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The CBO Has Been Occupied by OWS’s Intellectual Inequality

We already are the most progressive redistributive country in the world ? and that is the problem

One fundamental liberal desideratum is the achievement of equal results at the expense of equal opportunity.  Conservatives believe in implementing policies that protect our God-given rights, which provide every human being with an equal opportunity to succeed.  Liberals reject policies that foster unfettered equal opportunity because they invariably produce unequal results, being that human beings have different talents, capabilities, work ethic, and luck.  On Tuesday, the CBO decided to throw in with the left-wing affinity for highlighting income inequality and advocacy for equal outcomes – outcomes that would be dictated by our venerable federal government.

While the focus on income inequality in itself is a dubious endeavor for the CBO, their conclusions are downright scandalous.  Their most outlandish conclusion was that income inequality has increased between 1979 and 2007 due to a decrease in “government transfers” and tax cuts for the rich.  Here was their punch line:

Government Transfers and Federal Taxes Became Less Redistributive

Government transfers and federal taxes both help to even out the income distribution. Transfers boost income the most for lower-income households, while taxes claim a larger share of income as people’s income rises.

In 2007, federal taxes and transfers reduced the dispersion of income by 20 percent, but that equalizing effect was larger in 1979.

  • The share of transfer payments to the lowest-income households declined.
  • The overall average federal tax rate fell.

You might be scratching your head wondering how CBO can posit such a falsehood at a time when welfare spending is at an all-time high, the top 1% pay 36.7% of income taxes, even though they only earn 16.9% of AGI, and 47% pay zero income taxes.

Well, for one thing, they conveniently chose 2007 as the final year of their trend line.  The reality is that the recession has caused a sharp decline in income for the top 1%, food stamp usage has almost doubled since 2007, and the EITC and ACTC (along with the Make Work Pay Credit in 2009 and 2010) have made the tax code even more progressive.  However, the trend toward a more progressive tax code and a more robust government transfer system –the opposite of what was suggested in the CBO report – began long before 2007.

Taxes

The inconvenient truth for the left is that the tax code has become more progressive over the past few decades.  This trend has grown because of the tax cuts, not despite them.  While class warriors like to focus on the fact that Republican tax cuts lowered taxes on the rich, they forget that those tax cuts also removed millions of people from the tax rolls through the elimination of tax brackets and the expansion of the EITC and Child Tax Credit.

Let’s compare the change in share of the tax burden since 1980:

Top 1%

Top 5%

Top 10%

Top 25%

Top 50%

Bottom 50%

1980

19%

36.80%

49.30%

73%

93%

7%

2009

36.70%

58.60%

70.50%

87.30%

97.75%

2.25%

As you can see, the tax code has become increasingly progressive, to the extent that the rich pay almost twice the share of taxes they did in 1980.  Incidentally, 2007, which is the final year of the CBO trend line, was the most progressive year ever.  The top 1% paid 40.4% of all income taxes that year.  The number has actually declined slightly due to the recession.

Now let’s examine the trend line of lower-income earners.  Due to the Bush tax cuts and growth of refundable credits, in particular, more people than ever pay no income taxes.  In 2009, 25 million tax filers claimed the refundable portion of the earned income credit, at a cost of $54 billion.  Additionally, 21 million people claimed the refundable portion of the Child Tax Credit, at a cost of $27.5 billion.  Another 32 million enjoyed the two-year Making Work (refundable) Credit, at a cost of $13 billion.  In other words, the government spent more money ($94 billion) on giving people positive tax liabilities than it did on the burgeoning Food Stamp program ($77 billion).  Put another way, the government (i.e. the rich taxpayers) spent more on refundable tax credits than the entire sum of tax revenue generated by the 25%-50% tax percentile – the critical middle class. [See tax info from the Tax Foundation here]

All these credits, along with the elimination of lower tax brackets, has engendered a dynamic in which almost half of tax filers paid no income taxes, while 30% actually make money from the tax code.  In 1979, just 22.6% had a zero tax liability.  In 2001, prior to the Bush tax cuts, that number was still as low as 27%.

Yes – I know.  Many of these people (but not all) still pay payroll taxes.  But that is a non-sequitur because everyone receives Social Security and Medicare.  Those programs are not supposed to serve as welfare, so everyone must pay into them, irrespective of their income.  Therefore, one cannot expect to receive full benefits without paying into the system, or without transforming those programs into redistributive schemes.  CBO’s use of the payroll tax to justify their assertions only serves to obfuscate the purpose of the payroll tax.

Whether you think this is a virtue or a vice, the reality is that we have the most progressive tax system in the world, and it has become dramatically more progressive over the past 30 years.  To suggest otherwise is to live in the world of the unwashed protesters in Manhattan.

Government Transfers (aka Welfare)

The CBO report intimates that we haven’t been spending enough on transfer programs relative to the increased income of the rich.  That is the most absurd assumption that someone could possibly make, as it relates to public policy.  Total federal and state spending on roughly 185 means-tested programs (cash, food, housing, medical care, and social services for the poor) topped $950 billion for FY 2011.  In 1979, we spent less than $300 billion in inflation adjusted dollars on welfare.  Take a look at the trend line from this Heritage Foundation chart:

Additionally, welfare has been our fastest growing expenditure over the past few decades, according to Robert Rector of the Heritage Foundation.  In 1979, welfare spending was just over 3% of GDP; today, it accounts for 6.25% of our economy.  Current levels of welfare spending account for 73% of the gross income of the top 1% ($1.3 trillion).

Here’s a 1979-2011 study that CBO should undertake.  The following is a list of welfare categories, along with their inflation-adjusted percentage increase in costs since 1979 :

Medicaid- 612%%

Food and Nutrition – 209%

SSI- $266%

Earned Income Credit- 22-fold increase

Housing assistance – 112-fold increase

How can anyone in their right mind conclude that we don’t spend enough on transfers?  If there is any conclusion to be made, it is not that there is insufficient wealth transfer; it’s that redistribution of wealth has not worked.  Robert Rector estimates that we spent $16 trillion on welfare between 1965 and 2008.  That number has probably grown another $2.6 trillion just in the past three years (the part that’s not included in CBO’s analysis).  And what have we gotten for it?  We are languishing under record poverty.

So we can actually conclude that, despite the growth of “income inequality” on initial earnings, we are experiencing a record level of wealth distribution through the tax code and unparalleled growth in government transfer programs.  In other words, we have already implemented the very policies that these crazies are demanding…and they have failed to close the gap!  When will we end this circuitous madness?

Those who advocate more wealth redistribution need to answer the following questions:

1) If 36.7% for the top 1% and 58.6% for the top 5% of taxpayers is not enough, then what level of taxation would be sufficient?

2) If payroll taxes are too regressive for low-income earners, and you oppose private retirement accounts, how can we provide them with Social Security without creating another welfare program on top of SSI?

3) If $950 billion worth of welfare is not enough to satisfy our “government transfers” quota, then what is?

4) By any measure, the past three years have proven that unprecedented levels of welfare simply don’t work.  Why would a further increase make a difference?

Hopefully, we won’t be bankrupt by the time these leftists learn that spreading the wealth in the pursuit of equal outcomes will only perpetuate and exacerbate poverty.  Unfortunately, those vested with expertise in fiscal policy have failed to heed that lesson.

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