Smart TaxesSmart Taxes

U.S. households getting more from Uncle Sam than they pay in

A new study finds that for first time since the Great Depression, tax receipts from households total less than the government paid out in unemployment, Social Security and other programs.

By Amey Stone Apr 20, 2011 2:47PM

taxes: (© Peter Gridley/Photographer)The Fiscal Times on MSN MoneyBy James Cooper, The Fiscal Times

 

With President Obama’s deficit-reduction plan now on the table, the political left, right and center are ready to rumble over how to assure long-term fiscal stability. The big questions are where to slash and by how much. But over the next year or two, the most important question for the economy might well be how quickly the cutting should begin. Households have become unusually dependent on the government for income support and removing that prop too fast could put the recovery at risk. 

 

For the first time since the Great Depression, households are receiving more income from the government than they are paying the government in taxes. The combination of more cash from various programs, called transfer payments, and lower taxes has been a double-barreled boost to consumers’ buying power, while also blowing a hole in the deficit. The 1930s offer a cautionary tale: The only other time government income support exceeded taxes paid was from 1931 to 1936. That trend reversed in 1936, after a recovery was underway, and the economy fell back into a second leg of recession during 1937 and 1938.

 

Government handouts vs tax revenues: The Fiscal Times chart

 

As then, the pattern now reflects two factors: the severe depth of the 2007-09 recession and the massive fiscal policy response to it. The recession cut deeply into tax payments as more people lost their jobs, and it boosted payments for so-called automatic stabilizers, such as unemployment insurance, that ramp up payments as the economy turns down. Plus, policy actions, including the Recovery Act, boosted payments to households by expanding and extending jobless benefits and creating other income subsidies while extending the Bush-era tax cuts and adding new reductions in income and payroll taxes. 

 

Payments help keep economy afloat

 

Government transfers of income to households started to overtake personal taxes at the start of 2008, and the gap has been widening. In 2010, households received $2.3 trillion in income support from unemployment benefits, Social Security, disability insurance, Medicare, Medicaid, veterans’ benefits, education assistance and other cash transfers of government funds to individuals. Also last year, households paid $2.2 trillion in income, payroll, and other taxes. The difference was $125 billion, equivalent to 1 percentage point of overall personal income and about three times the amount Republicans and Democrats agreed to cut from government spending through Sept. 30.  

 

Since the onset of the recession, government direct payments have increased by $579 billion, accounting for 79 percent of the growth in overall personal income. As job growth has picked up, that contribution has diminished, but during 2010, government cash still accounted for 28 percent of the increase in income. Not surprisingly, Social Security, including survivors’ and disability benefits, accounted for a significant portion of the increased payments and the amount paid out in unemployment benefits more than tripled over that period. At the same time, tax payments since the recession began have fallen by $312 billion, also providing a boost to consumers’ purchasing power. 

 

Typically, the gap between transfers and taxes runs the other way –- and by a wide margin. “In normal times the household sector gives about 8 percentage points more of its income in taxes than it receives in direct transfers,” says J.P. Morgan economist Michael Feroli. The potential problem over the next few years is the enormous drag on household income as stimulus measures such as the payroll tax cut and extended unemployment benefits expire. Even if unemployment declines from its current level, the labor markets may not be strong enough to generate the wage and salary income needed to offset that drag.  

 

Feroli says that if the net flow of taxes and transfers even partly returns to normal, the resulting drag on incomes would be significant. The size of the drag would be especially sensitive to how fast that flow is reversed. A shift all the way back to the average 8 percentage point difference between taxes and transfers would be equivalent to about $1.2 trillion in income. To put that in context, half that amount is equal to the total increase in personal income over the past year.

 

The inflation factor

 

Consumers needed support in the first quarter, as inflation from surging energy costs ate into the buying power of their incomes. Energy helped push the Consumer Price Index in March up 0.5 percent, with prices during the first quarter rising at a 6.1 percent annual rate, gobbling up most of last quarter’s increase in income. Even with a reduced tax burden of about $60 billion last quarter, mainly reflecting the 2 percent cut in payroll taxes, inflation-adjusted spending appears to have grown only half as fast as the fourth quarter’s 4 percent pace. A tepid rise in March retail sales implies little momentum heading into the second quarter. 

 

An increasing number of economists are downgrading their expectations for first quarter economic growth, to be reported on Apr. 28, and for the rest of the year. The drag from costlier energy is lasting longer than expected, and uncertainties over the impact of Japan’s struggles and the ongoing turmoil in the Middle East are weighing on growth. Obama’s recent deal with the GOP to cut nearly $40 billion from the federal budget for fiscal 2011 is equivalent to about 0.5 percentage points of GDP over the next six months, although the timing of those cuts is not yet set.  

 

All this should be a yellow flag for the White House and Congress as they work toward reducing the deficit. Until the labor markets are strong enough to power consumer spending without the outsized income support from the government, withdrawing that support too quickly could put spending and the economy at risk to some unexpected shock.

 

More from The Fiscal Times:

 

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64Comments
Apr 20, 2011 7:12PM
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The article says households are getting more money than they pay.  Can you show what percentage of households are actually getting more than they paid?  I'm middle-class, and I paid more than I got.  A LOT more.

 

Seems to me a more accurate statement would be "government handouts to non-working citizens have gotten so high, they exceed what hard-working, income-producing citizens can afford."

 

Americans don't need handouts, they need jobs.

 

"If you want to help the poor, stop making it easy for them to be poor." - Benjamin Franklin

May 2, 2011 4:35PM
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The people who got an education of some sort and work for a living even when they are unwell or tired can no longer afford to support the malingering and lazy among us.  I have no doubt that most of my fellow citizens have NO PROBLEM with making sure that children and the REAL ill and elderly get protected from dying in the streets.  But, that is not who is getting benefits and paying no taxes.

 

I am sick and tired of supporting women who cannot control their fertility while the sperm donor goes his merry way.  I am tired of those who are "disabled" due to anxiety disorders and fake pain.  I am tired or paying for (and providing!) free medical care to those with high end cell phones, designer apparel, and faux nails who STILL expect free care, free medicine (like a PRESCRIPTION for baby motrin  rather than spending two dollars) and for their time in the hospital to be free meals, TV, and food for their visitors 24/7.  I am tired of paying to keep sociopaths in high school so they can bully teachers and other students while they get free "day treatment" and no consequences to them or their parents until they get pregnant or incarcerated.

 

No one seems to remember that what we now call welfare started out as "Aid to DESERVING widows" to keep women and children from starving when the HUSBAND was killed or died.  It was never meant to allow people to stay home and fornicate and sleep while their neighbors worked a double shift to support ALL of them...wait 16 years, rinse and repeat!!

Apr 20, 2011 10:32PM
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I have no problem with SOME social programs. They are needed to care for the folks who paid into the social funds while working. I paid just like the rest of the working stiff American guy with a family. Now I watch my son work and raise his family and not living anywhere as well as my family did when I raised them up.  I now notice that my son's neighbor are from south of the border. They have a large family of 6 kids and grandparents living in a five bedroom 3620 sq. ft. home and they have hugh parties on weekends with 20 - 30 total eating. The real rub is, NOBODY works in the home. I've seen county welfare, and different agency at the home over the years. They eat better, drive newer cars and all the parties. My son works 8 - 10 hours per day, 5 day a week. He can't party that away, drives a 1989 ford ranger pickup, and his wife drives a 1995 ford escort wagon. And pays about 23% of what he earns to social programs that will be empty when he is in need. The neighbor pays zero, zip, nothing, NADA and lives a better life. MAKES ME FEEL FRIGGEN SICK... We need to take a serious look at everthing we spend money on. Space programs, wars,  all the aid we spend everytime the earth shakes, or it rains in another country. But those countries never pay us back.
Apr 20, 2011 9:08PM
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Is it a surprise?  Just go to the grocery store.  Watch the people receiving food stamps buying $300+ groceries.  Look in their carts.  What do you see?  Junk food, soda, candy, cold deli foods prepared,   I have nothing against people who need food stamps to get them, but when people are living and eating better than the working man there is a problem.  What happened to providing people with the basics?  Let them cook, and eat what is necessary to survive.  I can remember when trucks use to come and people had to go to the trucks to get flour, cheese, dried milk.  As long as this country gives people so much why would they want to work?  They get welfare, help with their rent, utilities and eat like kings.  Then you have the more kids you have, the more money you get!!!!!  People keep having children that they can't afford and our government is rewarding them!  Taxes, they do not work so the government rewards them for this and gives them back more money!  Something is very wrong with this picture!  Then you have people who go to work everyday for minimum wage and gets laid off and you cut or take they benefits from them.  Or you tell them they make too much to receive any medical or food stamp help.  You want to cut social security and medicare the one system that has worked for many many years.  Fix the program, have everyone pay social security tax and medicare tax on all wages earned.  Why is there a cutoff?  The people who earn above the cutoff would not even miss that 7.65% taken out of their checks and it would fix any shortage there is, that is if there is one.  Better yet, open those file drawers and take out all the IOU's  of the money that was taken to be used elsewhere, and put it back where it belongs.  What is really sad is we pay all these people huge salaries to run this country and it doesn't take a rocket scientist to figure out what is wrong and how to fix it!!!!!  If people are on welfare and food stamps, after a certain length of time if they are not working, put them to work!!!!!!  There is enough to be done in this world that could keep them busy!  If they don't show up, discontinue all benefits!!!!!!  I apoligize but I could go on and on.  There is so much wrong with the way our government runs this country and a little common sense could fix it!
Apr 20, 2011 11:37PM
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The problem with this da@$ country is that our politicians tell us working class citizens that we're paid too much, and then vote themselves in a pay raise while they cut money from schools, police and other necessities.  That way we'll be forced to vote in their tax hikes. Banks are allowed to just take the TARP money and run and leave all of us hanging. Oil companies can keep hiking the price of fuel so they keep making their billions while we are struggling for milk and diapers. We're spending billions defending countries that don't have it in themselves to take care of their own. AND EVERYONE OF YOU IDIOTS KEEP VOTING DEMOCRAT OR REPUBLICAN AND YOU WONDER WHY IT KEEPS GOING WRONG!! The definition of insanity is to keep doing the same thing over and over, and in this case over and over and over, while expecting DIFFERENT results. Cut the freakin welfare system and put that money into the dang SCHOOLS. Educate our children to be productive citizens, not burdens on society. Get this idea out of your heads that disciplining children wounds them and ruins them. Our idiotic, let's be friends not parents, mentality is what has got us here. TAKE SOME DA@# RESPONSIBILITY and let's hold OURSELVES accountable. You are NOT entitled to ANYTHING you have NOT worked for. We start here, and we'll get better.
Apr 21, 2011 6:42PM
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I agree that most of the receipicants of federal money have never worked. I know people who are getting disability and have never worked, welfare and food stamps and never pay any taxes. I have seen women who tell Uncle Sam that they need the help with food stamps and free housing and then allow someone else to claim them on their taxes. For most of these claims they receive at minimum $5000 extra in earned income credit.  Then this money is split with both parties. Also who is getting the assistance? Americans pay illegal to stay in this country by providing the entitlement programs. Usually a hard working American who has been laid off from their job will not know how to use the system this way. The people who use it are savvy and smart. A regular citizen would not know where to begin to access the services that are provided. Let's wake up and get our factory jobs back in this country.
Apr 20, 2011 8:20PM
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Democrate, Republican, they both have this country in a mess and the sooner everyone comes together on that fact the sooner we can start working together.  If we the people don't come together, how can you expect congress to?  I'm sure every Democrat doesn't agree 100% with their party's actions and I as a Republican sure don't agree 100% with my party.  Leave the medicare and social security alone and cut out some common sense program, like sending $25 million over to Lybia.  Last time I looked, weren't we broke???
Apr 26, 2011 5:08PM
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It's time poor people pay "their fair share".

Apr 20, 2011 7:19PM
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I like how Republicans make the word entitlement a bad word, ALL working americans pay a special tax for social security and medicare. The only people who feel "entitled" to this money is congress who robbed it blind over the last several decades. If they feel we should take the brunt of their mismanagement then they should also. 20% of their pay and benefits and 20% of the congressional budget should go to repair what they screwed up. No where on my paycheck is a special tax placed for the trillions wasted on wars.

Apr 26, 2011 3:39PM
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Maybe just maybe if our  goverment would stop giving so called  friends around the world billions of dollars of our tax dollars, we just might be able keep this country afloat.  We  have rulers of other countries retiring or stepping down as millionaires or even billionaires.  Why to we have to continue keeping the rest of the world going ,while our country is going so far in debt, we cannot even help our own people here that are starving,living on the streets.  This includes women,children, and our service men and women.  My Uncle Jim,cousing Bert,George,Pat, brothers Ed, Don and myself served this country, and I am very disapointed  in those individuals that  running this country.  They ownly care about themselves.  This gov. I thought was for the people of this country.  Keep your nose out of everyone elses business. Leave them fight there own revaloutions like our forfathers did for this country..  You are pouring this country down the drain, and I sure as hell do not like it at all. I could go on but I think you get my point. 
Apr 20, 2011 10:22PM
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Everyone should work for the government. I am a Realtor and tried to buy a HUD house - for cash. 2 months later...still waiting for it to close, while HUD's employees sit around and do nothing. THAT is the reason we are in this trouble - SO MUCH WASTE IN THE GOVERNMENT. Get rid of 1/2 of the self centered lazy Gov. employees, and save us all a ton. Course then they would all be collecting welfare....oh wait - getting a paycheck for doing nothing IS welfare.
Apr 20, 2011 5:45PM
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You had be better convincing someone else than me for this is a bunch of crock===== for it is another Democratic controlled situation
Apr 20, 2011 9:22PM
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What a surprise. The demorats are in charge and we are spending too damn much. That happens when you authorize unemployment for over two damn years. Maybe you should call it funemployment. People are just laying around saying why should I work when I can just lay around on my **** and do nothing. Somebody needs to turn off the welfare spicket and watch this country recover from this sorry assed socialist experiment. Since we are flat busted broke, might be a good time to start.
Apr 20, 2011 9:45PM
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We need a balanced budget amendment and we need it now. We don't need to increase the debt limit and we need to do things that will help the economy and the citizens of the USA, not the politicians or the ILLEGAL ALIENS. The first thing we need to do is get rid of the IRS, or convert them into fraud police for SS and Medicare/Medicaid. This alone would save about $500 billion a year. Then we need to secure the border and start a mass deportation program along with making laws that would penalize employers for hiring ILLEGAL ALIENS that would be stiff enough to never do it again. This alone would save us another $600 billion a year. Just these two things would save us enough to pay our interest for the year. Then we implement a FLAT TAX to help the economy fully recover and the jobs would flourish. This would also stop the corruption of our politicians by taking away their power to do favors for the lobbyists and contributors by making laws and changing the tax code. Wow, I should be a TEA PARTY candidate, huh. TEA PARTY on people.  

Apr 21, 2011 12:52PM
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What's the problem? Glorious government can continue to borrow money so citizens get lots of goodies. And when things get tough, clever politicians and their slack-jawed supporters will demand that wealthy give up what they have to pay for spoiled America. Clever particularly when turning attention away from the fact the 10 $trillion debt was caused exclusively by same clever politician class. Again, what's the problem?
Apr 20, 2011 7:36PM
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It's not inflation from surging energy costs that's the problem, it's inflation caused by printing money out of thin air by the federal reserve that causes inflation.
Apr 22, 2011 11:56AM
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It's called income redistribution.  People want to complain about tax loopholes for big business and raising taxes on the rich, but how can they ignore this?  I guess it's real easy to ignore a problem when the problem benefits you, right?  The same reason that no politician will touch the unsustainables (SS, Medicare, Medicaid, etc.).
Apr 20, 2011 6:37PM
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If memory serves me Social Security is a separate fund which has been since it's inception monies paid by the working people of this country. We have paid into it  and a Fund for a specific purpose. This is moot to this article, as I see this article as another way to deceive and skew the facts.  Then again I am probably wrong.
Apr 20, 2011 9:58PM
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Republican?  Democrat?  If you blame one party or the other party then you have it all wrong.  There is not much of a difference between the two parties anymore when it comes to monetary policy and foreign policy.  The parties will fight over problems that don't really count for much. When it comes to real change that affects our country the most the two parties kiss and make up.  There is only a small group of good politicians in the house and even fewer in the senate.  As for the president it doesn't really matter either whether he or she is a republican or democrat.  Republican and democrat is just a name to call themselves and that is it but most of them don't have the guts to stand up for the common man or woman and do what is right.  Most republicans and democrats serve special interests and their(our) owners.  Stop claiming to be a democrat or republican and become a true american by becoming a libertarian. Stop being so proud to be republican or democrat and be proud of being an american and a defender of the United States Constitution.  I just had to post this comment seeing so many people blaming republicans or democrats.  Wake up and smell the coffee.             
Apr 20, 2011 7:30PM
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Obama and the Dems will SPEND us all out of this problem...LOL
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