faults in the U.S. tax system, inspired no doubt by the fact that income taxes were due April 15. Many pieces expressed alarm that the lower-income half of the U.S. population pay nearly nothing in federal personal income tax. Some see this as creating a class of people that enjoys political representation without taxation.
These people, it is feared, could support politicians who promise to wrest money away from higher-income people and hand it over to lower-income ones.
I agree some people in the lower half of our nation’s income distribution could pay more in federal income taxes. Some tinkering with zero-bracket amounts and marginal rates to accomplish that seems in order. But much of the rhetoric warning of a new parasitic underclass using its voting power to divert hard-won income from the shrinking productive classes is frustrating. Much of it seems based on a profound misunderstanding of some basic economic and demographic realities of our society.
Some of the most egregious misunderstandings were related to a much cited Tax Foundation study finding that 75 percent of the income of the poorest 20 percent of all households comes from the federal government.
This is true. But is it really the problem implied by despairing columnists? And would cutting off these income transfers make our society more efficient or more fair?
To some, the idea that a fifth of all households get 75 percent of their money conjures up images of welfare queens driving their Cadillacs down to the supermarket to buy frozen pizzas with food stamps. Or one may think of some unshaven lout cashing his extended-benefits unemployment check to buy beer and lottery tickets.
A much truer picture of this group on the public dole would be a bunch of blue-haired old ladies playing Rummikub in a senior citizens center. That is because the biggest single set of households in this lowest-income group are retirees on Social Security. And a disproportionate number are women who have outlived their husbands.
In many cases, they are not indigent. They may live in a house they own and may be drawing down their retirement savings. But if a modest Social Security payment is their primary source of income, as it is for many retirees, they would both fall into this income class and get most of their income from the government. Are these really leeches whose voting threatens our society?
Disabled people on Supplemental Security Income are another set in this poorest fifth of all households. Many are not eligible for Social Security because their physical or mental problems kept them from ever working long enough to become vested in the system. Some may have jobs but their SSI payments, together with food stamps and other transfer payments for low-income people, mean that what they get from government is large relative to their earned income.
Is our economy becoming less fair to higher income people and less economically efficient because people who spend their days in sheltered workshops or who are blind or confined to motorized wheelchairs throw their political weight around?
There is a third important set in this income group that I know well because some are my students. Here the federal criteria for defining a household are critical because a student living at home or in a dormitory usually is not a separate “household.”
But a college student living in an apartment is a household and many of these fall into the lowest income quintile, even if they work part-time during the school year and full-time in the summer.
And yes, even though subsidies to college students have fallen relative to the overall economy, many of these students do get federal grants or subsidized loans and thus their income “after taxes and transfers” is higher than “before taxes and transfers.”
I know this set well enough to assure you that while many would like higher federal grants for college study, they are not spending a lot of time lobbying to increase income transfers to the income group they are in at the moment.
Yes, there also are people among the poorest 20 percent of households who are lazy, who make bad decisions, who abuse alcohol or drugs and who are dishonest. But I find such people at all income levels.
The curious thing about such hand-wringing over the dangers of an idle but politically powerful sub-class using its political muscle to win ever greater money from working people is that such income transfers, apart from Social Security, Medicare and Medicaid, have shrunk over time as a percentage of the economy rather than increased.
Indeed, there is only one case in recent decades of a group using its political muscle to get Congress to transfer tens of billions of dollars from others to themselves.
This is the Medicare drug benefit enacted with bipartisan support during the George W. Bush administration. But it does not transfer money from poor to rich. Instead the transfer is from younger people to older people. Because it is funded from general tax revenues rather than FICA taxes, beneficiaries are not, on average, wealthier than those paying in, as is true for Social Security and the rest of Medicare. But that is the subject of another column.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.