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,
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 "additional" tax cuts were nearly all extensions
of existing tax provisions that would soon have
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.
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
stereotype that Republican
government automatically means less redistribution.
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
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
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.
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 is increasingly taking over the health
care system from private companies, 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 successfully make the transition away from dependence on the
The Increasing Tax
Burden on the Rich
The often repeated myth
that lawmakers are dumping more of the tax burden on low-income
families is simply false. From 1979 through 2003, the
highest-earning 20 percent of Americans-who earn 52 percent of all
income-saw their share of the federal tax burden rise from 56
percent to 66 percent of all taxes. By contrast, the lowest-earning
quintile of Americans-who earn 4 percent of all income-saw their
share of the federal tax burden drop from 2 percent to 1 percent.
(See Chart 1 and Chart 2.) Clearly, the rich are shouldering an
increasing share of the tax burden.
The effective tax rate,
which measures the actual share of income paid in taxes, is another
way of examining the data. In 2003, the highest-earning quintile
paid 25 percent of their income in federal taxes. The
lowest-earning quintile paid just 4 percent of their income in
Bottom Two Quintiles:
No Income Tax. Critics often suggest
that poor Americans do not receive enough of the benefits from
income tax cuts. Table 1, which also breaks down the tax burden by
the type of tax, shows that in 2003, the bottom quintile paid an
effective income tax of -5.9 percent of their income and that the
second-lowest quintile paid an effective income tax of -1.1
percent. Their income tax burden was negative, meaning that they
actually received a subsidy from Washington on April 15. This
is due to the refundable Earned Income Tax Credit (EITC) and Child
Tax Credit, both of which subtract income taxes dollar for dollar
and can reduce income tax liability to below zero.
Simply put, the bottom
40 percent of earners collectively pay no income taxes, and
many actually receive checks from Washington. The little tax
burden that they pay is in social insurance taxes, as well as
excise taxes (such as gas and cigarette taxes).
Top Quintile: Lower Tax
Rates, Higher Tax Burden. Between 1979 and 2003,
the share of income taxes paid by the highest-earning quintile
jumped from 65 percent to 85 percent. Their share of all taxes paid
(including social insurance, corporate, and excise taxes)
increased from 56 percent to 66 percent. Upper-income taxpayers are
paying more, not less, of the tax burden.
shift occurred after federal income tax rates for top earners were
reduced dramatically. Between 1979 and 2003, the highest
individual income tax rate was cut in half, from 70 percent to 35
percent. Yet the top earners' effective income tax rate
dropped only from 15.7 percent to 13.9 percent. (See Chart 3.) The
effective tax rate for the highest-earning 1 percent
dropped only from 21.8 percent to 20.6 percent.
Halving the highest
income tax rate only slightly reduced effective taxes paid, for two
First, lower tax
rates provide greater incentives to work, save, and invest.
High-earners respond by creating more wealth, and this additional
income is taxed in the highest tax bracket. In this case, instead
of taxing a small amount of income at 70 percent, the IRS taxed
greatly expanded incomes at 35 percent. The reverse is also true:
Higher tax rates reduce incentives and therefore depress incomes,
dropping taxpayers out of the new higher tax brackets.
Second, lower tax
rates reduce incentives for tax avoidance and tax evasion.
Taxpayers subject to a 70 percent tax rate are much more likely to
hide their money in legal tax shelters or even to try
illegally to evade taxes altogether. By lowering the top rate
to 35 percent, lawmakers substantially reduced the incentive for
taxpayers to shield or hide their income from the IRS.
Overall, the share
of all taxes paid by the top quintile increased because their
effective tax rates have remained steady, in spite of cuts in
federal tax rates, while the effective tax rates paid by low-income
earners have plummeted to below zero.
Consequences. However, this
narrowing of the tax burden to a small minority of
taxpayers undermines democracy, as those voting for government
benefits are increasingly separated from those funding the
benefits. In addition, because incomes at the top fluctuate much
more from year to year, federal tax revenues have become more
unstable as this group has assumed more of the tax
burden. While most agree that upper-income families should pay
more in absolute tax dollars than lower-income Americans, the
increasingly overwhelming concentration of federal taxes within one
group of Americans is a cause for concern.
The Added Progressivity
of the Bush Tax Cuts. Popular mythology also
suggests that only wealthy taxpayers benefited from the 2001 and
2003 tax cuts. While high-income households did save more in actual
dollars than low-income households, they did so because low-income
households pay so little in income taxes in the first place. The
same 1 percent tax cut will save more dollars for a millionaire
than it will for a middle-class worker simply because the
millionaire paid more taxes before the tax cut.
In 2000, the top 60
percent of taxpayers paid 100 percent of all income taxes. The
bottom 40 percent collectively paid no income taxes. Lawmakers
writing the 2001 tax cuts faced quite a challenge in giving the
bulk of the income tax savings to a population that was
already paying no income taxes.
Rather than exclude
these Americans, lawmakers used the tax code to subsidize them
(some economists would say this made that group's collective
tax burden negative). First, lawmakers lowered the initial tax
brackets from 15 percent to 10 percent and then expanded the
refundable child tax credit, which, along with the refundable EITC,
reduced the typical low-income tax burden to well below zero. As a
result, the U.S. Treasury now mails tax "refunds" to a large
proportion of these Americans that exceed the amounts of tax that
they actually paid. All in all, the number of tax filers with
zero or negative income tax liability rose from 30 million to 40
million. The remaining tax filers received lower
income tax rates, lower investment taxes, and lower estate taxes
from the 2001 legislation.
Consequently, from 2000
to 2003, the share of all individual income taxes paid by the
bottom 40 percent dropped from zero percent to -2 percent, meaning
that the average family in those quintiles received a subsidy from
the IRS. By contrast, the share paid by the richest quintile
increased from 81 percent to 85 percent. Clearly, the tax cuts have
led to the rich shouldering more of the income tax burden and
the poor shouldering less.
Quintiles. Analyzing how a single
income quintile fares over time creates the false impression of
measuring the same people over time. However, few people remain in
the same income quintile for their entire lifetimes. Many Americans
begin their working careers in lower-income quintiles. During their
working years, they add skills, receive pay raises, and find new
jobs, and their income levels peak in the upper quintiles during
their fifties and sixties before dropping back down to a lower
quintile after retirement. Lifetime incomes are more equal than any
one snapshot in time.
The data verify this
picture. More than half of all taxpayers change income quintiles
within a decade. This is especially true for those in the bottom
quintile, two-thirds of whom move up within a decade. One
study analyzed Americans who spent 1979 in the bottom quintile. By
1988, more of them had reached the highest income quintile (14.7
percent) than had remained at the bottom (14.2 percent). "In other
words," according to the Joint Economic Committee, "a member
of the bottom income bracket in 1979 would have a better chance of
moving to the top income bracket by 1988 than remaining in the
By definition, 20
percent of Americans will always be in the bottom quintile, but
economic growth can push up the threshold between quintiles so that
even those remaining in the same quintile experience healthily
More Spending for the
Just as common as the
myth that poor families are paying more of the taxes is the myth
that they are receiving less of the spending.
Chart 4 shows that an
increasing share of the federal budget is spent on antipoverty
programs. From 2.6 percent of the federal budget in 1962,
antipoverty spending rose steadily to:
4.3 percent in
8.6 percent in
9.1 percent in
14.9 percent in 2000,
16.3 percent (a record)
of all federal spending in 2004.
Social Security and
Medicare spending has risen by a similar percentage since 1962,
from 13 percent to 33 percent of all spending. (See Chart 5.) All
of this new spending came out of defense spending, which dropped
from 49 percent of the budget in 1962 to 20 percent in 2005. The
national security state has been replaced by the welfare/geriatric
Contrary to the
rhetoric claiming that President George W. Bush has slashed
antipoverty spending, its proportion of the budget has actually
risen from 15.3 percent to over 16 percent since 2001. Table 3
breaks down the antipoverty budget and its growth since
All four categories of
antipoverty spending have received healthy increases over the past
few decades and in recent years.
health spending on the poor has more than doubled from 3.3 percent
to 7.6 percent of all federal spending. In that time, the Medicaid
population has increased from 25 million to 55 million, while the
average (inflation-adjusted) payment per beneficiary increased from
$3,839 to $4,873. 
Since 2001, Medicaid
has added 10 million participants to its rolls and increased
spending by 40 percent to $182 billion. Spending for the new State
Children's Health Insurance Program (S-CHIP) has increased by 39
percent while insuring 4.4 million Americans. 
subsidies jumped from virtually zero in 1960 to 1.5 percent of
all federal spending by 1993, where it has remained since. During
the 2001 through 2005 federal spending spree, housing
programs received a 26 percent increase, an average of 5.5
percent annually. The Housing Certificate Fund/Rental
Assistance, the largest traditional low-income housing
program, has received a 39 percent budget hike since 2001.
Assistance. Since 1969, Food Stamp
rolls have expanded from 3 million recipients to nearly 26 million.
In that time, the inflation-adjusted average annual benefit per
person also increased from $424 to $1,112. In the first four years
of the Bush Administration, Food Stamp spending surged 71 percent
to $33 billion as 8.4 million new recipients enrolled and the
inflation-adjusted average benefit increased by 12 percent.
Food Stamps are not the
only antipoverty food program. Child nutrition programs such as
School Breakfasts and School Lunches have experienced a 24 percent
budget increase since 2001; funding for Women, Infants, and
Children (WIC) is up 22 percent; and the Commodity Assistance
Program is up 44 percent. Total food assistance spending increased
by 49 percent from 2001 through 2005.
Support. After accounting for
2.2 percent of all federal spending in 1962 and 2.6 percent in
1990, cash-support spending in 2003 reached 5.0 percent of federal
spending for the first time. The largest programs
Income (SSI). The caseload for SSI,
which provides benefits for the aged, blind, and disabled, has
increased from 3.1 million in 1971 to a record 7.0 million in 2004.
The inflation-adjusted average annual benefit also reached a record
$5,324 in 2004. Since 2001, total SSI spending has
increased by 36 percent to $41 billion.
for Needy Families (TANF). TANF, the successor to
Aid to Families with Dependent Children (AFDC), is the only
major antipoverty program with a declining caseload and budget.
After peaking at 14.2 million recipients in 1993, work requirements
have brought the caseload down to 4.6 million in 2005.
Consequently, since 2001, spending has remained flat at
approximately $18 billion, and the average annual benefit per
person has remained around $2,000 (or $6,000 for a family of
three). This should not be considered a
policy failure. As explained below, TANF moved millions of welfare
recipients into work, reducing the need for large cash welfare
Earned Income Tax
Credit (EITC). The EITC provides a
refundable tax credit to low-income workers. Created in 1975, it
has leaped from its original 6 million claimants to 22 million
claimants in 2003. In addition to reduced taxes, the EITC provides
a subsidy to millions of low-income taxpayers, which has expanded
from an inflation-adjusted average of $668 per tax return in 1977
to $1,869 in 2003. Since President Bush took office in 2001,
annual EITC outlays (in addition to decreased taxes) have increased
from $26 billion to $35 billion.
Credit. Lawmakers created a
$500 per child refundable tax credit in 1998 and expanded it to
$1,000 in 2001. The tax credit begins phasing out for singles
earning over $55,000 annually and couples earning over $110,000
annually. This benefit, which saves a typical working family $2,000
to $3,000 annually, has increased from $1 billion in 2001 to a
record $14.6 billion in 2005 while also reducing the amount of
taxes that low-income families pay.
Programs. Since 2001, federal
child care spending has increased by 32 percent (plus the
increasing use of federal TANF dollars for child care), and federal
funding for child support enforcement and family support has
increased by 21 percent. The Low-Income Home Energy Program
(LIHEAP) has maintained a level budget of $2.1 billion.
This paper shows that
data on antipoverty spending refute the myth that these programs
are being slashed. Yet more money does not necessarily mean more
progress. All too often, lawmakers measure compassion by how
much money is spent rather than by whether a program actually
improves people's lives.
Historically, people in
need could rely on neighbors, mutual-aid organizations,
religious organizations, educational organizations, and other
community organizations for assistance. Such assistance would often
come from locals who knew the family in need and could provide
moral support and a plan to help them back on their feet in
addition to financial assistance.
Today, families in need
of housing, food aid, medical care, or other types of assistance
simply walk into a government office, fill out a few forms, and
walk out with a guarantee of perpetual government benefits.
There is little if any personalization of services or planning to
help them achieve self-sufficiency, independence, and personal
responsibility. Community organizations and neighbors no
longer have a reason to look out for each other because they have
been replaced by a Washington bureaucrat with a checkbook. This
checkbook compassion, while easy, cannot fix poverty.
For years, AFDC spent
tens of billions of dollars subsidizing poverty, reducing work
incentives, and encouraging illegitimacy. Predictably, welfare
rolls skyrocketed, and poverty worsened. The 1996 welfare
reforms replaced that failed system with one promoting work and
family formation. It succeeded by moving people to work and
attacking the root causes of poverty.
Today, the true measure
of welfare reform's success is the number of Americans who
have left welfare for work. Caseloads have plummeted by 68
percent, black poverty is at the lowest level ever measured, and
even illegitimacy rates have stopped their once steep growth.
Thirty years of previous failures prove that this progress could
not have happened in the traditional welfare system.
The measure of
government effectiveness is not how many people can be trapped
into the dependency of an ever-expanding government
check, but how many people successfully make the
transition out of dependency. Viewed in that way, the increase
in Medicaid and Food Stamp rolls should alarm rather than
antipoverty programs reduce economic growth by reducing
incentives to work and be productive. This lower economic
growth means fewer jobs, lower incomes, and more difficulties for
those trying to escape poverty. Thus, many of the current
anti-poverty programs are counterproductive to both a healthy
society and a healthy economy.
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
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 that 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.
Riedl is Grover M. Hermann Fellow in Federal
Budgetary Affairs in the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation.