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Executive Summary #1912 on Federal Budget

February 14, 2006

February 14, 2006 | Executive Summary on Federal Budget

Executive Summary: The Myth of Spending Cuts for the Poor, Tax Cuts for the Rich

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During the 2005 budget reconciliation debate, critics trotted out the tired old myth that Republi­cans were cutting spending for the poor to pay for tax cuts for the rich. Many commentators accepted this as truth and repeated it, including Washington Post columnist E. J. Dionne, who accused the Republicans of passing a "cut-from-the-poor, give-to-the-rich budget."

However, the facts simply do not support these overheated claims. Rather than reduce entitlement spending, the budget reconciliation bill merely reduced its projected five-year growth rate from 39 percent to 38 percent. Furthermore, the flagship "additional" tax cuts were nearly all extensions of existing tax policies that would soon have expired.

More broadly, the accusation that poor families are shouldering more of the tax burden while receiving less of the spending is empirically false. From 1979 through 2003, the total federal tax bur­den on the highest-earning quintile (one-fifth or 20 percent) of Americans-who earn 52 percent of all income-rose from 56 percent to 66 percent of all taxes. Their share of individual income taxes jumped from 65 percent to 85 percent. On the spending side, antipoverty spending has leaped from 9.1 percent of all federal spending in 1990 to a record 16.3 percent in 2004.

Misreading the Data

The data clearly show that the tax burden is shifting annually up the income scale while spending continues to move down the scale. In other words, the people with the highest incomes are paying more of the tax burden while the poor are receiving more of the spending. Yet the mis­perception that the federal government is doing the opposite persists. This misperception is based on five factors:

The stereotype that Republican government automatically means less redistribution.

Baseline budgeting, which guarantees that large, persistent, annual increases in entitlement spending will go unnoticed because they occur automatically. Conversely, any attempt to scale back these automatic increases receives exten­sive media scrutiny because it requires a sepa­rate vote.

Tax cut sunset laws that require Congress to pass a new tax bill merely to keep the current tax rates at the same level, which allows these bills to be misreported as "new" tax cuts.

The misleading focus on how tax relief saves wealthy taxpayers the most money while ignor­ing the mathematical reality that the bottom half of taxpayers cannot receive much tax relief because they already pay almost no income tax.

An erroneous belief that tax cuts for upper-income Americans substantially reduce the amount of tax that they actually pay. Indeed, there is little correlation between tax rates and taxes paid.

Furthermore, the persistent increase in federal antipoverty spending fosters an unhealthy depen­dence on government. For example, from 1990 to 2005, the Medicaid caseload doubled to 55 million participants, meaning that the government increas­ingly is taking over the health care system from pri­vate companies and from community and charitable organizations, thus eroding self-reliance, independence, and local community responsibili­ties. The measure of the effectiveness of government antipoverty programs is not how many people are trapped into financial dependence on the govern­ment, but how many people succeed in freeing themselves from dependence on the government.

Conclusion

The myth of increased government redistribu­tion from the poor to the wealthy has important consequences for lawmakers. In particular, it clouds the real choices that must be made.

On the tax side, the mathematically impossible principle that income tax relief should be concen­trated among families who pay no income tax pre­vents any consideration of legitimate tax relief or tax reform. Additionally, the misperception that higher tax rates induce substantially higher tax revenues among upper-income taxpayers trans­lates into pressures for tax increases that harm eco­nomic growth without substantially increasing tax revenues.

On the spending side, the myth that antipoverty spending is being slashed also matters. In an era of massive, unsustainable spending increases and budget deficits, this erroneous consensus has effec­tively taken one-fifth of the non-interest federal budget off the table. In fact, anything less than the baseline growth of as much as 8 percent per year is now considered by many to be unconscionable. Given the long-term spending challenges America faces, it is time to analyze realistically which areas of federal spending are increasing, what the legiti­mate functions of the federal government are, and what is ultimately affordable.

Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Insti­tute for Economic Policy Studies at The Heritage Foundation.

About the Author

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Federal Budget