By Robert Rector
The Heritage Foundation
Introduction
Each year, families and individuals pay taxes to the government and receive back a wide variety of services and benefits. A fiscal deficit occurs when the benefits and services received by one household or a group of households exceed the taxes paid. When such a deficit occurs, other households must pay, through taxes, for the services and benefits of the group in deficit. Thus, government functions as a redistributive mechanism for transferring resources between groups in society.
This paper examines fiscal balance in the United States by income class. It estimates the distribution of the full array of government benefits and services including cash and near cash benefits, means-tested aid, education services, and general social services. It also estimates the distribution of all direct and indirect taxes used to finance government expenditure.
The distribution of benefits, services, and taxes is examined among conventional Census income quintiles of households for the year 2004. Of particular concern is the fiscal balance within each quintile. A quintile is in fiscal deficit if the sum of benefits and services received by households within the quintile exceeds the sum of taxes paid. A quintile is in fiscal surplus if the taxes paid exceed the cost of benefits and services received.
The analysis finds that the lowest three income quintiles are in fiscal deficit, while the two highest income quintiles are in surplus. Overall, there was a transfer of roughly $1 trillion in economic resources from the top 40 percent of households to the bottom 60 percent. This sum represents about 9.5 percent of total national income in 2004.
General Methodology and Data
The analysis presented in this paper goes beyond typical measures of income distribution by assessing the distribution of the full array of non-cash benefits and government services, not just cash benefits. The paper also analyzes the distribution of all taxes and revenue sources for federal, state, and local government.
A guiding principle in the analysis is budgetary comprehensiveness and accuracy. The estimating methods ensure that the sum of expenditures on each specific program in the analysis matches the actual expenditure total for that program according to budgetary sources. The analysis also provides budgetary comprehensiveness and accuracy with respect to revenues collected through specific taxes and revenue sources. For a given tax, the sum of taxes paid will match total collections from that tax according to budgetary sources.
Aggregate Federal, State, and Local Spending and Revenues
In fiscal year (FY) 2004, the expenditures of the federal government were $2.3 trillion. In the same year, expenditures of state and local governments were $1.4 trillion (after excluding federal grants and spending based on user fees). In FY 2004, the combined value of federal, state, and local expenditures was $3.75 trillion, and total taxes and revenues for federal, state, and local governments amounted to $3.43 trillion.
Types of Government Expenditures
The key to analyzing the fiscal distribution is to determine the beneficiaries of specific government programs and the fiscal cost of those benefits. Some programs, such as Social Security, neatly parcel out benefits to specific individuals. For those programs, both the beneficiaries and the cost of the benefit provided are relatively easy to determine. At the opposite extreme, other government programs (for example, medical research at the National Institutes of Health) do not neatly parcel out benefits to individuals. Determining the proper allocation of the benefits of that type of program is more difficult.
To ascertain accurately the distribution of government benefits and services, this study begins by dividing government expenditures into six categories:
- Direct benefits,
- Means-tested benefits,
- Educational services,
- Population-based services,
- Interest and other financial obligations resulting from prior government activity, and
- Pure public goods
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