Abstract. A fiscal deficit occurs when the benefits and services received by one group exceeds the taxes paid. When such a deficit occurs, other groups must pay, through taxes, for the services and benefits of the group in deficit. A fiscal distribution analysis measures the distribution of total government benefits and taxes in society, and assesses the magnitude of government transfers between groups. The present analysis provides a fiscal distribution analysis of families headed by single parents. It measures the total government benefits and services received by this group and the total taxes paid. This paper found that single-parent families are net beneficiaries of government expenditures, that is, as a group they generate a more benefits and services than taxes paid. On average, single-parent families paid $12,497 in total taxes and received $32,522 in immediate government benefits and services. With a $20,025 per family annual fiscal deficit and 13 million single-parent families, the annual aggregate net fiscal costs (or fiscal transfer) amounted to $260.5 billion in FY2004.
Each year, families and individuals pay taxes to the government and receive back a wide variety of services and benefits. A fiscal deficit occurs when the benefits and services received by one group exceeds the taxes paid. When such a deficit occurs, other groups must pay, through taxes, for the services and benefits of the group in deficit. Thus, resources are transferred between groups in the fiscal system, and government functions as the transfer mechanism.
In fiscal year (FY) 2004, federal government expenditures totaled $2.3 trillion and state and local expenditures totaled $1.45 trillion, for a combined value of $3.75 trillion. That same year, federal taxes amounted to $1.82 trillion, and state and local taxes and related revenues to $1.61 trillion. The $3.43 trillion in federal, state, and local taxes equaled 91 percent of the $3.75 trillion in expenditures. Government borrowing financed the remaining gap between taxes and spending.
A fiscal distribution analysis measures the distribution of total government benefits and taxes in society, and assesses the magnitude of government transfers between groups. Although previous fiscal incidence studies have focused on the distributional, as well as the redistributional, effect of government taxes and benefits on income, the analytical framework may be applied to other units of analysis that bear policy relevance. The literature on fiscal incidence offers evidence that factors than income, such as household characteristics, appear to be correlated with the distribution of government taxes and spending.
This paper provides a fiscal distribution analysis of families headed by single parents. It measures: (1) the net fiscal balance (total taxes paid minus total benefits and services received) of single-parent families and (2) the magnitude of the fiscal deficit or surplus generated by this group. Since the 1960s, an increasing proportion of children are living in single-parent families. In 2004, more than one child in three was born out of wedlock, one in four was living in a single-parent family, and more than one-half of all children will spend some time in a single-parent living arrangement during their childhood. That single-parent families are disproportionately low-income and recipients of numerous government benefits, from education to means-tested programs, suggests that they bear a relatively low tax burden and a relatively high benefit receipt compared to groups with higher income levels and less targeted by government programs.
This paper found that single-parent families are net beneficiaries of government expenditures (or net tax consumer) in FY2004. That is, as a group, single-parent families received more benefits and services than taxes paid, generating a net fiscal deficit. On average, single-parent families paid $12,497 in total taxes and received $32,522 in immediate government benefits and services. With a $20,025 per family annual fiscal deficit and 13 million single-parent families, the annual aggregate net fiscal costs (or fiscal transfer) amounted to $260.5 billion in FY2004.
The organization of this paper is as follows. Section I begins with a literature review of U.S. fiscal incidence studies, followed a brief outline current trends in single-parent families and their demographic composition in Section II. Section III presents the general methodology, Section IV, summary findings, and Section V, conclusion. Specific methodological topics are detailed in the Appendices.
Section I: The Fiscal Incidence Literature
A fiscal incidence study integrates tax incidence and benefit (or expenditure) incidence. It addresses, in one analysis, the twin questions of “who bears the tax burden or receives benefits from government?” and “how much taxes paid or benefits received?”.
Economist Irwin Gillespie, a pioneer of modern-day fiscal incidence studies, once defined fiscal incidence as the change in an individual’s (or a group of individuals’) “economic position” after the “introduction of the public sector,” whose function “is to divert resources from the private sector of the economy so as to provide goods which satisfy social wants.” In other words, fiscal incidence compares the pre-tax-and-benefit to the post-tax-and-benefit world, or the redistributional effect of paying taxes and receiving government benefits. Like fiscal incidence analysts before and after him, Gillespie operationalized “economic position” as current income, though he acknowledged that wealth might capture more broadly the concept of “economic position.” Income class – by decile, quintile, or other income classification – is usually the standard unit of analysis.
Though Gillespie (1965) marked a departure from the earlier literature, a comprehensive fiscal analysis that laid the groundwork for later such studies, analysts on both sides of the Atlantic had been conducting redistribution research for decades. Earlier work on fiscal incidence had been motivated by interest in the redistributive aspect and outcomes of tax and social welfare policies. Though limited in their scope and methodology, these studies nonetheless sought a more coherent theoretical and empirical approach to subject. Chamberlain and Prante (2007), in their review of the literature, concluded that “a general pattern of findings emerged [from those earlier efforts], most notably that the combined distribution of government spending and taxes is much more redistributive than is apparent from the tax distributions alone.”
In general, tax incidence was and still is more developed theoretically and empirically than benefit incidence. Gillespie (1965) saw that as a limitation to fiscal incidence analyses. To address that imbalance, he focused on the allocation of expenditures in his comprehensive fiscal incidence analysis. Overall, Gillespie (1965) found that incidence pattern at the federal level “generally favor[ed] low incomes, burden[ed] incomes, and [was] mainly neutral over a wide middle income range,” and at the state and local level, the “pattern also favor[ed] low income, but [was] essentially neutral over both the middle and upper income ranges.” Furthermore, state and local benefits to the low-income groups appeared to exceed those of the federal government, a finding that was contrary to the conventional view at the time. In sum, “the middle income brackets pay[ed] the cost of providing themselves with government services,” and “redistribution occurs from the upper income brackets to the lower income brackets, but not in the middle income brackets.”
The first to use a single data source, the 1960-1961 Survey of Consumer Expenditures, to allocate taxes and benefits, Bishop (1967) found that benefit incidence generally favored low-income families and that there was significant redistribution of income. In what he called the “standard case” (Bishop estimated incidence based on several alternative assumptions), the amount of benefits received was four times the taxes paid for families in the lowest income group in his analysis ($2,000 or less in 1960). By contrast, families in top income group in his analysis ($15,000 or more in 1960) borne a tax burden that exceeded the benefits received by about 160 percent. The break-even point was slightly right of the center of the distribution (at about $6000 in 1960)
The fiscal incidence literature continued to advance after the 1960s, both on the empirical and theoretical fronts. On the empirical front, analysts examined the combined federal, state, and local fiscal system as well as more limited fiscal systems such as just the federal or a municipal budget.  While these studies yielded varying patterns at the disaggregated levels, the net distributional effect at the aggregate level is generally and substantially pro poor.
Another significant study in the literature, Ruggles and O’Higgins (1981) used microdata (1970 Census and IRS tax files) and found federal tax burdens to be proportional to incomes cross the income distribution but local tax burdens to be slightly regressive; government expenditures as a share of income, on the other hand, tended to increase as income decrease; although, at the middle of the income distribution, average expenditures were rather comparable. Overall, it appeared that resources were redistributed away from the top three or four income decile to the bottom half of the income distribution.
While most fiscal incidence studies have a single-year accounting period, two studies in the literature analyzed trends in the distributional effect of government taxes and spending over time. Reynolds and Smolensky (1977) analyzed fiscal incidence in 1950, 1961 and 1970, and found that though the distributional impact was large during any given year, the distributional effect did not change between 1950 and 1970. Chamberlain and Prante (2007) found that, between 1991 and 2004, “the overall fiscal system became somewhat more favorable toward households in the four lowest quintiles…and somewhat less favorable toward household in the top quintile.”
On the theoretical front, considerable work has been done in the literature as well. Though the basic fiscal incidence framework appears to be straightforward – net distributional effect equals the difference between taxes paid and benefits received – the literature is fraught with theoretically and technical challenges. To begin, analysts have debated about the real definition of “original” or “primary” income and its distribution (or, using a Gillepsie (1965) concept, “economic position”) in the complete absence of government activity. Menchik (1991) summed up the conundrum well, “The difficulty is that we don’t observe the counterfactual; we do not know how much income a transfer recipient would earn in the no-government state.” While analysts have proffered tenable theoretical models on this question, these theoretical models are admittedly difficult, if not infeasible, to operationalize in empirical work.
A second major conceptual issue in the literature involves the valuation and allocation of certain government expenditures. There are two questions within this issue. First, who benefits from government services and benefits that cannot be attributed to a specific user? Second, how much, in dollar amount, are those benefits and services? Gillespie (1965) described two approaches: (1) identify beneficiaries as those on whose behalf government expenditures are expended, or (2) allocate expenditures based on the benefits, or value, they generate for each individual (or unit of analysis). At core is the issue of valuating goods that do not have clearly defined users and that generate present and future externalities. Aaron and McGuire (1970), a seminal work in the literature, critiqued earlier fiscal studies on theoretical grounds and offered a theoretical model for the distribution of public goods based individual preferences. Maital (1973) provided empirical results based on the model in Aaron and McGuire (1970). Analysts since Aaron, McGuire, and Maital have continued to develop the theoretical front on the distributional effect of public goods.
Brennan (1976) provides a counterpoint to Aaron and McGuire. Brennan did not argue against using utility functions to impute the value of public goods to individuals if sufficient information regarding personal preferences is available. He did, however, argue for a more practical approach (e.g., equal allocation of public goods benefits by household) in the presence of “informational constraints.” While analysts recognize and acknowledge the theoretical difficulties involved in fiscal incidence, they, in estimating empirical results, have generally opted for the first approach descried by Gillespie and ask the question “on whose behalf is this expenditure made?”. As Ruggles and O’Higgins explain, “In order to be able to make any estimates of the distribution of benefits from public expenditure, it is necessary to deal somehow with these problems.”
In addition to the two major theoretical quandaries summarized above, literature reveals a number of other theoretical and technical issues. Examples include the proper accounting period, the appropriate definition of proper income base, and the focal unit of analysis. As noted earlier, most fiscal incidence studies analyze the change in the income distribution after government taxes and spending. Income class, of individuals or a group of individuals such as a household, has been the conventional unit of analysis in the literature. Analysts have noted, however, that examining the distributional effect of taxes and government spending on other units of analysis might yield interesting findings.
Ruggles and O’Higgins (1981), for example, conducted a series of distributional analyses with different focal units, first by income decile, then household size, number of earners in the household, and gender and race of the householder. They found:
Although income level is highly correlated with taxes paid, income alone does not go very far towards explaining the distribution of public expenditure benefits. Instead, these tend to be correlated with a number of different household characteristics, which vary over the particular public expenditure categories under consideration. Overall the single variable which appears to be most important in determining the distribution of benefits is household size, although the analyses by race and sex of household show, within particular population and income groups other characteristics are also very important.
Aside from Ruggles and O’Higgins (1981), only a few other fiscal incidence studies have focused on units of analysis other than income, most notably the work on the fiscal impact of immigration. This paper explores a demographic characteristic not yet explored in the literature, namely family structure, and focuses on the fiscal distribution of single-parent families in the United States. In addition, this paper, with its relative emphasis on expenditure allocation, seeks to contribute to the development expenditure incidence methodology. Finally, this paper, using 2004 data, provides a portrait of the present fiscal system.
Section II: Trends in Single-Parent Families
The shift in family structure toward single-parent families is one of the most dramatic demographic trends of the last forty years. In 1960, single-parent families comprised 5 percent of all families or 9 percent of families with children, and about 9 percent of children lived in single parent families at any given point in 1960. The unwed birth rate that year was about 5 percent. By contrast, single-parent families comprised 13 percent of all families and 28 percent of all families with children in 2004. About 28 percent of all children live in single-parent families at any given point during that year, and nearly 37 percent of all births were to single mothers (see Figure 1). With rising trends in unwed childbearing, cohabitation, and divorce, about one-half of all children and women will spend some time in a single-parent living arrangement.
Figure 1: Trends in Single-Parent Families, 1960-2004
Different factors have contributed to the rise of single parenthood over the decades. Increasing divorce rates appeared to have played a major role in the 1960s and 1970s and out-of-wedlock childbearing in the 1980s and 1990s. While the majority of single-parent families are headed by single mothers (over 80 percent), the rise in the number of families headed by single fathers since the 1980s is also noticeable. Nonetheless, despite having increased at a faster rater than single-mother families since the 1980s, single-father families constituted only about 5 percent of all families with children in 2004.
The rise in single-parent families has not been distributed evenly across various economic and demographic dimensions. Single-parent families tend to be concentrated at the bottom of the income distribution. According to McLanahan (2004), the lowest income quartile saw the great increase in the share of single-parent families compared to other income quartiles. In 1960, 14 percent of mothers in the bottom quartile were single mothers and in 2000, 43 percent (compared to 4.5 percent of married mothers in top quartile in 1960 and 7 percent in 2000). Cut in another way, in 2000, 50 percent of divorced or separated single mothers, 75 percent of never-married single mothers, 38 percent of cohabiting single mothers, and 48 percent of widowed single mothers fell in the bottom income quintile.
Single-parent families also tend to be concentrated among the less educated, and the rise of single-parent families has been unequal along the education distribution. Among children whose mothers are college graduates, only 6 percent lived in single-mother families in 1965; that share increased to 10 percent in 1980 and plateaued thereafter. By contrast, among children of mothers with less than a high school degree, the share of children who lived in single-mother families increased from 13 percent to 40 percent between 1965 and the mid-1990s but have since slightly declined.
Similarly for women, the rate of and the increase in out-of-wedlock childbearing has been higher among less-educated women. In fact, Ellwood and Jencks (2004) observed this trend in every educational group, from those with than less than high school education to those with some college, except among college graduates. Divorce and separation rates, and the increase in these rates since the 1960s, among ever-mothers by educational attainment generally follow a pattern similar to that of out-of-wedlock childbearing; although, the divorce and separation rates among ever-married with less than a high school degree appeared to have decreased and the rates among ever-married college mothers appeared to be unchanged since the mid-1990s. Educational differentials are important to note because of the strong association between education attainment and earnings potential.
That single-parent families tend to be concentrated at the bottom of the income distribution, have lower educational attainment, which impacts their earnings potential, and are recipients of numerous government benefits and services, such as public education and means-tested programs, suggests single-parent family status may be correlated not only with the distribution of taxes paid but also with the allocation of public expenditures. This paper seeks to estimate the net fiscal balance of single-parent families and the magnitude of that net balance.
Section III: General Methodology
This paper is based on the core methodological principle on of fiscal comprehensiveness in two regards. First, this analysis seeks to cover all government expenditures and taxes and similar revenue sources for federal, state, and local government. Comprehensiveness helps to ensure balance in the analysis and avoid biases in the conclusions. Second, a basic principle of estimation procedure employed for each expenditure program or category in the analysis is that, if the procedure is replicated for the whole U.S. population, the resulting estimated expenditure will equal expenditures on the program according to the official budgetary documents. The same principle is applied to each tax and revenue category.
The two primary sources of data used in the allocation of government expenditures and taxes are the March 2005 Current Population Survey (CPS) Supplement and the 2004 Consumer Expenditure Survey. Data on federal expenditures were taken from Historical Tables, Budget of the United States Government, Fiscal Year 2004. Data on federal taxes and revenues were taken from Analytical Perspectives, Budget of the United States Government, Fiscal Year 2006. State and local aggregate expenditures and revenue data were taken from the U.S. Bureau of Census survey of government finances and employment. Added information on state and local spending categories was taken from U.S. Census Bureau, Federal and Local Governments: 1992 Government Finance and Employment Classification Manual. Detailed information on means-tested spending was taken from Congressional Research Service, Cash and Non-cash Benefits for Persons with Limited Income: Eligibility Rules, Recipient and Expenditure Data, FY 2002-FY 2004. This report provides important information on state and local means-tested expenditures from states’ and localities’ own financial resources as distinct from expenditures funded by federal grants in aid. Data on Medicaid expenditures for different recipient categories were taken from the Medicaid Statistical Information System (MSIS) as published in Medicare & Medical Statistical Supplement, 2006. Other data sources include the 2001 National Household Travel Survey and the 2004 National Nursing Home Survey.
Definition of Single-Parent Families
The Census Bureau defines “family” as “a group of two people or more (one of whom is the householder) related by birth, marriage, or adoption and residing together.” A “subfamily” is defined as “a married couple with or without children, or a single parent with one more own never-married children under 18 years old…[and] does not maintain their own household, but lives in the home of someone else.” Subfamilies may be related or unrelated to the householder. The count of subfamilies is not included in the count of families after the 1980 Current Population Survey. As single-parent families are the focal unit of analysis, this paper considers single-parent families and single-parent subfamilies as distinct family units. This paper uses martial status as defined in the CPS. Thus, single-parent families with cohabiting partners (with two adults present) are counted as single-parent family units and married-parent families with absent spouses (with one adult present) are counted as married-parent family units.
Calculating Aggregate Federal, State, and Local Spending
This paper seeks to cover all government expenditures and all taxes and similar revenue sources for federal, state, and local government. The first step in a comprehensive analysis of the distribution of benefits and taxes is to count accurately the cost of all benefits and services provided by the government. In fiscal year (FY) 2004, the expenditures of the federal government were $2.3 trillion. In the same year, expenditures of state and local governments were $1.4 trillion. The combined value of federal, state, and local expenditures in FY2004 was $3.75 trillion (see Appendix Tables D-3 and D-6). On the revenue side, federal taxes in FY 2004 amount to $1.82 trillion. State and local taxes and related revenues amounted to $.16 trillion. Together, federal, state and local taxes amounted to $3.43 trillion, which came to 91 percent of the $3.75 trillion in expenditures. The gap between taxes and spending was financed by government borrowing. Aggregate federal expenditures at the sub-function level were taken from Historical Tables, Budget of the United States Government, FY 2007. These data are presented in Appendix Table D-3. State and local aggregate expenditures were based on data from the U.S. Bureau of Census survey of government.
Two modifications were necessary to yield an estimate of the overall combined spending for federal, state, and local government. First, some $408 billion in state and local spending is financed by grants in aid from the federal government. Since these funds are counted as federal expenditures, federal grants in aid were deducted from the appropriate categories of state and local spending, so as to avoid double counting.
A second modification involves the treatment of market-like user fees and charges at the state and local levels. These transactions involve direct payment of a fee in exchange for a government service: for example, payment of an entry fee at a park. User fees are described in the federal budget in the following manner:
[I]n addition to collecting taxes…the Federal Government collects income from the public from market-oriented activities and the financing of regulatory expenses. These collections are classified as user charges, and they include the sale of postage stamps and electricity, charges for admittance to national parks, premiums for deposit insurance, and proceeds from the sale of assets such as rents and royalties for the right to extract oil from the Outer Continental Shelf.
In the federal budget, user fees are not counted as revenue, and the government services financed by user fees are not included in the count of government expenditures. As the Office of Management and Budget states:
[User charges] are subtracted from gross outlays rather than added to taxes on the receipts side of the budget. The purpose of this treatment is to produce budget totals for receipts, outlays, and budget authority in terms of the amount of resources allocated governmentally, through collective political choice, rather than through the market.
In contrast, Census tabulations of state and local government finances include user fees as revenue and also include the cost of the service provided for the fee as an expenditure. The most prominent user fees treated in this manner in the Census state and local government financial data are household payments to public utilities for water, power, and sanitation services. But market-like, user fee payments of this type do not involve a transfer of resources from one group to another or from one household to another. In addition, government user fee transactions do not alter the net fiscal deficit or surplus of any household (defined as the cost of total government benefits and services received minus total taxes and revenues paid) because each dollar in services received will be matched by one dollar of fees paid. Finally, determining who has paid a user fee and received the corresponding service is very difficult.
For these reasons, this paper has applied the federal has applied the federal accounting principle of excluding most user fees from revenue tallies and excluding the services funded by the fees from the count of expenditures to state and local government finances. As noted, the inclusion or exclusion of these user fees has no effect on the net fiscal deficit or surplus.
Types of Government Expenditures
After the full cost of government benefits and services has been determined, the next step in the analysis of the fiscal distribution analysis is determine the beneficiaries of specific government program. Some programs, such as Social Security, neatly parcel out benefits to specific individuals. For those programs, both the beneficiaries and the cost of the benefit provided are relatively easy to determine. At the opposite extreme, other government programs (for example, medical research at the National Institute of Health) do not neatly parcel out benefits to individuals. Determining the proper allocation of the benefits of that type of program is more difficult.
To ascertain most accurately the distribution of government benefits and services, this study begins by dividing government expenditures into six categories: (1) direct benefits, (2) means-tested benefits, (3) educational services, (4) population-based services, (5) interest and other financial obligations resulting from prior government activity, and (6) pure public goods.
Direct benefits programs involve either cash transfers or the purchase of specific services for an individual. By far the largest direct benefit programs are Social Security and Medicare. Other substantial direct benefit programs are Unemployment Insurance and Workmen’s Compensation. Direct benefit programs involve a fairly transparent transfer of economic resources. The benefits are parceled out discretely to individuals in the population; both the recipient and the cost of the benefit are relatively easy to determine. In the case of Social Security, the cost of the benefits would equal the value of the Social Security check plus the administrative costs involved in delivering the benefit.
Calculating the cost of Medicare services is more complex. Ordinarily, the government does not seek to compute to the particular medical services received by an individual instead government counts the cost of Medicare for an individual as equal to the average per capital cost of Medicare services. (The number equals the total cost of Medicare services divided by the total number of recipients.) Overall, government spent $840 billion on direct benefits in FY 2004.
Means-tested programs are available only to households below specific income thresholds. The federal government operates over 60 means-tested programs. The largest of these are Medicaid; the Earned Income Tax Credit (EITC); food stamps; Supplemental Security Income (SSI); Section 8 housing, public housing, Temporary Assistance to Needy Families (TANF); the school lunch and breakfast programs; the WIC (Women, Infant, and Children) nutrition program; and the Social Services Block Grant (SSBG). Many means-tested programs, such as SII and the EITC, provide cash to recipients. Other such as public housing or SSBG, pay for services that are provided to recipients.
The value of Medicaid benefits is usually counted in a manner similar to Medicare benefits. Government does not attempt to itemize the specific medical services given to an individual; instead, it computes an average per capita cost of services to individuals in different beneficiary categories such as children, elderly persons, and disabled adults. (The average per capita cost for a particular group is determined by dividing total expenditures on the group by the total number of beneficiaries in the group.) Overall, the U.S. spent $564 billion on means-tested aid in FY 2004.
Government provides primary, secondary, post-secondary, and vocational education to individuals. In most cases, the government pays directly for the cost of educational services provided. In other cases, such as the Pell Grant program, the government in effect provides money to an eligible individual who then spend it on education. Education is the single largest component of state and local government spending, absorbing roughly a third of all state and local expenditures. The average per pupil cost of public primary and secondary education is now about $9,600 per year. Overall, federal, state, and local governments spend $590 billion on education in FY 2004.
Whereas direct benefits, means-tested benefits, and education services provide discrete benefit and services to particular individuals, population-based programs generally provided services to a whole group or community. Population-based expenditures include policy and fire protection, courts, sparks, sanitation, and food safety and health inspections. Another important population-based expenditure is transportation, especially roads and highways.
A key feature of population-based expenditures is that such programs generally need to expand as the population of a community expands. (This quality separates them from pure public goods, described below). For example, as the population of a community increases, the number of policy and fireman will generally need to expand in proportion.
In its study of the fiscal costs of immigration, The New Americans, the National Academy of Sciences argued that if service remains fixed while the population increases, a program will be “congested,” and the quality of service for users will deteriorate. Thus, the NAS uses the term “congestible goods” to describe population-based services. Highways are an obvious example of this point. In general, the cost of population-based services can be allocated according to an individual’s estimated utilization of the service or at a flat per capita cost across the relevant population.
A sub-category of population-based services is government administrative support functions such as tax collections and legislative activities. Few taxpayers view tax collection as a government benefit; therefore, assignment the cost of this “benefit” appears problematic. The solution to this dilemma is to conceptualize government activities into two categories: primary functions and secondary functions. Primary functions provide benefits directly to the public; they include direct and means-tested benefits, education, ordinary population-based services such as police and parks and public goods. By contrast, secondary or support functions do not provide direct benefits to the public but do provide necessary support services that enable the government to perform primary functions. For example, no one can receive food stamp benefits unless the government first collects taxes to fund the program. Secondary functions can thus be considered as inherent part of the “cost of production” of primary functions, and the benefits of secondary support functions can be allocated among the population in proportion to the allocation of benefits from government primary functions.
Government spent $622 billion on population-based services in FY 2004. Of this amount, some $546 billion went for ordinary services such as policy and parks, and $116 billion went for administrative support functions.
Interest and Other Financial Obligations Relating to Past Government Activities
Interest payments for government debt are in fact partial payments for past government benefits and services that were not fully paid for at the time of delivery. Similarly, government employees deliver services to the public. Part of the cost of service is paid for immediately through the employee’s salary, and government employees are also compensated by future retirement benefits. Expenditures of public sector retirement are thus to a considerable degree, present payments in compensation for services delivered in the past. The expenditure category “interest and other financial obligations relating to past government’s activities” thus includes interest and principal payments on government debt and outlays for government employee retirement. Total government spending on these items equaled $468 billion in FY 2004.
Pure Public Goods
Economic theory distinguishes between “private consumption goods” and pure public goods. Economic Paul Samuelson is credited with first making this distinction. In his seminal 1954 paper, Samuelson defined a pure public good (or what he called in the paper a “collective consumption good”) as a good “which all enjoy in common in the sense that each individual’s consumption of such a good leads to no subtractions from any other individual’s consumption of that good.” By contrast, a “private consumption good” is a good that “can be parceled out among different individuals.” Its use by one person precludes or diminishes its use by another.
A classic example of a pure public good is a lighthouse. The fact that one ship perceives the warning beacon does not diminish the usefulness of the lighthouse to other ships. Another clear example of a governmental pure public good would be future cure for cancer produced by government-funded research. The fact that non-taxpayers would benefit from this discovery would neither diminish its benefits nor add extra costs to taxpayers. By contrast, an obvious example of a private consumption good is hamburger: when one person eats it, it cannot be eaten by others.
Direct and means-tested benefits and education services are private consumption goods in the sense that use of a benefit or service by one person precludes or limits the use of that same benefit by another. (Two people cannot cash the same Social Security check.) Population-based services such as parks and highways are often mentioned as “public good,” but they are not pure goods in the strict sense described above. In most cases, as the number of persons using a population-based service (such as highways and parks) increases, either the service much expand (at added costs to taxpayers) or the service will become “congested” and its quality will be reduced. Consequently, the use of population-based services such as policy and fire departments by non-taxpayers does impose significant extra costs on taxpayers.
Government pure public goods are rare; they include scientific research, defense, spending on veterans, international affairs, and some environmental protection activities such as the preservation of endangered species. Each of these functions generally meets the criterion that the benefits received by non-taxpayers do not result in a lost of utility for taxpayers. Government pure public good expenditures on these functions equaled $628 billion in FY 2004. Interest payments on government debt and related costs resulting from public good spending in previous years added an estimated additional cost of $67 billion, bringing the total public goods cost in FY 2004 to $695 billion.
Table 1: Summary of Total Federal, State, and Local Expenditures, FY2004
Taxes and Revenues
Total taxes and revenues for federal, state, and local governments amount to $3.43 trillion in FY 2004. A detailed breakdown of federal, state, and local taxes is provided in Appendix Table D-7. The biggest revenue category was the federal income tax, which was $808 billion in 2004, followed by Federal Insurance Contribution Act (FICA) taxes at $685 billion. Property tax was the biggest revenue producer at the state and local levels, generating $318 billion, while general sales taxes gathered $244 billion.
Allocation Estimation Procedures
Estimating the Allocation of Direct and Means-Tested Benefits
In most cases, the dollar cost of direct benefits and means-tested benefits received by single-parent families was estimated by the dollar cost of benefits received as reported in the CPS. One problem with this approach is that the CPS underreports receipt of most government benefits. This means that the aggregate dollar cost of benefits for a particular program as reported in the CPS is generally less than the actual program expenditures according to government budgetary data. To be consistent, any fiscal analysis must adjust for benefit underreporting. Smith and Edmonston (1997), for example, adjusted for such underreporting.
This paper adjusts for underreporting in the CPS with a simple mathematical procedure that increases overall spending on any given program to equal actual aggregate spending levels and increases expenditures on single-parent families in an equal proportion. Let:
E tx = Total expenditures for program x reported in the CPS;
Epx = Expenditures for program x for single-parent families reported in the CPS;
Ebx = Total expenditures for program x according to independent budgetary sources; and
Fp = Number of single-parent families in CPS.
Epx/ E tx = Share of expenditures received by single-parent families reported in the CPS;
(Epx/ E tx ) ´ Ebx = Actual expenditures allocated to single-parent families; and
(Epx/ E tx ) ´ (Ebx/ Fp) = Average program x benefit per single-parent family.
The key assumption behind this underreporting adjustment procedure is that single-parent families underreport receipt of welfare and other government benefits at roughly the same rate as the general population. As there is no evidence to suggest that single-parent families underreport government benefits to the Census at a rate different from that of the general population, this procedure appears valid as an estimating technique.
Estimating the Allocation of Education Expenditures
The average cost of public education services was calculated in somewhat a different manner since the CPS reports whether an individual in enrolled in a public school but does not report the cost of education services provided. Consequently, data from the Census survey of governments were used to calculate the average per pupil cost of public and secondary education in each state. The total governmental cost of primary and secondary schooling for each household was then estimated by multiplying the number of enrolled pupils in the household by the average per pupil cost in the state where the household resides. This procedure yielded estimates of total public and primary and secondary education costs for single-parent families and for the whole population in the October 2004 CPS Supplement. Adjustment for underreporting in the CPS were made according to the procedures outline above. Public costs for post-secondary education were allocated in a similar manner.
Estimating the Allocation of Medical Expenditures
The Census does not determine the costs of medical treatments given to particular person. Instead, it calculates the average cost of Medicaid or Medicare benefits per person for a particular demographic/beneficiary group. For example, per capita Medicaid costs for children are very different from those for the elderly. The Census assigns the appropriate per capita Medicaid or Medicare costs to each individual who reports coverage in the CPS that equals to the average government for each individual who reported Medicare or Medicaid coverage.
Allocation of Medicaid expenditures is complicated by the fact that a significant portion of those expenditures goes to person in long-term care institutions who are not counted in the CPS. In the average month in 2004, some 1.65 million individuals resided in long-term care institutions, of whom about 62 percent reported receiving Medicaid assistance. The first step in allocating Medicaid expenditures is to determine the share of expenditures going to institutionalized and non-institutionalized person within each of the four primary recipient groups: elderly, children, non-elderly disabled adults, and non-elderly able-bodied adults. The procedures for determining this are presented in Appendix C. Once non-institutionalized expenditures have been separated from institutionalized expenditures, the single-parent family share of Medicaid spending in the general/non-institutional population can be determined for each of the recipient categories directly from CPS data. The demographic characteristics of long-term institutional care residents and those of family-parent families do not match very well, specifically for the categories of adult (disabled and non-disabled) and elderly. Therefore, the only institutionalized recipient category assumed to have a single-parent family share is the children’s recipient category.
Estimating the Allocation of Population-Based Services
Wherever possible, this paper has allocated the cost of population-based services for single-parent families in proportion to their estimated utilization of those services. For example, the proportionate utilization of roads and highways by single-parent families were estimated, in part, on the basis of their share of gasoline purchases as estimated in the Consumer Expenditure Survey (CS). When an estimate of proportionate utilization was not possible, the cost of population-based services were allocated on a uniform per capita basis.
Estimating the Allocation of the Costs of General Government and Administrative Support Services
Allocation of the costs of general government services such as tax collections and legislative functions presents difficulties since there are no apparent direct beneficiaries. Most taxpayers would regard IRS collection activities as a burden, not a benefit; however, while government administrative function per se do not benefit the public, they do provide necessary foundation that makes all other government benefit and service programs possible. It seems reasonable to integrate proportionally the cost of government support services into the cost of other government functions that depend on those services. Following this reasoning, the expenditures for general government and administrative support have been allocated among families in the same proportions that total direct benefits, means-tested benefits, education, and population-based services are distributed among families.
Estimating the Allocation of Financial Obligations Relating to Past Government Activities
When government revenues do not cover the full cost of government benefits and services, a portion of annual costs is passed on to be paid in future years, through two mechanisms. First, when government expenditures exceed revenues, the government runs a deficit and borrows funds. The cost of borrowing is passed to future years in the form of interest payments and repayments of principal on publics. Second, when a government employee provides a service to the public, part of the cost of that service is paid for immediately through the employee’s salary, but the employee may also receive government retirement benefits in the future in compensation for services provided in the present. Expenditures on public-sector retirement systems are thus, to a considerable degree, present payments in compensation for services delivered in the past.
The allocation procedure for these costs associated with past services among the present-day population is uncertain. In this paper, the following procedure was used. First, veteran benefits were regarded as compensation for pure public goods and were allocated as such. Second, the share of debt payment associated with past public good expenditure was considered a pure public good itself and allocated as such. Third, the remaining interest and government retirements were allocated in proportion to the share of all direct benefits, means-tested benefits, education, and population services received by single-parent families in FY2004.
Estimating the Allocation of Pure Public Goods
Government pure public goods include expenditures on defense, veterans, international affairs, scientific research, and part of spending on the environment, as well as debt obligations relating to past public good spending. The total cost of pure public goods was divided by the whole U.S. Population to determine a per capita cost.
Estimating the Allocation of Taxes and Other Government Collections
The distribution of federal and state income taxes was calculated from CPS data. The Census imputes tax payments into the CPS based on a family’s income and demographic characteristics and the appropriate federal and state tax rules; however, since income is underreported in the CPS, this means that imputed taxes will also be too low. Thus, the imputed tax payments in the CPS were adjusted to equal the aggregate income tax revenue reported in government budgetary documents.
The procedures for adjusting the underreporting of federal and state income taxes were the same as those used to adjust for underreporting of expenditures. For example, for federal income tax, let:
Tt = Total income tax reported in the CPS;
Tpt = Total income tax for single-parent families reported in the CPS;
Tb = Total income tax according to independent budgetary sources; and
Fp = Number of single-parent families in CPS
Tpt / Tt = Share of taxes paid by single-parent families as reported in the CPS;
(Tpt / Tt ) ´ Tb = Actual taxes allocated to single-parent families;
(Tpt / Tt ) ´ (Tb/Fp) = Average taxes paid per single-parent family.
Employees were assumed to pay both the “employee” and “employer” share of FICA taxes. Allocation of FICA taxes was estimated based on the distribution reported in the CPS, adjusted for underreporting in the manner described above.
The incidence of federal and state corporate profits tax was assumed to fall 70 percent on workers and 30 percent on owners of capital. The workers’ share was allocated according to the distribution of earnings in the CPS; the owners’ share was allocated according to the allocation of property income in the CPS.
Sales and excise taxes were assumed to fall on the consumers; tax payments were estimated based on the share of total consumption of relevant commodity or commodities in the Consumer Expenditure Survey (CS). For example, since the CS reported that single-parents consumed 12.9 percent of the sales of tobacco products, these same families were estimated to pay a corresponding 12.9 percent of all excise and sales taxes on tobacco products.
Section IV: Results
Table 2 summarizes the demographic characteristics of single-parent families (and for comparison purposes, demographic characteristics of all families and married-parent families are presented as well). In 2004, there were an estimated 13 million single-parent families in the United States. Some 38.7 million individuals, about 13.3 percent of the U.S. population, lived in single-parent families. Of the 13 million single-parent families, an estimated 17.8 percent were single-parent subfamilies, or family units that resided in the household of another family. On average, single-parent families had three individuals per family.
With some 28 million earners residing in single-parent families, each single-parent family contained, on average, approximately two individuals who reported any earnings in 2004. Single-parent families contained, on average, one earner per family compared to one-and-a-half earners per family in all family units and nearly two earners per family in married-parent family units. Not surprisingly, single-parent families had lower average earnings per family compared to the all family units and married-parent families. Interestingly, although married-parent families had nearly twice the number of earners per family compared to single-parent families, married-parent families had, on average, nearly three times the average annual earnings per family as that of single-parent families ($75,207 versus $25,843).
On average, single parents were slightly younger than married parents (36 years of age versus 39 years of age). Among single parents, the average age varied by marital history. Never-married single parents, the largest group of single parents (about 44 percent) were, on average, the youngest (average age 30 years), and widowed single parents were, on average, the oldest (average age 52 years). The average ages of divorced and separated single parents were 40 years and 38 years, respectively.
Single parents, as noted earlier, are predominately female, about 81 percent in 2004. Compared to all family reference persons and married parents, single parents tended to have lower educational attainment. Some 19 percent of single parents did not have high school degrees compared to 15 percent of all family reference person and 12 percent of married parents. About a third of single parents were high school graduates and another third reported some college education. However, the education differentials were the most apparent at the higher education levels. Married parents were twice as likely as single parents to be college graduates (21.5 percent versus 9.4 percent), and more than three times as likely to hold a graduate degree (11.6 percent versus 3.6 percent). In regard to racial and ethnic background, about one half of all single parents were white, about 27 percent were black, and 18 percent were Hispanic.
Table 2: Demographic Characteristics of Single-Parent Families
Notes: Authors’ tabulation; weighted population estimates, March 2005 CPS Supplement. Single-parent family units are defined as primary family and subfamily units in the CPS whose reference person’s marital status is separated, divorced, widowed, or never married and has at least one child under the age of 18.
Government Benefits and Services Received by Single-Parent Families. The focus of this paper is the benefits received and the taxes paid by single-parent families, and the group’s net fiscal balance. Appendix Table D-1 shows the estimated benefits and services received by single-parent families in 51 separate expenditure categories. The results are summarized in Table 3.
Overall, in FY2004, single-parent families received, on average of $32,522 per family in immediate benefits and services, including direct benefits, means-tested benefits, education, and population-based services. If expenditures for interest and other financial obligations relating to past government activities are added to the count, the average expenditures per family rise to $37,476. If the cost of public goods is added, annual total expenditures on benefits and services come to $44,579 per family.
Means-tested aid constituted the largest expenditure category received by single-parent families, an estimated average of $12,391 per family, followed by education services, $11,602 per family. These two categories constituted over one half of all government benefits and services received by single-parent families, which is not surprising. Nearly 30 percent of children resided in single-parent families, and these families are the targeted recipient group of numerous means-tested aid programs. In FY2004, single-parent families also received an estimated average of $6,200 per family in population-based services, $2,330 of which were in police, fire, and public safety benefits, and $1,042 of which were in transportation services.
Table 3: Expenditure Allocation Summary
It is important to note that the costs of benefits and services summarized in Table 3 are a composite average of all single-parent families. They represent the total costs of benefits and services received by single-parent families divided by the number of such families. It is unlikely that any single family would receive this exact package of benefits. Nonetheless, the figures are an estimated portrayal of the governmental benefits and services expended on behalf of single-parent families. When combined with similar data on taxes paid, they enable an assessment of the fiscal status of such families as a group and their impact on other groups in the fiscal system.
Taxes and Revenues Paid by Single-Parent Families. Appendix Table D-2 details the estimated taxes and revenues paid by single-parent families in 31 categories. The results are summarized in Table 4. Overall, single-parent families paid $12,497 in federal, state, and local taxes, about $6,821 in federal taxes and revenues and $5,676 in state and local taxes and revenues. Federal Insurance Contribution Act (FICA) comprised the largest tax burden for single-parent families (workers were assumed to pay both the employee and employer share of FICA taxes), on average about 27 percent of all taxes paid. Federal, state, and local individual income taxes amounted to about 21 percent of all taxes paid. This analysis assumed that a significant portion of property taxes and rental and business properties were passed through to renters and consumers; this resulted in a tax burden of $1,623 property tax burden for an average single-parent family. On average, single-parent families paid $1,398 in general sales taxes. Property and general sales taxes comprised about a quarter of the total tax burden for an average single-parent family. This analysis also assumed that 70 percent of corporate income taxes fell on workers; this contributed to an average of $855 in federal, state, and local corporate income tax burdens for single-parent families.
Net Fiscal Balance. In FY2004, single-parent families received, on average, $32,522 per family in immediate government benefits and services, including direct and means-tested benefits and education and population-based services, which was about $6,679 more than the average earnings per single-parent family of $25,843. Average total government expenditures per family rose to $37,778, if interest and governmental financial obligations are included. On the tax and revenue side, single-parent families paid, on average, $12,497 in taxes and revenues per family in FY2004. Thus, single-parent families received at least two-and-a-half dollars in government benefits and services for each dollar in taxes paid. If the costs of public goods and governmental financial obligations are added, the ratio rises to $3 in services and benefits to one dollar in taxes paid. This $3-to-$1 ratio does not include the $7,103 in average public goods benefits received per family. Not including public goods and past financial obligations of the government, single-parent families generated, on average, a net fiscal deficit (taxes paid minus benefits and services received) of $20,025 per family. At the aggregate level, with 13 million single-parent family units, single-parent families generated a net fiscal deficit of $260.5 billion. This sum includes direct benefits, means-tested benefits, education and population-based services. Including single-parent families’ share of interest and other financial obligations related to past government activities, the net fiscal deficit would come to $324.9 billion. Including public goods benefits, the net fiscal deficit would be on the magnitude of $417.3 billion.
Table 6: Ratio of Benefits and Services Received to Taxes Paid per Family
Limitations and Caveats. Admittedly, any fiscal distributional analysis is accurate insofar as the data on which its estimations are based are accurate. To the extent that this analysis captures the true net fiscal balance of taxes paid and government benefits and services received by single-parent families depends on the how well the survey data reflect the true patterns and characteristics of single-parent families. As noted earlier, income and certain benefit receipts, for example, are underreported in the Current Population Survey, which required adjustments to correct for the underreporting in this paper, or are imputed by the Census Bureau using statistical estimation procedures.
A second limitation to determining “true” fiscal impact involves a host of issues inherent in any fiscal distribution analysis. The debate in the literature on determining the “true” valuation of benefits (dollar cost of expenditures versus utility generated), particularly the value of public goods, and the “true” incidence (those on whose behalf a particular expenditure is made or some other beneficiaries not immediately observed) illustrates this point well. This paper also assumed the value of benefits to equal the dollar amount expended by government; it did not, as most fiscal incidence studies do not, account for the externalities, negative or positive, generated by government activities and the beneficiaries of those externalities. The classic example is education: while education clearly and directly benefits enrolled students, it has been argued that education generates positive externalities and benefits society as whole. This paper estimated education benefits based on total government expenditures on education and the number of enrolled students. Another caveat is the accounting period. The fiscal system is dynamic, and one accounting period impacts the next. This paper is a one-period analysis; it estimated the net fiscal balance of single-parent families in FY2004 when the single parents were on average in their mid-thirties and have children under the age of 18 present in the home.
A caveat should also be made of allocation assumptions. A different set of allocation assumptions, or even a few different assumptions on the key expenditure or tax categories, may yield different results. As George Bishop (1967) notes, “Estimating the distribution of the tax burden and expenditure benefits require assumptions about the incidence of taxation and the distribution of benefits. The most complete survey data cannot remove the need to assumptions, some of which are more generally accepted than others.” This paper followed the conventional incidence assumptions and distributors in the literature. Nonetheless, as the literature shows, there is not one definitive set of approved assumptions and distributors. This is particularly true of expenditure incidence, which is less well developed than tax incidence and the emphasis of this paper. Finally, this paper seeks to estimate the net fiscal balance of single-parent families in FY2004 – an “aerial-view” distributional analysis, so to speak – and the results should be interpreted with this view in mind. While Appendix Tables D-1 and D-2 detail 80-plus specific expenditure, tax and revenue allocations, the analysis should not be interpreted as discrete incidence analyses for the 80-plus categories. The overall magnitude of the net fiscal balance, however, is relatively stable and less sensitive to assumptions, allocators, and share estimates than the individual categories.
Section V: Conclusion
A comprehensive fiscal incidence considers all government taxes, revenues, and expenditures. Individuals and families contribute to the fiscal system through taxes paid but also make gains through government benefits and services received. The net fiscal balance for a unit or a group of units in the system equals the total taxes paid minus the benefits and services received. If the former exceeds the latter, the unit or group generates a net fiscal surplus. If, on the other hand, the benefits and services received exceed the taxes paid, then the unit or group generates a fiscal deficit. Such a deficit is borne by other units or groups in the fiscal system. In other words, in through the fiscal system, resources are transferred between groups.
A fiscal distribution analysis estimates the distribution of government spending and taxes in society and provides an assessment of the magnitude of the transfer between groups. This paper estimated the net fiscal balance of single-parent families. Overall, in FY2004, single-parent families received, on average, $32,824 in immediate government services and benefits, including direct and means-tested benefits and educational and population-based services ($37,476 if interest and other financial obligations from past government activities added and $44,579 if public goods are included as well) per family. By contrast, single-parent families paid, on average, $12,497 in total federal, state, and local taxes. Consequently, in FY2004, single-parent families generated, on average, a fiscal deficit of at least $20,025 per family. At the aggregate level, this amounted to a net fiscal deficit of $260.5 billion. Significantly, single-parent families are substantial consumers of education and means-tested benefits. The average tax payment of $12,497 per family covered the average means-tested aid receipt of $12,391 per family but did not cover direct benefits, education and population-based services received. The ratio of benefits and services received to taxes paid ranged from 3.6 to 2.6. Results in this paper are consistent with previous findings in the literature on the correlation between non-income factors, such as household characteristics, and the distribution of government taxes and spending.
The rise in single parenthood is one of the most marked demographic transitions of the last forty years. That single-parent families are net fiscal consumers bears relevance to current and future U.S. social policies. The net fiscal deficit of $260.5 billion in FY2004 generated by single-parent families is not an insubstantial sum (about 2.3 percent of GDP in 2004). This deficit was borne by other taxpayers. Changes in government policies and programs, particularly those that directly impact single-parent families (such as education and means-tested programs) could easily alter the net fiscal balance of this group. Moreover, the resultant shift would affect others in the system as well, either increasing or decreasing their fiscal burden.