Tax Foundation Issues Ridiculous Report on Government Redistribution

I discussed how I was eager to be in that category of Americans who cost the government rather than support it. If you believe a recent study by The Tax Foundation, that category includes about 60% of America.

They purport to divide America into five income quintiles and to show that while an average member of each one gets roughly the same amount of benefits from government spending, the richest quintiles pay far more taxes, so that the overall effect of government taxes and spending is essentially a transfer of wealth from people in the top 40% to people in the bottom 60%:

“Government spending targeted at the lowest-earning 60 percent of U.S. households is larger than what they paid in federal, state and local taxes.… In , between $1.03 trillion and $1.53 trillion was redistributed downward from the two highest income quintiles to the three lowest income quintiles through government taxes and spending policy.”

Their study is getting a lot of play in circles that have always suspected that the poor have sneakily rigged the system at the expense of the rich, right under the noses of the rich politicians and lobbyists and lawyers who run it.

But their report has significant problems. For example:

  • While their summary claims to be talking about government spending “targeted” at certain people or groups, the study itself actually asserts that all government spending benefits individuals, not only direct government spending on people. So, for example, if the government spends money on invading Iraq, the study says it has really given that money to Americans in the form of the Iraq War.
  • Furthermore, some of this spending, like military spending, or spending on the space program, is considered to be shared equally among households, so that, for instance, in the president of Boeing received a $135 benefit from the government in the form of his portion of government spending on the space program, and so did the President’s Senior Space Science Advisor, and so did I. And I didn’t pay taxes for my share, so the space program is, by the study’s logic, in part a welfare program by which the government redistributes $135 from good taxpayers to leeches like me.
  • The study calls all government spending a “good” that the government is giving to someone. The prisoner and the judge who sentenced him are both getting an equally-sized “good” from the government in the form of the justice system. The lucky prisoner, paying almost no taxes on his 17¢/hour job stamping license plates, is therefore considered a winner in this great wealth transfer from the rich to the poor via government.
  • The study acknowledges that this divvying up of “public goods” and “quasi-private goods” equally among households is controversial. But their solution to this controversy is not to acknowledge that some well-connected households benefit far more than others from government spending of this sort, but to include some tables showing that their calculations look very similar even if they don’t include any of this “public goods” and “quasi-private goods” spending at all! This would be like the owner of a baseball team saying “we won every game (144 wins, 0 losses) we played this year, if you include in the victory category those games in which our opponents scored more runs than we did (91 games). We know this is a controversial method of counting, so for the skeptics among us we will also include the figures with those games omitted (53 wins, 0 losses), which leads to an essentially identical result.”
  • Indeed, the report is full of absurd and naïve assumptions about the pure nature of government spending that would make a communist blush. Here’s a good one: “Policymakers crafting spending programs clearly aim to supply valuable outputs to households, not simply to make payments to inputs such as defense contractors, road builders or police officers.” The study must make assumptions like this so it can ignore that the real beneficiaries of government spending are often the politicians who authorize it and the recipients of the spending: “The basic purpose of government spending is to provide households with valuable outputs of goods and services — such as pollution controls to improve the environment, armies to provide protection from foreign nations, and courts to adjudicate disputes and maintain the rule of law. These represent the outputs of government spending.” And each of those “outputs” are counted by the study as benefits — “government spending distributions” — that are “supplied to households by the state” as if they were direct cash payments to the households that offset their taxes! This is a conservative, free-marketish think tank saying these crazy things!
  • So, for instance, the money the government spends to build Senator Stevens’s “Bridge to Nowhere” isn’t a benefit that taxpayers are giving to Senator Stevens, or to the contractors who build the bridge, or to the lobbyists who made it possible, but is, according to the study, a benefit the government is paying to us in the form of a nice bridge. Similarly, Bill Clinton’s pension and secret service protection isn’t a benefit the government is paying to him, but a benefit the government is paying to the American people in the form of an inducement it allows us to offer people of Clinton’s caliber in the hopes of getting them to work for us.
  • But some government spending is considered a private good, one that accrues to individuals depending on their circumstances. For instance, the study says that interest paid on the national debt is a benefit that goes to holders of government bonds who receive that interest, and government spending on food stamps goes to the people who get the stamps. Some of their assumptions seem questionable, though. For instance, government spending on higher education isn’t considered a public good but is considered to be given to “current enrolees of colleges and universities” — a suspect assumption, and one that makes full-time students (with correspondingly low incomes) out to be the recipients of government spending much of which benefits educational institutions, their employees, and future students. This is another part of what the study characterizes as a transfer of wealth from the rich to the poor.
  • The study uses unusual definitions of “income” and doesn’t define them clearly, so it’s difficult to determine just who is categorized as belonging to the different quintiles. For instance, if you don’t work for a living but just live off of your investments in one of the homes you own, are you in the low income quintile even though you’re rich? (In one appendix, they present a table that shows how their numbers change if corporate income taxes are assigned to owners of capital, comparing this to the numbers under their default assumption that employees of corporations bear 70% of this tax burden. Under the new numbers, the tax rate for the lowest quintile rose — indicating to me that there must be many people in that category who don’t have much “income” but do have a lot of assets.) Some of the confusion comes from a deliberate distortion made for sketchy p.r. reasons: “The final decision to present results on the basis of household cash money income with equal number of persons was chosen largely for the purposes of clarity when presenting results to non-technical audiences such as policymakers, journalists and the general public. When placing themselves into an income category, most non-economists would likely choose based on a definition of income that broadly corresponds with the measure of cash money income used in the current study.”
  • The study notes that “[i]n general, federal government spending is more sharply tilted toward lower-income households, due to the large amount of federal transfer payments to lower-income households through Social Security, Medicare and Medicaid.” There’s a problem that the study acknowledges: People who retire and get Social Security are treated as low-income spending recipients, but while they were still working and not receiving Social Security they were treated as higher-income. How much of the study’s implied income-class redistribution can really be explained by just the normal age-related redistribution of the Social Security system? In other words, if a middle-class worker pays payroll taxes, and a rich retiree with no income gets social security, is this really fairly categorized as a redistribution of wealth from the middle class to the poor? The study’s authors make some effort to address this in an appendix, but I wasn’t convinced that they’d really addressed the problem.
  • The study divides up Americans into quintiles, each containing an equal number of people, but then through most of the study it analyzes and reports results for “households” and not for people. The highest-income quintile contains only 60% as many households as the lowest-income quintile because people in the lower-income quintile are more likely to be young singles, or retired without children, whereas high-income folks are more likely to be dual-income with kids. The study addresses this and provides some alternate data, but this can be confusing. For instance, if every household gets $135 in government spending because they get a share in the glory of another space shuttle launch, but there are 40% fewer households in the top quintile than in the bottom, then it can appear like the government is spending more to launch space shuttles for the poor than for the rich, if you fail to read the data carefully.
  • The study deliberately excludes state lotteries from consideration, while including just about every other tax under the sun. I wonder why? Could it be that such lotteries largely function as a government-mediated transfer of wealth from the poor to the rich and would mess up their numbers?

Note: since I read the working paper , and since I posted my response here, the Tax Foundation has issued a slightly different version that adds a section in Appendix A that addresses “Alternative Allocations of Public Goods and Quasi-Private Goods.”

This section includes tables that show how some of their results change if you assume one particular non-equal distribution of benefits from such spending, one in which the benefits accrue to households in proportion to household wealth. This assumption doesn’t have much more empirical backing than the default assumption of the paper (that the benefits from such spending are equivalent to the amount of the spending and accrue to all households equally), but something like it seems to me to be a more likely scenario.

Although this may help remedy the problem of the assumptions behind the apportioning of the benefits of government spending, it seems to me that at least as serious and distorting a problem is the assumption that $1 in government spending means $1 in benefits all around. The paper uses the example of a fireworks display as a public good that benefits everybody equally, so that if the government taxes John $1,000 and taxes Jane $2,000 to put on a fireworks show that costs $3,000, this is considered equivalent to the government redistributing $500 from Jane to John. The problem is that this model doesn’t care if the government puts on the fireworks show in the middle of the day, on the dark side of the moon, or whether John and Jane wanted a fireworks show to begin with. John and Jane may just end up feeling $1,000 and $2,000 poorer, compensated in no way by the government’s hope that they enjoy the light show.