Study: Fewer Taxpayers, More Dependent on Government

Published November 15, 2010

Higher government spending on dependence-creating programs, and an ever-shrinking number of taxpayers, are imperiling the nation’s fiscal position, say William Beach and Patrick Tyrell of the Heritage Foundation.

In “The 2010 Index of Dependence on Government,” Beach and Tyrell point out the United States is nearing the point where half the population will pay no taxes for the government benefits they receive.

In 2009, 64.3 million Americans depended on the government (read: their fellow citizens) for their daily housing, food, and health care.

Disappearing Taxpayers
Even more alarming than the rise in the number of government dependents is the rapid growth in the percentage of people who do not pay taxes, the authors note. In 1984, 14.8 percent of the population paid no federal income tax or were not claimed as dependents by someone who did pay income taxes. In 2008, 43.6 percent of people fell into these categories.
Tyrell says the damage to the nation’s republican form of government, and to the country’s finances, is significant.
“I’m not surprised by the findings,” says Tyrell. “We knew the index would be higher this year because of all the federal programs being offered by the government, including the First-Time Home Buyer’s Tax Credit and the credit adjustment for the Earned Income Tax Credit. We were a little surprised that the number was so close to 50 percent.

“I think 50 percent is the tipping point where you will have too many people dependent upon government programs, and they will keep voting in the politicians that promise them things, which in turn will add to the federal deficit and necessitate higher and higher taxes to pay for it all,” he says.

No Connection or Accountability
Tyrell says the growing dependency on government for life’s necessities is a problem “because the recipients are getting money from someone that they don’t know. They don’t have any connection to the taxpayers who are paying for their benefits, so there’s no accountability as there would be if you were receiving help from someone you knew in your own community. The problem with federal handouts is that they lead to an entitlement mentality.”

Moreover, the federal deficit is so high, says Tyrell, because the market economy can no longer meet the government obligations. In 10 years, when many of these newer debts start coming due, the interest costs to service them will consume much of the federal budget.

“There will be less capital to start or expand businesses, there will be fewer jobs, and the tax burden will be crushing,” explains Tyrell.

Tyrell says it’s important that the public be made aware of the burdens the welfare state puts on businesses, including a high corporate tax rate, regulatory burdens, and compliance costs.

“These obstacles keep businesses from investing and keep them from hiring,” says Tyrell.

‘Past the Tipping Point’
Scott Hodge, president of the Tax Foundation, says the results of the Heritage study are not surprising. The Tax Foundation is a nonpartisan educational organization in Washington, D.C.

“We’ve been steadily growing these programs for the last 50 years. Instead of expanding them, we ought to be scaling them back,” says Hodge.

“We’ve seen an increase in all manner of programs designed to help people or afford them a lifestyle. It’s the inevitable expansion of the welfare state. But everyone is finding out that the social contract in Europe is unaffordable. Up until this point, we’ve been able to afford it in America. But we can no longer afford a minority of the population supporting the majority.

“We are past the tipping point in terms of sustainability. The Tax Foundation studies show the top 40 percent of income earners in America are sending $1 trillion to the bottom 60 percent of earners in the form of welfare programs, tax rebates, and the progressive tax code,” he added.

Hodge says if the nation continues on this path it will soon resemble much of Europe, with its chronic high unemployment, slow growth, and high tax burdens.

“Also like Europe, we will see a tremendous tension between the tax feeders and the taxpayers,” says Hodge. “The long-term effect is predictable: There won’t be any capital to start a business, buy new equipment, or hire new workers. It will result in a tremendous misallocation of resources. Lastly, the economy will never generate enough revenue to pay for these obligations.”

Cautious Optimism
But Hodge says there is some reason for optimism.

“I think there is a great demand for politicians to say, ‘We’re no longer going to spread the wealth around.’ There was a great outrage when Barack Obama uttered that phrase during the campaign, and it resulted in the formation of the Tea Party. Today, I think there is a deep-seated animosity at spendthrift politicians.”

Dependency upon government, however, will not be changed overnight, cautions Hodge. Two things must happen, he says:

“We need changes to the tax code to improve it and grow the economy so that people will be more inclined to participate in work. The second change we need is to reduce the value of the benefits. At some point we’re also going to have to inoculate people so that it is no longer cool or OK to be a ‘taker’.”

Kenneth Artz ([email protected]) writes from Dallas, Texas.