Professional Documents
Culture Documents
Written by Joseph Landry, Washington and Lee University, 2013 Advisor: Dr. Harlan Beckley, Shepherd Program Director and Fletcher Otey Thomas Professor of Religion at Washington and Lee
Table of Contents
TABLE OF FIGURES ...................................................................................................................... 2 INTRODUCTION ...........................................................................................................................3 GENERAL GOVERNMENT FINANCIAL BALANCES ........................................................................ 4 SOCIAL SPENDING........................................................................................................................6 Introduction ............................................................................................................................ 6 International Social Spending Comparisons ..........................................................................6 Social Spending by Category ..................................................................................................8 SOCIAL SPENDING IN THE FEDERAL BUDGET ........................................................................... 11 Introduction .......................................................................................................................... 11 Comparing Social Insurance and Means-Tested Federal Spending .................................... 12 How Health Care Costs are Driving Social Spending Expansions ...................................... 15 Transfers By Income Group ................................................................................................. 21 Conclusion............................................................................................................................. 23 TRENDS IN FEDERAL TAXATION ............................................................................................... 24 Introduction .......................................................................................................................... 24 Trends in Federal Taxation Across Income Groups ............................................................ 25 TAX EXPENDITURES .................................................................................................................. 29 Introduction .......................................................................................................................... 29 Budgetary Effects .................................................................................................................. 29 Beneficiaries by Income Group ............................................................................................ 29 CONCLUSION ............................................................................................................................. 32 MAJOR SOURCES ........................................................................................................................ 34
Table of Figures
Figure 1: General Government Spending and Receipts as a % of GDP, 2012 (Projections) .................. 4 Figure 2: General Government Spending and Receipts as a % of GDP, 2007 ......................................... 4 Figure 3: U.S. General Government Financial Balances Since 1994 (as a % of Nominal GDP) ............ 5 Figure 4: Public Social Spending in OECD Nations in 2007 (% of GDP) ................................................ 6 Figure 5: Total Social Spending as a Percentage of GDP (1980-2005) ....................................................... 7 Figure 6: US Social Spending as a % of GDP (Pie Chart) ............................................................................ 9 Figure 8: Federal Social Spending by Major Category, 1965-2011 (Unstacked) ......................................12 Figure 9: Federal Social Spending as a Percentage of GDP (Unstacked) .................................................13 Figure 10: Federal Social Spending as a Percent of Overall Outlays (Unstacked) ...................................14 Figure 11: Federal Social Insurance Spending (Stacked), 1965-2011 .........................................................15 Figure 12: Federal Means-Tested Transfer Spending by Major Program, 1965-2011 ............................16 Figure 13: Federal Means-Tested Transfer Spending by Major Program .................................................16 Figure 14: US Health Expenditures as a Percentage of GDP (1960-2010) ..............................................18 Figure 15: US Health Expenditures Since 1960: Source of Funding .........................................................19 Figure 16: Source of Health Expenditure Funding since 1965...................................................................19 Figure 17: Medicaid Enrollment versus Medicaid Expenditures................................................................20 Figure 18: Share of Total Transfers by Market Income Group .................................................................21 Figure 19: Transfers as Percentage of Average Household Income, 1979-2007 .....................................22 Figure 20: Reduction in Inequality Resulting From Federal Transfers .....................................................23 Figure 21: Federal Revenues as a Percentage of GDP, 1979-2009 ............................................................24 Figure 22: Federal Taxes as a Percentage of Household Income Since 1979 ..........................................25 Figure 23: Pre-Tax and Post-Tax Income Shares .........................................................................................26 Figure 24: Share of Total After-Tax Income by Income Group, 1979-2007 ...........................................27 Figure 25: Reduction in Inequality Resulting from Federal Taxes .............................................................28 Figure 26: Reduction in Inequality Resulting From Transfers and Taxes Combined .............................28 Figure 27: Percent Change in After-Tax Income From Tax Expenditures ..............................................30 Figures 28-37: Average Household Benefit From Tax Expenditures (2007) ...........................................31
INTRODUCTION
The current political climate fosters broad ideological debate about the size and role of American government. Talking points, however, fail to reveal complexities in the structure, size, and distribution of spending programs. Many important questions remain unanswered: Is government spending increasing? How does U.S. spending compare to other developed nations? Which social programs are expanding and which are shrinking? How much does each income group benefit from spending? How much do taxes and transfers reduce inequality, and how has this changed over time? How much revenue does the federal government forego through tax expenditures, and who benefits from these provisions? Together, the answers to each of these questions provide a constructive and informed approach to policymaking. The purpose of this paper is to provide this important historical and international context to the current policy debate. This report traces trends in social spending thematically rather than chronologically. It begins by comparing the overall size of American government with that of partner Organization for Economic Cooperation and Development (OECD) nations. It then provides an international comparison of social spending, as distinguished from other forms of government spending. The main focus of the paper, however, is the size and composition of social spending in the federal budget. An analysis of social insurance and means-tested programs demonstrates that healthcare costs, in large part, served as the impetus for spending increases in recent decades. This report shows why overall costs are increasing and which government programs have absorbed costs. It also highlights that, as reported by the non-partisan Congressional Budget Office, low-income households now receive a smaller percentage of direct social spending than they did in 1979, which explains why government transfers now reduce inequality less than they did in that year. This is an example of a detail that could be confusing to some who witness trends of increasing inequality at a time when overall government spending is increasing. The explanation for this aberration is that a smaller portion of that spending is now actively reducing market inequality. The report concludes with an analysis of trends in federal taxation. Over the last few decades, tax rates have decreased for households at all income levels. This has diminished the degree to which the tax system reduces market inequality. Further, this analysis exposes one of the most important, and misunderstood, components of American social spending: tax expenditures. These incentives, which allow specific households to reduce tax liability through exclusions, deductions, deferrals, and credits, represent revenue losses at the federal level. While some tax expenditures are targeted toward lowincome households, the majority of these programs, such as the home mortgage interest deduction and the exclusion of employer-provided health insurance, disproportionately benefit higher-earning households. This section of the report includes reasons for uneven benefit distribution, an analysis of several major tax expenditures, and an examination of the overall effects of tax expenditures on Americas social spending system. The charts and analysis that follow are intended to provide an overview of essential yet often overlooked background material related to the most prominent current policy debates. In many cases, this material does not make for simple Newsbites, as it does not conform to simple ideological platforms. But a careful consideration of the history and international context of social spending is imperative in order to form a sustainable national social policy for the future.
Source: OECD Economic Outlook, No. 88, November 2010, Annex Table 26, p. 300.
Source: OECD Economic Outlook, No. 88, November 2010, Annex Table 25, p. 299.
Figure 3 illustrates outlays, receipts and the resulting budget deficit for the U.S. from 1994 through 2013. As the graph shows, the surplus (designated by the green area) of the late 1990s and early 2000s was the result of increasing receipts and decreasing outlays. Further, the graph demonstrates that decreasing receipts and increasing outlays have simultaneously fueled the deficit (designated by the orange area) growth of the past six years. While spending significantly increased as a percentage of GDP in the late 2000s, revenues did not. The data in Figure 3 project that the deficit will decrease in coming years as receipts increase and spending decreases.
Figure 3: U.S. General Government Financial Balances Since 1994 (as a % of Nominal GDP)
US Outlays US Receipts
Deficit/Surplus
40.0
30.0
20.0
10.0
0.0 1994
1995
1996
1997
1998
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2011
2012
2013
10.0
20.0
30.0
40.0
50.0
SOCIAL SPENDING
Introduction
Expenditures dedicated to the improvement of citizen welfare constitute government social spending. The OECD divides social spending into the following categories: health; old age support; incapacity related assistance; survivors benefits; family support; income maintenance, social assistance, and other benefits; unemployment assistance; and labor market programs. Thus, social spending incorporates a broad array of domestic programs that benefit various demographics, from the elderly and disabled to working mothers. This spending can benefit citizens across the socioeconomic spectrum. In the United States, for example, programs such as Social Security and Medicare provide benefits to high-income, moderate-income, and low-income senior citizens. U.S. social spending remains relatively low. Increasing healthcare costs, however, (primarily in the form of Medicare and Medicaid payments) are adding to this figure at a rate faster than in these other nations.1
Mexico United States Japan OECD Average United Kingdom Source: OECD.Stat Extracts: Public and Private Social Expenditure By Country
Germany
Sweden
France
1 Because figures in this section compare social spending in 1990 and 2007, they do not include recent changes in the United States in the form of the Patient Protection and Affordable Care Act of 2010. These figures demonstrate that healthcare costs in American social spending were increasing dramatically independent of that legislation. 2 OECD (2010), OECD.Stat (database) 3 Ibid.
A comparison of social spending within these nations since 1980 reveals few changes. As Figure 5 demonstrates, all countries included in this comparison except for Sweden experienced social spending increases from 1980 through 2005, albeit gradual in some cases.4 Germany and France have each experienced significant increases in overall public social spending. Although public social spending in the United Kingdom increased overall between 1980 and 2005, it decreased between 1985 and 1990 and between the mid-1990s and early 2000s. Social spending increased in Japan from the early 1990s to today, surpassing U.S. social spending in the mid-1990s. U.S. social spending has remained relatively stagnant at 15% of GDP since the mid-1990s.
30
Percentage of GDP
25
United States Japan OECD Average United Kingdom Germany Sweden France
20
15
10
dramatic decline of social spending in Sweden was the result of an economic collapse in that country that led to severe austerity measures in the mid-1990s. 7
4 The
OECD (2010), OECD.Stat (database) See Robert Greenstein and Richard Kogan, Are Low-Income Programs Enlarging the Nations Long-Term Fiscal Problem? Programs Outside Health Care Projected to Decline as Share of Economy Center on Budget and Policy Priorities, November 2, 2012, available at: http://www.cbpp.org/files/5-10-12bud.pdf. 7 The Social Expenditure database: An Interpretive Guide OECD 2007, from http://stats.oecd.org/OECDStatDownloadFiles/OECDSOCX2007InterpretativeGuide_En.pdf
5 6
Figure 6: US Social Spending as a % of GDP (Pie Chart) US Social Spending as % of 1990 GDP
Income Maintenance, Social Assistance, and Other Benefits In Kind, 0.4 Unemployment, 0.4 Family, 0.5 Active Labor Market Programs, 0.2
Total: 13.5%
Survivors, 0.7
Family, 0.7
Total: 16.2% Source: OECD.Stat Extracts: Public and Private Social Expenditure By Country
France 2007
0.9 0.8 7.5
Health
Old Age
Sweden 1990
0.9 0.5 1.6 0.6 7.4 4.4 0.7 5.5 8.6 0.5 5 0.7 0.6
Sweden 2007
1.1 0.5 6.6
Incapacity Related
3.4
Survivors
Germany 1990
0.8 0.5 0.9 0.1 1.7 1.5 6.3
Germany 2007
0.2 1.4 1.8 2.1 1.9 0.7 0.6
Family
0.5
7.8
9.4
8.7
UK 1990
0.7 0.8 0.2 0.3 2.2 4.8 0.6 0.2 4.9 0.1
0.3 0.2
UK 2007
1.3
Japan 1990
0.1 0.3 0.9 0.3
Japan 2007
0.3 0.2
Housing
0.6
4.5
6.3
4.1
8.8
10
11
1975
1985
1995
2005
Medicare provides health insurance coverage to Americans over the age of 65. Medicaid provides health insurance coverage to low-income children, elderly and disabled adults, and some other qualifying adults.
8
12
Figure 9 shows the growth in social insurance and means-tested transfers as percentages of GDP. Note that spending on means-tested transfers remained relatively constant at roughly 2% of GDP from 1975 through 1990. It then remained relatively constant at roughly 2.5% of GDP from 1990 through 2008. Social insurance spending followed a similar trend, although spending on this category fluctuated more over time in relation to GDP. Beginning in 2008, spending on means-tested transfers spiked, approaching 4% of GDP. This occurred primarily as a result of temporary adjustments to Medicaid and the Supplemental Nutritional Assistance Program (SNAP) in the American Recovery and Reinvestment Act of 2009. 9 Congress enacted these temporary increases in means-tested transfers in order to provide a countercyclical remedy to the burden that the economic recession placed on low-income families. Further, because this chart displays social spending as a percentage of GDP, social spending appears larger during economic recessions even when program costs do not increase.
Means-Tested Transfers
10.00%
8.00%
6.00%
4.00%
2.00%
0.00% 1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
9 See 2011 Actuarial Report on the Financial Outlook for Medicaid, Department of Health and Human Services, March 16, 2012, available at: https://www.cms.gov/Research-Statistics-Data-andSystems/Research/ActuarialStudies/downloads/MedicaidReport2011.pdf.
13
Figure 10 shows social spending by category as a percentage of the overall federal budget. This shows that over time, both social insurance and means-tested spending have gradually increased as a share of the budget. Social insurance programs, in large part, automatically follow population trends such as growth and aging, as they are federal entitlement programs. These programs are funded through dedicated payroll taxes and trust funds, and supplemented with funds from general revenues. This makes the programs less vulnerable to austerity measures, as Congress simply contributes the necessary funds annually to keep the programs working. Most means-tested programs, however, are funded through annual Congressional appropriations. Thus, these programs are more sensitive to efforts aimed at decreasing or restricting federal spending.
1970
1975
1980
1985
1990
1995
2000
2005
2010
14
1,200,000.00
1,000,000.00
800,000.00
600,000.00
400,000.00
200,000.00
0.00 1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
15
400,000.00
300,000.00
200,000.00
100,000.00
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Figure 13: Federal Means-Tested Transfer Spending by Major Program (excluding Medicaid), 1965-2011
Childrens' Health Insurance Housing Aid AFDC-TANF 300,000.00 Supplemental Feeding Programs Food Stamps SSI School Food Programs EITC
250,000.00
200,000.00
150,000.00
100,000.00
50,000.00
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
16
That Medicare and Medicaid are consuming increasing shares of social spending should not be a surprise. As Robert Greenstein and Richard Kogan write in their 2012 report, Are Low-Income Programs Enlarging the Nations Long-Term Fiscal Problem?, the growth in both social insurance and means-tested entitlements can be attributed primarily to two major factors: 1) expanding healthcare costs and 2) the aging of the population. These factors directly affect the costs of all health insurance programs, and government-funded insurance programs are not immune. Expanding health care costs are a result of improving technology, which has also contributed to longer lifespans and thus, population aging. There is not a simple solution to the increasing costs of health insurance. As the 2011 Actuarial Report on the Financial Outlook for Medicaid states, Determining how to optimally balance our collective demand for the best possible health care with our not-unlimited ability to fund such care through private and public efforts represents one of the most challenging policy dilemmas facing the Nation.10 Figure 14 displays historical trends in health expenditures as a percentage of GDP. Over the past five decades, national health expenditures in the United States have increased more rapidly than GDP. In fact, between 1969 and 2010, considering only common benefits between both forms of insurance, per enrollee expenditures on private health insurance increased by 39.6 times while per enrollee expenditures on Medicare increased by a smaller 24.0 times.11 Thus, although Medicare costs are increasing quickly, they are increasing more slowly than costs for private health insurance. This is also true of Medicaid, primarily as a result of price controls for services covered by government insurance programs. 12 Premiums for employer-funded health insurance coverage increased by 7.7 percent between 2000 and 2009, while Medicaid costs per beneficiary increased by only 4.6 percent during this same period.13 Thus, the increasing costs of Medicare and Medicaid are simply a response to larger national trends in healthcare costs. Further, as health expenditures have continued to increase in recent years, participation in employersponsored health insurance has declined. In 2000, 181.1 million Americans, or 64 percent of the population, received private health insurance through employer-sponsored plans. In 2010, only 165.9 million Americans, or 53 percent of the population, received health insurance through these plans. 14 In that same period, enrollment in Medicaid jumped from 38.8 million to 46.6 million individuals (an increase of slightly more than one percent of the population), while the number of uninsured Americans jumped from 34.6 million to 47.2 million individuals (an increase of roughly three percent of the population). Those who continue to receive health insurance through their employers are primarily those who earn higher incomes. For example, only 23 percent of workers who earn less than $8.10 per hour receive medical coverage through their employers. In contrast, 92 percent of workers who earn the equivalent of $37.02 per hour or more receive medical coverage through their
See 2011 Actuarial Report on the Financial Outlook for Medicaid, Department of Health and Human Services, March 16, 2012, available at: https://www.cms.gov/Research-Statistics-Data-andSystems/Research/ActuarialStudies/downloads/MedicaidReport2011.pdf. 11 CMS Historical Tables, available at: https://www.cms.gov/Research-Statistics-Data-and-Systems/StatisticsTrends-and-Reports/NationalHealthExpendData/downloads/tables.pdf. 12 See Robert Greenstein and Richard Kogan, Are Low-Income Programs Enlarging the Nations Long-Term Fiscal Problem? Programs Outside Health Care Projected to Decline as Share of Economy Center on Budget and Policy Priorities, November 2, 2012, available at: http://www.cbpp.org/files/5-10-12bud.pdf. 13 As quoted in the Testimony of Robert Greenstein Before the House Budget Committee Hearing on Strengthening the Safety Net April 17, 2012; from John Holohan et. al. Medicaid Spending Over the Last Decade and the Great Recession, 2000-2009, Kaiser Family Foundation, February 2011. 14 Centers for Medicare and Medicaid Services Historical Tables, available at: http://www.cms.gov/ResearchStatistics-Data-and-Systems/Statistics-Trends-and-Reports/MedicareMedicaidStatSupp/2011.html.
10
17
employers.15 The tax expenditure section of this report will show that although these forms of health insurance exist in the private market, special alterations in the federal tax code both incentivize and partially fund these health insurance programs for middle- and upper-income households. For those primarily low-income Americans who lack access to employer-provided health insurance, however, the increasing costs of health care present a significant and potentially devastating financial burden. Figure 14: US Health Expenditures as a Percentage of GDP (1960-2010)
20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1960 1970 1980 1990 2000 2010
Figure 15 shows the increasing costs of total national health expenditures in the United States compared to increasing costs of government-funded and private health insurance programs. The chart demonstrates that, over the past five decades, Medicaid and Medicare expenditures have continued to increase along with total national health expenditures. Figure 15 shows that these increases align with increases in both private health insurance and out-of-pocket health expenditures.
Centers for Medicare and Medicaid Services Historical Tables, available at: http://www.cms.gov/ResearchStatistics-Data-and-Systems/Statistics-Trends-and-Reports/MedicareMedicaidStatSupp/2011.html.
15
18
Figure 16: Source of Health Expenditure Funding since 1965 (as percentage of Total National Health Expenditures)
Medicare 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Medicaid Out of Pocket Private Health Insurance
19
Increases in Medicare and Medicaid costs can be explained primarily through an analysis of the phenomenon of population aging. Population aging plays a significant role in the changing state of American health care costs. From 1960 to 2010, the percentage of the population over the age of 65 has increased from 9 percent to 13 percent.16 Medicare and Medicaid absorb most healthcare costs for this population group, so as the number of Americans over 65 continues to increase, the costs of these government insurance programs will also continue to increase. Medicaid, although not directly targeted toward the elderly like Medicare, contributes significantly to health care coverage for those over 65. Figure 17 shows the distribution of Medicaid funds by beneficiary group. Twenty-two percent of Medicaid expenditures fund healthcare for the elderly population (the second largest beneficiary group in terms of dollars spent). One of the primary causes for this reliance on Medicaid funding among those over 65 years is the increasing cost of nursing care. As of 2011, the average annual cost of private nursing home care equaled $87,000. 17 This expense exceeds even many middle-income elderly individuals ability to pay. As a result, many of these previously middle-income households, after contributing their savings to nursing home care, eventually qualify for participation in the Medicaid program. As of 2004, roughly 60% of all nursing home residents benefited from Medicaid coverage.18 Nationwide, the Medicaid program covers 31.8 percent of all national nursing home expenses as well as 35.6 percent of home health expenses.19 Medicaid program costs have expanded in recent decades in order to meet the needs of an aging population. Figure 17: Medicaid Enrollment versus Medicaid Expenditures
Medicaid Enrollment Medicaid Expenditures
18% 23%
10%
49%
22%
20% 14%
44%
Healthcare expenditures for nursing care facilities and continuing care retirement communities have expanded significantly since 1970. Medicaid has played an important role in absorbing much of these costs.20 Medicare also covers a significant portion of these expenses. Although the program does not
Age and Sex Composition: 2010, US Census Bureau, May 2011, available at: http://www.census.gov/prod/cen2010/briefs/c2010br-03.pdf. 17 Howard Gleckman, The Rising Cost of Long-Term Care Services, Forbes, October 25, 2011, available at: http://www.forbes.com/sites/howardgleckman/2011/10/25/the-rising-cost-of-long-term-care-services/. 18 Kaiser Commission on Medicaid and the Uninsured, available at: http://www.kff.org/medicaid/upload/key%20Medicare%20and%20Medicaid%20Statistics.pdf. 19 See 2011 Actuarial Report on the Financial Outlook for Medicaid, Department of Health and Human Services, March 16, 2012, available at: https://www.cms.gov/Research-Statistics-Data-andSystems/Research/ActuarialStudies/downloads/MedicaidReport2011.pdf. 20 Including both state and federal program expenditures. National Health Expenditures Aggregate, Centers for Medicare and Medicaid Services, available at: http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trendsand-Reports/NationalHealthExpendData/Downloads/tables.pdf
16
20
cover situations in which custodial care is the sole purpose of a stay at a nursing facility, it does cover some stays at skilled nursing and rehabilitation facilities.21
Source: Trends in the Distribution of Household Income Between 1979 and 2007 (Congressional Budget Office)
Figure 19 shows the distribution of transfers as a percentage of average household income (across all income groups). As this chart shows, Medicare, Medicaid, and the Childrens Health Insurance Program have consumed an increasing share of overall transfer payments since 1979. Thus, as the composition of transfer payments shifted toward these health care programs, the income characteristics of beneficiaries also shifted away from households in the lowest quintile.
21 Medicare Coverage of Skilled Nursing Facility Care, Centers for Medicare and Medicaid Services, available at: http://www.medicare.gov/publications/pubs/pdf/10153.pdf. 22 Trends in the Distribution of Household Income Between 1979 and 2007, Congressional Budget Office.
21
Figure 19: Transfers as Percentage of Average Household Income, 1979-2007 (by Major Category)
Social Security 14 12 Percentage of Household Income 10 8 6 4 2 0 1979 Medicare, Medicaid and CHIP Other
1984
1989
1994
1999
2004
Figure 20 demonstrates that during the same period that the share of federal transfer payments shifted away from the lowest-earning quintile of households, the degree to which federal transfers reduced the countrys Gini Index measure decreased. The Gini Index is a measure of overall inequality within a nation. A Gini Coefficient of 1 indicates complete inequality of wealth, while a Gini Coefficient of 0 indicates complete equality of wealth. In 1979, federal transfers reduced the Gini Coefficient in the United States by 15.0 percentage points. In 2007, federal transfers reduced the Gini Coefficient in the U.S. by only 11.2 percentage points.23
23
Trends in the Distribution of Household Income Between 1979 and 2007, Congressional Budget Office. 22
1984
1989
1994
1999
2004
Conclusion
Federal social spending has expanded significantly over the past five decades, both in the form of social insurance and means-tested transfers. These statements, however, only tell part of the story. Increases in both major forms of social spending can be attributed primarily to increasing the increasing costs of government-funded health insurance programs: Medicare and Medicaid. Spending on these programs has increased in recent years, both as a percentage of GDP and as a percentage of federal budget outlays. These increases are not unique to government-funded insurance. Instead, they follow a trend of increasing overall national health care costs. The vast majority of Medicare and Medicaid spending benefits elderly Americans. As we have shown, elderly middle-class households often become eligible for Medicaid as a result of the financial burden associated with long-term care. Thus, the aging of the population has significantly contributed to rising program costs. As debates surrounding the increasing costs of federal assistance continue, it is important to remember the largely unavoidable demographic changes that are contributing to these increases.
23
20.0
Percentage of GDP
15.0
10.0
5.0
0.0 1979
1984
1989
1994
1999
2004
2009
Congressional Budget Office, Trends in Federal Tax Revenues and Rates, Testimony of Director Douglas W. Elmendorf before the United States Senate Committee on Finance, December 2, 2010, p. 2
24
24
The trend of decreasing effective rates yet increasing tax liability share has been primarily driven by changes in the distribution of market income. In 1979, the top one percent of households earned 9.3 percent of all national income. In 2007, households in this category earned 19.4 percent of all national income. 26 In that same period, the share of income earned by the lowest quintile of
25 Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2005, December 11, 2007, Appendix Table 1A, available at: http://www.cbo.gov/publication/41654. 26 Congressional Budget Office, Average Federal Taxes by Income Group, June 1, 2010, available at: http://www.cbo.gov/publication/42870.
25
households declined from 5.8 percent to 4.0 percent.27 Thus, while the share of income earned by the top one percent increased by 2.08 times (9.3 to 19.4 percent) from 1979 to 2007, the percentage of taxes paid by this group increased only by only 1.82 times (15.4 percent to 28.1 percent) during this period. Combined, the reduction of federal tax rates and the concentrated growth of market income among the highest earning households have contributed to the growth of after-tax income share among the top one percent of households. This trend is displayed in Figures 23 and 24.
20.0
15.0
10.0
5.0
0.0 1979 1983 1987 1991 1995 1999 2003 Source: Historical Effective Tax Rates, 1979-2005 (Congressional Budget Office)
Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2005, December 11, 2007, Appendix Table 1A, available at: http://www.cbo.gov/publication/41654.
27
26
This, in addition to across-the-board reductions of federal tax rates, has contributed to the development of a tax system that is less progressive today than it was in 1979. Figure 25 displays the percentage reduction in Gini index achieved through the tax structure. This shows the degree to which federal taxation reduces inequality across all income groups. In 1979, federal taxes reduced the United States Gini index measure by 9.9 percentage points. In 2007, federal taxes reduced the measure by only 6.7 percentage points. During the 1980s, the federal tax system reduced inequality by the smallest amount, reaching a low of a 4.8 percentage point reduction in the Gini index in 1986.28
Congressional Budget Office, Average Federal Taxes by Income Group, June 1, 2010, available at: http://www.cbo.gov/publication/42870.
28
27
10.0
8.0
6.0
4.0
2.0
0.0 1979
1984
1989
1994
1999
2004
Figure 26: Reduction in Inequality Resulting From Transfers and Taxes Combined
25.0
20.0
15.0
10.0
5.0
0.0 1979
1984
1989
1994
1999
2004
28
TAX EXPENDITURES
Introduction
The Internal Revenue Service does not collect all income owed under the basic tax system. Instead, it offers incentives in the form of exclusions, deductions, deferrals and credits that reduce tax liabilities of filing households. These incentives referred to as tax expenditures represent revenue losses at the federal level. The Tax Policy Center of the Urban Institute estimates that federal tax expenditures totaled $760.5 billion in 2007.29
Budgetary Effects
Although not included as outlays at the federal level, these alterations to the basic tax structure do significantly affect the balance between receipts and outlays at the federal level. For example, federal government outlays in 2007 totaled 19.7% of gross domestic product. 30 In that year, government receipts totaled 18.5% of GDP, resulting in a deficit equivalent to 1.2% of GDP. 31 The revenue forgone as a result of tax expenditures in 2007 equaled 6.2% of GDP.32 This revenue, which the federal government would have collected under its basic tax structure, would have resulted in a large budget surplus had it not been excluded from tax receipts for that year. Thus, tax expenditures have the potential to induce considerable budgetary consequences.
29
earning households. Further, higher-earning households tend to participate more in the activities that these largest expenditures are intended to incentivize. Households in the highest quintile are more likely to purchase homes, receive employer-provided medical insurance, and to participate in taxdeductible retirement savings plans than households in the lowest quintile. 34 Households in the highest quintile are also more likely to acquire income through capital gains and dividends, which tax expenditures incentivize, than are households in lower quintiles, which obtain income primarily through wages and salaries. 35 Finally, knowledge and understanding of the tax code and available exclusions and deductions is necessary in order to fully benefit from tax expenditures. Those in the highest quintiles are most likely to have access to this information, often in the form of professional tax assistance.36 Thus, on average, higher-earning households are in a better position to benefit from exemptions and deductions in the tax code. Figure 27 demonstrates the average total benefit of tax expenditures per household. In 2008, Leonard Burman, Eric Toder, and Christopher Geissler of the Tax Policy Center estimated the percent change in after tax income (by quintile) that would result from the elimination of all tax expenditures.37 They account for the interactions between all provisions, as well as capital gains and dividend tax expenditures that take the form of lower tax rates (not considered tax expenditures by some sources). Applying their calculations to after-tax income measures by the Congressional Budget Office, we can determine the average per-household benefit of all tax expenditures by quintile. Note that while the average benefit within these quintiles is displayed, the benefits are not distributed evenly within these groups. For example, while the chart shows that the average household in the Fifth Quintile received $22,526.88 in benefits from tax expenditures for 2007, the top 1% of households received $178,555.41 on average. Thus, the benefits of tax expenditures are concentrated within the highest earning households. Figure 27: Percent Change in After-Tax Income From Tax Expenditures
16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile Top 1% Excluding Capital Gains Special Tax Rates on Capital Gains and Dividends
Ibid. Ibid. 36 Ibid. 37 Leonard Burman, Eric Toder, and Chistopher Geissler, How Big are Total Individual Income Tax Expenditures, and Who Benefits from Them? The Urban Institute, December 2008, available at: http://www.taxpolicycenter.org/UploadedPDF/1001234_tax_expenditures.pdf.
34 35
30
Figures 28-37: Average Household Benefit From Tax Expenditures (2007) (graph for each of major expenditures) Source: Burman, Toder and Geissler
$120,000.00 $100,000.00 $80,000.00 $60,000.00 $40,000.00 $20,000.00 $1,154.04 $First Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile Top 1% $3,097.00 $3,716.16 $5,182.59 $18,342.75
Tax Expenditures Total (revenue forgone per household, excluding special tax rates on capital income)
$101,089.02
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CONCLUSION
It is easy to obscure, either intentionally or unintentionally, changes in social spending over the last several decades. For example, while it would be accurate to say that the top one percent pays a larger percentage of federal taxes than in 1979, it is also accurate to say that this group pays a much smaller percentage of its own income than in 1979. A complete analysis accepts each of these facts and explains that because of across-the-board tax rate decreases and an increasingly unequal distribution of market income, the top one-percent pays a greater share of federal taxes. The increasing share does not emanate from a higher tax rate, but from a larger share of market income among the highest income households. The aim of this project is to provide this deeper assessment of the American tax and transfer system. This comprehensive examination reveals an overall reduction in mitigating inequality through taxes and transfers. Since the 1970s, market inequality has increased significantly. Social spending today offers fewer resources to low-income households, and taxes require a smaller portion of income, especially from the highest-earning households. Consequently, the tax and transfer system is weaker in counteracting the inequality that the market has produced. While economic gains of recent decades have benefited high-income households, those at the bottom and middle of the income ladder have seen minimal economic advancement, either from the benefits of growth allocated through the market or from taxes and transfers. Comparatively, the United States dedicates fewer resources to social spending as a percentage of GDP than most other OECD nations. From 1980 to 2005, social spending in the United States increased slower than in peer nations. Moreover, the primary cause for increased social spending in the United States has been greater outlays for healthcare costs, growing by 2.5% of GDP between 1990 and 2007. This spending is not targeted for low-income citizens. Today, American social spending is heavily concentrated in the areas of health and pensions for older citizens, even compared to nations that guarantee universal health insurance coverage. These increasing healthcare costs have driven spending growth in Medicare and Medicaid programs over the last two decades. Medicare exclusively aids the elderly, and two-thirds of Medicaid spending assists the aged and disabled. Thus, health spending on both elderly and disabled individuals constitutes the mainspring of minimal social spending increases in the United States. Fewer social spending resources now assist low-income households. The share of transfers received by the lowest quintile has declined dramatically since the 1970s, while the share that the top quintile collects has increased. Not surprisingly, transfers are now less effective at mitigating income inequality, as they are more evenly distributed among households of all incomes. The progressivity of the American transfer system is in decline. The modern tax system also reduces inequality by a smaller degree. Revenues as a percentage of GDP have declined since the 1970s.. Today, all income groups, including the top one percent of all households, contribute a smaller percentage of household income to federal revenue. The top one percent contributes less of its overall income to federal taxes than in 1979, while earning more than twice the percentage of national income that it earned in 1979. As the income of this group has skyrocketed, its tax obligations have waned. Declining tax rates for all groups have helped conceal this change. Finally, tax expenditures, often overlooked as a cost to tax payers, disproportionately reduce the tax burdens of higher-income households. Typically constituting roughly 6-7 percent of GDP, this spending through the tax code constitutes a large and often veiled contributor to federal deficits. Tax expenditures disproportionately benefit high-income households, because they have higher marginal tax rates, more frequently engage in incentivized activities (such as homeownership,
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purchase of employer-provided health insurance, equities investments, and contribution to retirement plans), and enjoy access to professional tax services. By reducing the tax obligations of households in top income groups, these expenditures contribute to the declining progressivity of the federal income tax code. Several proposed alternatives would change the drifting decline in progressivity of the current tax and transfer system. One method is to raise top marginal tax rates. Although high-income households currently contribute a large percentage of overall revenues, they contribute smaller portions of personal incomes. High-income households should pay a greater portion of their incomes, not merely a greater share of tax revenues. These households now earn larger shares of overall market income. Their tax obligations should correspond to this rise, as President Obama and Congressional Democrats are currently arguing. In addition, Congress should seek to eliminate or limit those tax deductions that are highly regressive and do not serve a clear public purpose. In approaching elimination of tax deductions from an all-or-nothing standpoint, legislators lose an opportunity to reshape expenditures in order to achieve desirable social aims and to construct a more progressive system. Eliminating portions of existing deductions, such as the deduction for mortgage interest on second homes or for large mortgages, would raise revenue while maintaining the public objective of promoting homeownership for all. Both Governor Romney and President Obama have also suggested capping expenditures for high-income households. Governor Romney has suggested capping all deductions at a fixed amount, while President Obama has suggested that high-income households should receive lower benefits on deductions above a certain amount. Both of these proposals are important in that they reform tax expenditures with an effort to enhance progressivity. Transfers and taxes constitute essential instruments for mitigating income inequality. Their effectiveness at achieving this aim has diminished in recent decades. For transfers, declining progressivity results from a declining concentration of benefits among low-income households. With taxes, the story is different. Although high-income households now pay a larger percentage of overall tax revenues, they benefit more than others from tax cuts for all income groups. In addition, these households reap the lions share of deductions and exclusions that reduce their tax obligations. The American tax and transfer system is undergoing a dangerous decline in progressivity. The current fiscal cliff provides an opportunity for leaders in both parties to step above ideological obstinacy and enact reforms that will reverse this trend.
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MAJOR SOURCES
Burman, Leonard, Eric Toder and Christopher Geissler. How Big Are Total Individual Income Tax Expenditures, and Who Benefits from Them? The Urban Institute, December 2008. Centers for Medicare and Medicaid Services Congressional Budget Office Organization for Economic Cooperation and Development White House Office of Management and Budget
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