Nums: Who pays taxes? Who benefits?

Since it’s tax day, I thought I’d flashback to a drill down I did on the tax system —  who pays in, where does it go and who benefits …

In a prior post, we drilled down on taxes … or, as my Dem friends would say government “revenues”.

We posted that in 2012 Americans paid a tad over $5 trillion in taxes to the Feds, States and Local Governments.

Drilling down, the $5 trillion is split roughly 50%-30%-20% to the Feds, States and Locals, respectively. Note that the Federal portion is just under $2.5 trillion.


* * * * *
If these are “revenues” there must be matching services provided, right?

I found a study by the non-partisan Tax Foundation that analyzes taxes paid and benefits received.

The study is old – using 2004 data – but, in my opinion is a good starting point to calibrate the answer.

First, the easy part …

The Federal tax revenues in 2004 were a bit over $2 trillion … compared to our $2.5 trillion projection in 2012.

Here’s how the 2004 tax revenues were spent … i.e., the benefits received by citizens.

Note that the Federal spending is just under $20,000 per household.


* * * * *

The Tax Foundation analysts also sorted taxes paid by household income pentile against benefits received by the pentiles ….. and things got interesting.

The bottom pentile – households in the bottom 20% of income – pay about 2.5% of Federal taxes (including payroll taxes !) … and receive 1/3 of government benefits.

The top pentile pays over half of the Federal taxes and draws about 15% of government benefits.

The middle pentile comes close to breaking even – paying 14.1% of Federal taxes and getting 16% of government benefits.


* * * * *
Here’s another way to cut the data …

On average, households in the bottom pentile get $23,178 more in benefits than they pay in taxes; average households in top 20% run a deficit of almost $40,000 – that is, they pay about $40k in taxes than they receive in benefits; the breakeven point is somewhere around $50,000 in household income – that’s where taxes paid equal benefits received.


* * * * *
When state & local taxes and benefits are factored in, the surpluses and deficits grow even larger.

The bottom 20% gets over $31,000 per household in net government benefits; the top 20% pays almost $50,000 per household more than it gets in government benefits.

The breakeven point is still somewhere around $50,000 in household income – that’s where taxes paid equal benefits received.


* * * * *

I’ll be hunting for more recent data.

Until I find it, chew on this!

Note: The Tax Foundation says it doesn’t have funding to update its study.

Nuts !



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8 Responses to “Nums: Who pays taxes? Who benefits?”

  1. John Says:

    I wonder if the numbers are different if the entire tax burden is considered. What about state, local, Medicare and Social Security. I don’t think Social Security taxes are even taken out above about $120K or so.

  2. Andrew L. Says:

    On a state basis, the tax rate varies. California has (likely) the most progressive system. Twenty-two states are tied for most regressive (no variation), and seven states are awesome (with no income tax).

    Social Security is not a tax, but rather a forced-savings scheme. The amount you pay in is tied to the amount you draw out. The contribution limit is capped, but so is the benefit. Low earners have about a 6% rate of return on their contributions, but the return rate for high earners is less than 1%.

    With regard to Medicare, higher earners pay more into the system, but receive the same benefits as low earners. Moreover, Medicare now withholds an additional .9% for earners making more than $200k.

  3. John Says:

    You are probably technically correct about Social Security and Medicare and stuff but I think for practical purposes and conceptually they are all a tax. No matter how it is camouflaged the funds go into the general US Treasury and the services received for both are similar in principle for the services citizens get from traditional taxes like roads, parks, police, fire… So I still wonder, viewing the “tax” and pseudo-tax burden on citizens, has anyone really looked at who ends up paying the most.

  4. Andrew L. Says:

    How many legs does a dog have when you call the tail a leg? Still four. I love the intellectual flexibility though. A mandate isn’t a tax (except when it is), and a saving scheme is a tax (except when it isn’t).

    Anyhoo, as long as we are just making things up can we chuck in sales tax, gas tax, cigarette tax, and FCC fees since they are all incredibly regressive? Since we as a nation have collectively decided to shove it to the little guy, we can at least offer them a little accuracy in return.

    Or are we just, you know, picking the ones that you want to use to make your point as a question rather than a statement?

    • John Carpenter Says:

      Good point. I would include sales taxes of all sorts especially since they are so obviously connected to consumption or the attempt to prevent consumption. Taxes are taxes. I think I would even include corporate taxes as it may be possible to assign them to individuals by shares owned. Airfare taxes, AMT…everything should count. It is not a dog it is a centipede. Counting them all is the only way to get the real picture. Only counting/picking particular taxes is a statistical lie.

  5. TTK Says:

    1) Let’s not forget that several of the recent police confrontations were driven by revenue raising schemes. We are absolutely sticking it to the poorest and weakest.

    2) Low taxes seem great…until you get stuck with a million little fees.

  6. TTK Says:

    You’d probably need a post twice this long to take on the idea of “benefits”

  7. Andrew L. Says:

    My mistake for overwriting the thesis here. To be clear, I’d argue that the little guy simply pays too much, not that they pay too disproportionate a share. The OP is correct.

    On the specific question of the rates across all levels/types, the Tax Policy Center (which is a JV between Brookings and the Urban Institute before you all start complaining about sources) pegs the tax rate for the bottom 40% of earners at below 5%. The comparable rate for all taxpayers is 18%.

    The effective average rate for the top 5% is 23%, the EAR for the top 1% is 27.6%, and the EAR for the top .1% is 30.8%. The top quintile pays a rate 29 times greater than the lowest quintile and four times greater than the second lowest quintile.

    No argument on the police-as-tax-collector statement though.

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