Thursday, July 19, 2012

U.S. taxes and transfer payments

Harvard economist Greg Mankiw posted this in his blog:

To update one of the tables for the next edition of my favorite textbook, I have been looking at the new CBO report on the distribution of income and taxes. I found the following calculations, based on the numbers in the CBO's Table 7, illuminating.

Because transfer payments are, in effect, the opposite of taxes, it makes sense to look not just at taxes paid, but at taxes paid minus transfers received. For 2009, the most recent year available, here are taxes less transfers as a percentage of market income (income that households earned from their work and savings):

Bottom quintile: -301 percent
Second quintile: -42 percent
Middle quintile: -5 percent
Fourth quintile: 10 percent
Highest quintile: 22 percent

Top one percent: 28 percent

The negative 301 percent means that a typical family in the bottom quintile receives about $3 in transfer payments for every dollar earned.

Like Mankiw, those statistics concern me.

The tax structure should be progressive, that is, people who earn more should pay a higher percentage of their income in taxes. (Incidentally, the same is true of charitable giving. The tithe is not the Christian standard. Instead, a Christian approach to charitable giving is progressive proportionality where one voluntarily increases contribution as income increases.) The current U.S. system of income taxes and transfers is clearly progressive.

Most people should have some skin in the game, i.e., most people should pay something in taxes both to help fund the government and, much more importantly, to convey a sense of ownership and responsibility for the government. When the bottom sixty percent of people receive net benefits from the government through a wide variety of tax credits and welfare payments, the system badly needs fixing.

Generally, government revenues should match government expenditures. In economic downturns (the 2008 recession) or national emergencies (WWII, not the wars in Afghanistan and Iraq), governments should have the option of borrowing funds. But governments, like all good borrowers, should repay those debts in good times. The current tax and transfer system operates at significant deficits in good and bad economic times. Increasing the tax burden on the bottom sixty percent of earners will help to fix that situation but will generate insufficient revenue to allow the government to match revenues with expenditures. Those who earn more – especially those in the top quintile – should pay more in taxes.

The Episcopal Church at its 77th General Convention passed a resolution that supports the propositions I’ve outlined above and that highlighted God’s preferential concern for the poor. The United States has the highest percentage of people who regularly attend Christian churches of any developed nation. Yet the United States in many respects has done less to care for the poor and the most vulnerable.

Charles Murray in Coming Apart argues that four characteristics have made the United States exceptionally free and prosperous: industriousness, marriage, honesty, and religiosity. He argues persuasively that all four are waning among large segments of the population and that a new elite that is privileged and very affluent has emerged, increasingly isolated geographically and socially. The Horatio Alger myth is losing apparently losing whatever validity it once may have had as the new elite insulates itself from the rest of the population and becomes ever better at self-perpetuation.

Concern for the poor does not mean eliminating individual responsibility (one expression of industriousness). Concern for the poor does entail providing a short-term safety net so that nobody starves, has to live on the streets, or be naked. Longer-term, concern for the poor involves promoting equality of opportunity for all, individual responsibility, honesty, marriage, and religion.

The Church has three significant roles to play: promoting those values; being an attractive, inclusive community that practices a genuinely radical hospitality by welcoming all people; and prophetically insisting on our collective concern for the poor and the most vulnerable. Individual responsibility does not eliminate or in any manner preclude the importance of exercising appropriate collective responsibility.


Anonymous said...

This is an extraordinarily difficult topic. When Jesus said we would be judged by how we treated 'the least of these,' was he speaking to us as individuals, or as nations? That particular interpretation of scripture depends, I think, on one's own view of...reality. It's the primacy of the individual vs. the needs of the collective.

For myself, I think that the the order of assistance should begin with the individual, then the family, the church, the town/city, the state, and finally the federal government. Unfortunately, we seem to have flipped that model in this post-Great Society nation.

I enjoy your blog very much, Father. God bless you.


Gail said...

While it is true that the tax structure is out of whack, it can also be interpreted as the upper caste paying the lower caste to keep them in line. If wages were more equal, then everyone could have the option of buying in to the system and feeling a sense of ownership, responsibility and an urge to participate. As it stands, the lower quarter might revolt if they were pressed with a higher tax burden in the absence of other adjustments.

Gail said...

While disturbing, the data might also be seen as the upper caste paying the lower caste to keep them in line. A higher tax burden, in the absence of a flattening in salary and income disparity might produce a propensity to violence by the lower income members instead of a higher "buy in" and more feeling of responsibility and participation. What does the data on income look like?

George Clifford said...

Gail, Good point about the discrepancy between low and high incomes. As I've previously blogged, that is a problem. The tax structure is also a problem. The U.S. economic system needs help!

George Clifford said...

One difficulty in establishing an order of assistance is that some assistance is best delivered systemically. In that case, the type of assistance, economies of scale, portability, and other factors determine whether the best provider of the assistance is local, the state, or the federal. Local officials may have the most situational knowledge but lack the broader perspective or resources. Federal officials often have the broadest perspective and most resources but can lack key local knowledge and necessarily must cope with more bureaucracy. In other words, no ideal solution exists. Personal and non-profit assistance generally lacks the resources of the government and may entail "strings" (i.e., expectations, formal or informal, of recipients that are inappropriate - government assistance may lack appropriate expectations).

George Clifford said...

Some income data is available at