Sep 21, 2012 at 10:26 pm
Update: Nice WaPo editorial on this: “To tax is to redistribute. To govern is to redistribute. Benefits from government spending flow in different amounts to different individuals and different states.”
Lots a words flying around about who is and isn’t a “European-style-five-year-planning-redistributionist.”
Let’s look at some facts.
First, from some work by my CBPP colleagues, here’s a picture comparing shares of the population by income with shares of entitlement benefits, including Social Security, Medicare, Medicaid, UI, EITC, and a bunch of other stuff. The bottom fifth receives a larger share of benefits than their income share and visa-versa at the top, which is what you’d expect in a system where some, though not all, benefit receipt is conditional on income.
The middle class benefit share is proportionate to its income. All told, clearly some redistribution here but not anything that would lead to stark divisions between “makers and takers.”
But what if we look at another type of entitlement in our system: tax expenditures? Those are the credits and deductions you subtract from your tax liability for favored expenditures and income types, like capital gains or the mortgage interest deduction.
Those tax benefits are redistributed upwards. Two-thirds go to the top 20% and 24% of the benefits go to the top 1%.
Finally, here’s a disturbing little picture from Goldman Sachs reseachers about whose incomes get whacked by the tax increases (and loss of UI benefits) associated with the fiscal cliff. One point is of course the contractionary impact of income losses next year—if we go over and stay over the cliff*—that range from 9% for low-income households to 7% for high income ones.
THE FISCAL CLIFF EFFECT BY INCOME GROUP
Source: GS Researchers
But another thing you see here is who’s fighting for whom. If, like Congressional R’s, you’re fighting to get rid of UI benefits but preserve the high-income tax cuts, you’re an upward redistributionist. If, like some of the D’s, you’re ready to finally let the high end tax cuts sunset in the interest of deficit reduction (about $1 trillion over ten years), while preserving UI for the long-term unemployed, you’re trying to steer more benefits to the low end.
So let’s be clear about this. In a system like ours with so many tax and benefit cross-currents, there’s always a lot of redistributing going on. And it goes both ways.
*If we go off the cliff but reverse course quickly, reinstating, e.g., the middle-class tax cuts, extended UI benefits, and payroll tax cuts, this picture looks a lot less bad at the middle and low-end of the income scale.
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