Many Americans Profit from Tax System: Study

Published July 1, 2007

Are Americans getting a good deal for their tax dollars? While many studies answer the question of who pays taxes in America–and how much they pay–the question of who gets the most government spending in return for their tax dollars is almost always ignored.

The Tax Foundation set out to answer that question. We studied household tax payments (local, state, and federal) and government spending in calendar year 2004. The findings were released in March 2007, “Who Pays America’s Tax Burden, and Who Gets the Most Government Spending?”

Looking at taxes alone doesn’t tell us how much America’s fiscal system is helping or hurting low-income households. To answer that, we must look at government spending as well.

Majority Subsidized by Taxes

Among other things, we concluded:

  • America’s lowest-earning one-fifth of households receives about $8.21 in government spending for each dollar of taxes paid.
  • Households with middle incomes receive $1.30 per tax dollar paid.
  • America’s highest-earning households receive 41 cents for every dollar of taxes paid.
  • Government spending targeted at the lowest-earning 60 percent of U.S. households is larger than what they paid in taxes in 2004. Overall, between $1.03 trillion and $1.53 trillion was redistributed downward from the two highest income quintiles to the three lowest income quintiles through government taxes and spending.

$81,933 Tax Bill

The top 20 percent of earners paid an average of $81,933 in taxes in 2004–$57,512 to the federal government and $24,421 to state and local governments.

Households in the middle income group–which some refer to as the “middle class”–paid an average of $24,194 in taxes, or $13,028 in federal taxes and $8,166 in state and local taxes.

America’s lowest-earning households–those earning less than $23,700 in cash income in 2004–face the nation’s lowest tax burden but still pay thousands of dollars to finance government spending at all levels. Households in the bottom income quintile paid an average of $4,325 in taxes in 2004–$1,684 to the federal government and $2,642 to state and local governments.

Spending $31,108 per Household

In 2004, governments at all levels spent about $3.5 trillion–an average of $31,108 from each household. About $2.2 trillion was spent by the federal government and $1.3 trillion by state and local governments.

That $3.5 trillion of total government spending amounted to nearly 30 percent of the U.S. economy in 2004. That’s larger than the combined gross domestic product of Austria, Belgium, Canada, Denmark, Finland, Greece, Hungary, Mexico, and New Zealand in that year.

Two trends in recent years have made it more important than ever for Americans to look beyond tax burdens and focus on who’s on the receiving end of government spending.

Tax Code Manipulation

First is the rapid growth in what economists call “tax expenditures” and “targeted tax credits.” These policies implement social and economic policy through the tax code instead of traditional government spending.

Lawmakers have come to prefer tax expenditures and credits because they are less transparent to taxpayers, face less budgetary scrutiny, and allow lawmakers to funnel taxpayer dollars from one group to another without facing criticism that they are big-spending politicians.

For instance, the federal Earned Income Tax Credit (EITC) dispenses aid to low-income Americans through the tax code rather than direct welfare. Similarly, the Child Tax Credit gives generous subsidies to parents through the tax code rather than through direct welfare payments.

And various targeted tax credits offer a wide range of tax bonuses to companies that produce alternative fuels, locate in politically favorable areas, or engage in other activities Congress deems worthy of subsidy.

Looming Spending Crisis

Another concern is the looming crisis of growing federal entitlement spending, which is on an unsustainable long-term path. In coming decades Americans face a stark choice between sharply higher taxes or dramatic cuts in Social Security, Medicare, and Medicaid.

On the tax side, there is plenty of information available to guide decisions about reforms. But on the spending side there is little information available about who gets the most from government spending programs and who gets little.

“Who Pays America’s Tax Burden, and Who Gets the Most Government Spending?” helps provide that important spending information.

Andrew Chamberlain ([email protected]) and Gerald Prante ([email protected]) are staff economists at the Tax Foundation in Washington, DC. Scott A. Hodge ([email protected]) is president of the Tax Foundation. This article was adapted from “Who Pays America’s Tax Burden, and Who Gets the Most Government Spending?”

For more information …

The full text of “Who Pays America’s Tax Burden, and Who Gets the Most Government Spending?” is available online at