The chairman of the economics department at Harvard University, Professor Greg Mankiw analyizes one portion of the new CBO report on the distribution of income and taxes and finds a telling statistic.
Because transfer payments are, in effect, the opposite of taxes, it makes sense to look not just at taxes paid, but at taxes paid minus transfers received. For 2009, the most recent year available, here are taxes less transfers as a percentage of market income (income that households earned from their work and savings):
Bottom quintile: -301 percent
Second quintile: -42 percent
Middle quintile: -5 percent
Fourth quintile: 10 percent
Highest quintile: 22 percent
Top one percent: 28 percent
The negative 301 percent means that a typical family in the bottom quintile receives about $3 in transfer payments for every dollar earned.
The most surprising fact to me was that the effective tax rate is negative for the middle quintile. According to the CBO data, this number was +14 percent in 1979 (when the data begin) and remained positive through 2007. It was negative 0.5 percent in 2008, and negative 5 percent in 2009. That is, the middle class, having long been a net contributor to the funding of government, is now a net recipient of government largess.
You can tax the rich all you want, but until you either raise taxes on the middle class or cut back on the government cheese, you’re going to bankrupt the county.
Thanks to Paul Caron for pointing this out.