Analyzing Taxes and Transfers Together

By :: December 5th, 2013

Government redistributes income through tax and spending programs. Nearly everyone pays some tax – be it federal or state income taxes, payroll taxes, or sales taxes. The tax system also affects people by delivering a host of benefits through tax expenditures (subsidies like the mortgage interest deduction or the child tax credit).   And broad spending programs such as national defense and Social Security affect nearly everyone over the course of their lifetime.

Yet, we know surprisingly little about the combined effect of taxes and spending on our well-being. Two new studies—one by the Congressional Budget Office (CBO) and another by the Tax Foundation—have begun to close this knowledge gap by analyzing spending and taxes together. Tuesday, I participated in a TPC panel discussion that highlighted these papers (you can hear the program and see the slides and papers here). Two things are clear: First, what CBO and the Tax Foundation are trying to do is very hard. It requires analysts to make assumptions about how taxes and spending affect people. Second, there’s a lot of redistribution—for example, from the nonelderly to the elderly and from higher-income people to lower-income people. (I focus on the CBO report here but the Tax Foundation’s analysis reaches similar conclusions.)

In 2006 (the year the CBO report focuses on), the federal government spent roughly $2.7 trillion and collected $2.4 trillion in taxes and other revenues.

The CBO study focuses on three groups – the elderly, the nonelderly with children, and the nonelderly without children. Given the size of Social Security and Medicare, it’s no surprise that CBO found that in 2006 the elderly received more in benefits than they paid in taxes.  But, as my Urban Institute colleague Melissa Favreault pointed out, it isn’t that simple. What if you look at this picture not as a one-year snapshot but over a lifetime? Today’s elderly paid taxes when they were younger—in many cases, more than they will receive in benefits.  And the story gets even more complicated because some nonelderly people benefit indirectly from Social Security and Medicare. Retirees’ children benefit because they do not have to provide as much support for their elderly parents as they would without the programs.

Younger households present other issues.  CBO found that government spent more on low-income households in 2006 than on high-income households. But people’s incomes change during their lives as they move from low-income to higher-income or vice versa. An annual estimate may not reflect how a person will fare over a lifetime.

Other kinds of government spending create different challenges, especially programs such as defense. Unlike transfers that go to individuals, defense is a public good—we all benefit in some way. But how should we value those benefits for individuals?  Do we all benefit equally? Do rich people benefit more? There’s no clear answer.

Ultimately, this sort of analysis could also provide information on how pre- tax-and-transfer income differs from after-tax-and-transfer income – information likely to be in high demand in any serious budget negotiations. We know from the CBO report the net effect of taxes and transfers on broad swaths of the population, but not on individual families or households within income classes. This can mask big winners and losers within income groups.

Notwithstanding these reservations, the CBO and Tax Foundation reports help us start to think about taxes and transfers together – and give a more accurate view of government than we get by focusing on only one side of the budget.


  1. Eugene Patrick Devany  ::  12:56 pm on December 5th, 2013:

    The only fair way to study taxes and transfers together is to look at the gradual change in net wealth over time. President Obama began to speak about wealth and income just yesterday: “Wealth” – “millions of families were stripped of whatever cushion they had left”, ” the top 1 percent has a net worth 288 times higher than the typical family, which is a record for this country”, “gaps [in social welfare measures] are now as much about growing up rich or poor as they are about anything else”. “Income” – the top 10 percent no longer takes in one-third of our income — it now takes half. [He will take a pounding for the phrase “our income”].

    Only a study of family wealth over time will identify the real problems and enable worldwide comparisons.

  2. Michael Bindner  ::  12:41 am on December 6th, 2013:

    I agree that studies need to show income class impacts of both taxing and spending – both over a lifetime and in current budget years. Defense may “benefit” the nation and our allies – however defense dollars when spent go to real people, from military families to defense employees and contractors and their families. My father benefited from the Defense (and briefly the Coast Guard) budget from the time he enlisted to fight in WWII until he died while receiving a pension from Boeing, which at the time funded Rockwell, International’s retirement and health. Of course, he wold have been aghast at the contention that he spent his entire work life on the dole – even though he did.

  3. Tax Roundup, 12/6/2013: Fools Gold Edition. And: corporations can have their identity stolen too! « Roth & Company, P.C  ::  8:34 am on December 6th, 2013:

    […] Maag,  Analyzing Taxes and Transfers Together […]

  4. SteveinCH  ::  9:37 am on December 7th, 2013:

    I don’t know if this is the right place to ask but is there a place where the various tables in the report can be accessed in Excel?

  5. Ralph H  ::  10:40 am on December 7th, 2013:

    Your father was no more on the dole than other government workers: policemen, teachers, and social workers. Presumably they all benefit us and are professionals. So far we are not speaking German or Russian! We just have to monitor the spending to be sure we are getting good value.

  6. Elaine Maag  ::  10:58 pm on December 8th, 2013:

    One of the really nice things the authors of this paper chose to do was to put the data in Excel charts available to anyone on the web. The address is:

  7. Lee Thomas  ::  2:03 pm on December 10th, 2013:

    One of the issues that goes along with taxes, is that not all income is taxed. There is one of the measurements not looked at. Try to look a this with a open mind. Here is a family that gets food stamps, they receive $500.00 worth per month. They sell them for the going rate of .50 on the dollar. (If you are not aware that this goes on you are not in touch with the real world). Anyway, family sells them and receives $250.00 a income untaxed. The buyer gets them and uses them untaxed. The family has $250.00 to use as they want the $500.00 worth of food stamps that tax payers contribute to are a asset now with a capital gain for the buyer of $250.00 in un-reported income as was the families $250.00. All free to them but paid for by the tax payer.