More than half of Americans receive more money in various types of government transfer payments (Medicare, Medicaid, food stamps, Social Security) than they pay in federal taxes.1
According to a report released this year by the Congressional Budget Office, only the top two income quintiles in the United States pay more in taxes than they receive in government transfers.
Not surprisingly, the lowest income quintiles receive far more in transfers than they pay in taxes:
In the lowest quintile, households pay only $400 in taxes (as of 2014, the most recent data available) while receiving more than $16,000 in various types of tax-funded transfer payments.
The end result is households in the bottom three quintiles have higher incomes after taxes and transfers than they do before taxes and transfers:
The second-to-top quintile is slightly worse off after taxes and transfers, and the highest quintile is sizably worse off. In other words, the top two income quintiles are subsidizing the bottom three, and the advantage, proportionally speaking, gets larger as income goes down.
The Politics of a Majority on the Dole
The political implications of this are considerable. As Ludwig von Mises once noted, once we get to the point that a majority of the voting population receives more in benefits than it pays in taxes, then voters will demand more and more wealth be transferred to them through government programs. It will then become politically necessary to extract larger and larger amounts of wealth from a minority in order to subsidize the majority.
Market economics will become less and less popular because the voters will have realized they can — in the words of James Bovard — “vote for a living” instead of work for a living.
These findings don’t always apply at the level of the individual household, of course. In the middle quintile, especially, we’ll find some households that are indeed worse off after taxes and transfers than before. This will especially be the case for households that do not yet receive old-age benefits such as Medicare and Social Security. Those households are currently being taxed to pay for current recipients of SS and Medicare. Later, however, those households will begin to receive those benefits. And, over a lifetime, they’re likely to receive more in benefits than what they “paid in.”2 This notion of “paying in,” however, is pure fiction, and there is no “trust fund” for old-age benefits, and all benefits received at any given time are funded via taxation of current wage earners.
As far as politics goes, this latter fact is very important because voters receiving old-age benefits know that any significant cut in government spending and government taxation is likely to necessitate a decline in paid benefits. This is why neither major party ever seriously talks about cutting Medicare or Social Security, and why Donald Trump has even recently declared his own love for Medicare. It’s simply a redistribution of income and wealth from current wage earners to current recipients, and for most elected officials, attempting to cut these benefits would be political suicide.
At the low end, benefits more frequently take the form of “means-tested” benefits such as Medicaid and food stamps. And since these benefits are geared toward low-income earners, we naturally see more benefits going toward the lowest earners. Indeed, in the lowest quintile, market income is less than half of income after taxes and transfers.
But for many voters, the reality is this: any significant cuts in federal spending will mean less government benefits, either now or later.
(And don’t forget that the data here doesn’t even account for government employees whose “market” income is also government funded. In the case of those workers, cuts in government spending will reduce both their market income and their transfer income.)
Since many households at both the lowest end and near the middle receive more in benefits than they pay in taxes, we end up with a situation in which the voters think tax cuts don’t benefit them much — but spending cuts definitely do hurt them.
Thus, the political outcome is one in which there is plenty of political pressure to maintain spending levels — or increase them — while tax cuts aren’t as popular.
Transfer Income Is Growing as a Portion of Market Incomes
Looking at transfer incomes as a percentage of market incomes, by quintile, we find significant growth since the dot-com bust of 2001:
With the lowest quintile, transfer payments declined during the 1990s economic expansion, and in the wake of the 1996 welfare reform. But government transfer payments grew again following the 2001–2002 recession. Transfers dipped again as the US approached the 2008 bust, and have grown sizably ever since.
Indeed, as of 2014, transfers by this measure were at an all-time high for the second-to-lowest quintile, and were near an all-time high for the lowest quintile.
But in all quintiles, transfers have increased proportional to market income, whether due to stagnating market income or growing transfer payments. An increasing role for transfer payments can also give a false impression of overall income growth since official income numbers, as provided by federal agencies such as the Census Bureau, usually include transfer payments and other taxpayer-funded sources of income in the income data. Basically, transfer payments are padding the income data — paid for by the top income quintiles.
Like all statistics of this sort, though, we can’t get a complete picture from this alone. This data only tells us about transfer payments — which are easy to track — and doesn’t tell us much about the many other ways that governments transfer wealth and income. For instance, we must also consider how regulations negatively impact the incomes of employees and business owners at all levels. And we must not ignore how money-supply inflation tends to hurt the poor the most, while tending to favor higher-income groups. And then there are government contracts — such as high-tech weapons contracts that tend to benefit higher income groups as well.
Ultimately, though, perceptions often matter more than the details behind the numbers. The CBO report reminds us that a great many voters receive government welfare checks of various types, and the perception is that any true cuts in spending will bring a high cost to those who have become accustomed to their taxpayer-funded benefits. Ultimately, the effects on voting patterns and public policy will be very real.