In a report this week, the Tax Foundation attempts to answer the question. It compares how different income groups benefit from federal spending — directly and indirectly — for every tax dollar they pay.
The broad takeaway: The bottom 60% of Americans receive more from government spending than they pay in taxes, and the top 40% get less from government spending than they pay.
The issue comes down to a question of how federal spending is allocated to each group. There is no widespread agreement on the right way to do that.
Spending represents everything from direct federal payments such as those for food stamps, Social Security, and farm subsidies to spending on public goods intended to benefit everyone such as national defense, education, and highways.
Those in the bottom 20% of the income scale (who make no more than $17,000 and are at or near the poverty level) get back the equivalent of $8.13 in federal spending for every federal tax dollar they pay, according to the report. That’s in part because of anti-poverty programs and refundable tax credits.
By contrast, those in the top 20% (who make more than $120,000) get back 25 cents for every tax dollar they pay.
Those in the middle ($37,000 to $67,000) receive $1.57.
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In coming up with these numbers, the Tax Foundation, a conservative-leaning tax research group, decided to allocate the benefits of spending on public goods like defense evenly across the population.
But it also notes that there are alternative ways to allocate spending.
One common scenario assumes that high-income households benefit more from public goods spending than lower-income households.
In that case, the gap would narrow as the amount of spending per tax dollar would go up for high-income taxpayers, and go down for the lowest- and middle-income groups.
The fact that there is a gap at all, however, is not surprising because many spending programs and the tax code are designed to be progressive — meaning they are meant to redistribute some income from the wealthiest to the poorest.
So what’s the point of the exercise?
After all, there’s no way to objectively assess whether the gaps are too wide, too narrow or just right. Indeed, that’s a political decision, and there is ample divide over that question in Washington.
“It’s a point to start the conversation,” said Scott Hodge, executive director of the Tax Foundation, which has advocated for lower tax rates and a simpler tax system.
Of course, that assumes lawmakers are ready to have a meaningful debate and craft substantive policy about taxes and spending — something they currently are nowhere near.
