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Jan. 22 2003 11:38 PM

Meme Watch: Follow the Money

The taxpaying class and the welfare class are one and the same.

"The increasing reliance on taxing higher-income households and targeted social preferences at lower incomes stands in the way of moving to a simpler, flatter tax system."

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R. Glenn Hubbard, chairman of the White House Council of Economic Advisers, at a Dec. 10 conference sponsored by the American Enterprise Institute.

Yesterday, Chatterbox disputed Hubbard's analysis by citing an interesting chart published in the Jan. 21 New York Times. The chart (assembled by Times reporter Daniel Altman, who is also an economist) showed that when you consider all taxes at the federal, state, and local level, the U.S. already has a flat tax. Households in each of the five economic quintiles pay, on average, about 17 percent of their income in taxes. Ergo, the tax-the-poor meme's warning that America is being divided into two separate nations—those who pay taxes and those who receive government benefits—is, from a fiscal perspective, bunk.

Today, Chatterbox will demonstrate that the Two Nations warning is bunk from a spending perspective, too.

In a distressingly sympathetic column in the Jan. 27 Newsweek, the usually sensible Robert Samuelson repeats the tax-the-poor line that government spending is increasingly focused on poor people. Here is Samuelson's evidence:

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Federal spending has shifted from defense to payments for individuals (Social Security, unemployment insurance, food stamps, Medicare). In 1955, military spending represented 62 percent of the federal budget. Payments for individuals were 21 percent. By 2001, the figures were reversed: defense, 17 percent; payments for individuals, 61 percent….Not surprisingly, these transfers go heavily to the bottom half of the income spectrum. In 2001, about 60 percent of federal cash payments (retirement, disability, unemployment benefits) went to the poorest 40 percent of Americans, reports the Census Bureau. Noncash programs (food stamps, Medicaid, Medicare, public housing) are similarly skewed.

Samuelson's first assertion—that government spending has shifted from defense to entitlements—is undeniable. (The two obvious causes are the expansion of the welfare state in the 1970s and the end of the Cold War in the late 1980s. Neither of these phenomena bear any relationship to the small increase in federal income-tax progressivity that occurred during the 1990s. But we digress.)

But Samuelson's second assertion—that the shift has benefited mainly the "bottom half of the income spectrum"—simply isn't true. Samuelson cites Census data that shows a little more than half of all federal cash payments going to a little less than half of all Americans. The real surprise is not that the poorer half get so much, but that the richer half get so much. Isn't welfare supposed to be for poor people?

Samuelson's Census data does show federal entitlement spending to slightly favor the poor, but the best available data strongly suggests that the Census is wrong. As Phillip Longman and Neil Howe pointed out in a 1992 Atlantic article that Chatterbox never tires of citing, "Cash-income surveys conducted by the Census Bureau are plagued by high rates of underreporting (especially by the wealthy)." This is mainly because retirees do a poor job keeping track of their investment income. (Actually, everybody does a poor job keeping track of their investment income, but retirees don't have salaries, so the low-balling has greater impact.) To address this data problem, the Congressional Budget Office did its own research combining the Census surveys with filings from the Internal Revenue Service. Longman and Howe got their hands on the results, which turned everybody's preconception about entitlement spending on its head:

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[T]he most affluent Americans actually collect slightly more from the welfare state than do the poorest Americans. … [In 1991,] U.S. households with incomes over $100,000 received, on average, $5,690 worth of federal cash and in-kind benefits, while the corresponding figure for U.S. households with incomes under $10,000 was $5,560. Quite simply, if the federal government wanted to flatten the nation's income distribution, it would do better to mail all its checks to random addresses.

Sadly, the CBO (which didn't get around publishing these numbers until 1994) hasn't performed a similar distributional analysis of entitlement spending in subsequent years, and nobody else that Chatterbox is aware of has done so, either. So we can't say for certain that entitlement spending continues to favor the wealthy. But anecdotal evidence suggests this problem has gotten worse, not better. As Chatterbox noted last summer, on Aug. 5, David Pace of the Associated Press published an investigation of congressional spending patterns. Pace found that after 1994, when the GOP took over the House of Representatives, government spending, which had previously favored Democratic congressional districts, came to favor Republican congressional districts. What's more, the discrepancy was now 15 times greater (discounting for inflation) than it had been under the Democrats. (You can play with Pace's data here.) Republican constituencies tend to be wealthier than Democratic ones, and this was reflected in the kind of spending Pace found to have declined and the kind he found to have increased. Down went spending on child care food programs, public and Indian housing, food stamps, and disabled coal miners. Up went spending on farmers, businesses, and home mortgage insurance.

In sum, the best evidence we have shows there is no divide between the taxpaying class and the government-benefit-collecting class. We all belong to the taxpaying class, we all belong to the government-benefit-collecting class, and to the extent anyone gets more government cash than anyone else, it's the rich.

Meme Watch archive:
Jan. 21, 2003: "Tax Rates Are Already Flat"
Jan. 20, 2003: "Return of the Lucky Duckies"
Jan. 16, 2003: "Tony Snow Says Tax the Poor!"
Jan. 14, 2003: "A Payroll Tax Rise?"
Jan. 2, 2003: "Bushies Get Cold Feet"
Dec. 16, 2002: "Bushies Take the Bait"
Nov. 27, 2002: "Introducing the Meme Watch"