At the heart of all fiscal policy discussions in Washington is the question of progress: how much should tax and spending policies be redistributed from high-income households to low-income households?

This debate is often more rhetoric than substance, but a recent study by the Congressional Budget Office (CBO) fills that gap by presenting data showing that the financial system of right now — both taxes and direct federal benefits — are very progressive and very fragmented.

The CBO study estimates the impact of federal monetary policy on household income in 2019 (the most recent data). This is done by comparing the number of households that benefited from social insurance programs (eg, Social Security and Medicare) and means-tested transfer programs (eg, Medicaid, SNAP, and Supplemental Security Income) of the amount they paid in total federal taxes—incl. personal taxes, payroll taxes, corporate taxes, property taxes, and miscellaneous taxes.

These policies raise the incomes of many households (who receive more in federal benefits than they pay in total federal taxes) and lower the incomes of others (who pay more in taxes in federal taxes than they receive in direct federal benefits). CBO’s data allow us to measure the impact of these policies on the average household in various population groups and then aggregate the results to measure how income is distributed among those groups. These policies are individual.

Households certainly benefit from other federal programs such as national defense, highway spending, and public education, but CBO does not include them in this exercise. Here are the benefits of such a program. The analysis focuses on fiscal policies that directly affect household income.

Direct Federal Benefits Raise the Average Income of the Top Three Quintiles

Table 1 shows how federal benefit programs and taxes can increase market incomes or decrease them. For example, in 2019, households in the lowest quintile paid almost no federal income tax but received $22,000 in transfer benefits. As a result, these policies doubled their household income, increasing by 126 percent.

The story is very similar for households in the second and middle quintiles, although not as extreme. After federal taxes were paid, direct federal benefit policies raised household income in the second quintile by 39 percent and household income in the middle quintile by 11 percent.

Table 1: Summary data on household income, benefits, taxes and changes in income in 2019
2019 Number of households (millions) Average household income Benefits: Social security and means tested Total federal taxes per household Average income after
Transfer and
Gain (+) or loss (-) per household Percentage change in household income
Lowest quintile 26.1 $17,200 $21,800 $100 $38,900 $21,700 126%
Second quintile 25.5 $39,600 $20,000 $4,600 $54,900 $15,300 39%
Middle quintile 25.6 $67,500 $18,000 $10,600 $74,800 $7,300 11%
Fourth quintile 25.4 $108,700 $16,300 $20,600 $104,400 -4,300 dollars -4%
Highest quintile 25.3 $318,900 $14,200 $81,100 $252,100 -US$66,800 -21%
81 to 90 Decile 12.7 $166,600 $14,700 $36,000 $145,300 -21,300 dollars -13%
91 to 95 Decile 6.4 $236,700 $13,700 $55,000 $195,300 -41,400 dollars -17%
96 to 99 Decile 5.0 $403,600 $13,800 $101,800 $315,500 -88,100 dollars -22%
1% above 1.2 $1,983,700 $15,100 $600,300 $1,398,500 -585,200 dollars -30%

Federal taxes reduce the median income of the top two quintiles

The story changes dramatically for the average household in the top two quintiles. On average, they paid more in taxes in 2019 than they received in direct federal benefits. Households in the fourth quintile, for example, saw their income drop by 4 percent, while household income in the highest quintile fell by 21 percent.

At the top of the income spectrum, the story is even more dramatic. Households in the top 1 percent paid an average of $600,000 in federal taxes and received about $15,000 in federal benefits. As a result, federal tax and spending policies have reduced household income in the top 1 percent by about one-third (30 percent).

It is interesting to note that federal benefit programs are distributed evenly across income levels, while federal taxes are heavily skewed toward those with higher incomes.

Each product contributes to a large distribution

Figure 1 shows the total income or loss due to federal tax and benefit policies for the five quintiles plus the top 1 percent of households. We can see that the federal fiscal policy increased the income of households in the lowest level by $ 566 billion in 2019. Households received an income of $ 390 billion in the second quintile while household income in the middle quintile earned $187 billion.

Combined, the top three quintiles received more than $1.1 trillion from federal benefit policies, even after federal taxes were paid.

On the other side of the income spectrum, we see that progressive fiscal policy reduced the income of households in the fourth quintile by $109 billion in the year 2019. However, this is a fraction of the nearly $1.7 trillion that households in the highest quintile saw. income decreases due to federal monetary policy. Of that amount, about $702 billion came from households in the top 1 percent.

Overall, federal fiscal policy reduced the income of 40 percent of American households by $1.8 trillion in 2019. Of this, more than $1.1 trillion was redistributed to raise household incomes in the bottom 60 percent of the population, while the rest. $656 billion paid for other federal spending.

The federal financial system examines the progressive tax code including federal taxes and social security distributions.

The financial system has historically benefited low-income households

Figure 2 provides an interesting picture of the growth of the federal tax and benefit system since 1979. CBO has adjusted the data to 2019 dollars to allow an apples-to-apples comparison over the years. the decades.

Not surprisingly, since 1979, households in the lowest and second brackets received more federal benefits than they paid in taxes. And tax policy has been a major factor in this trend, especially since the mid-1990s, as Table 7 of the CBO supplemental data in the report shows.

The successive expansion of the tax credit and the introduction of the child credit have significantly reduced the tax burden for low-income households. In fact, the doubling of the child tax credit to $1,000 from $500 in the 2001 tax bill, along with the reinstatement of ‘part of the debt, has completely eliminated the tax debt for households in the second quintile and has given them a large tax subsidy.

The average household also benefits on net

However, the more important story is the shift in the middle quintile. These households also benefited greatly from the expansion of credit, and we see that since 2002—after the doubling of child loans—they have benefited from They are federal policymakers, not participants. As a result, the gap between the amount of federal benefits the middle quintile received and the federal taxes they paid widened over the next 15 years.

It should also be noted that the gap has narrowed in recent years for the fourth quintile as well. However, this gap narrows significantly as these households receive social insurance and means-tested benefits. This is yet another indication that the burden of the financial system is increasing even more on households in the highest quintile.

The burden of the highest quintile continues to increase

The most obvious trend in this chart is the downward trend showing the increasing burden of households in the highest quintile and, more recently, those in the top 1 percent. In 1979, the financial system lowered the household income of the highest quintile by $634 billion in constant 2019 dollars. In 2000, their net worth more than doubled to $1.5 trillion, rising to $1.7 trillion in 2019.

The top 1 percent of households have also seen their participation in the financial system increase over the past four decades. In 1979, the financial system reduced their income by $182 billion in 2019 dollars. By 2000, that amount had tripled to $626 billion, rising to $702 billion in 2012.

CBO’s findings provide useful insight into the tax and spending debate in 2023. Some may say the system is too progressive while others say it’s not progressive enough. But the CBO data clearly shows that the financial system is doing what progressive financial systems are intended to do — raising the incomes of the poor and middle class, while reducing household incomes. top It is up to voters and MPs to decide if this funding is too much or too little.

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