As US tax rates drop, government's reach grows

Study: 1 in 2 Americans now receives income from government programs.

Maybe the era of big government isn't over, after all.

As Americans finish their annual tax-filing flurry to meet a Tuesday deadline, it is true that tax rates are lower than they were a few years ago. But according to a different yardstick, the federal government's reach is expanding.

Slightly over half of all Americans – 52.6 percent – now receive significant income from government programs, according to an analysis by Gary Shilling, an economist in Springfield, N.J. That's up from 49.4 percent in 2000 and far above the 28.3 percent of Americans in 1950. If the trend continues, the percentage could rise within ten years to pass 55 percent, where it stood in 1980 on the eve of President's Reagan's move to scale back the size of government.

That two-decade shrink-the-government trend now appears over, if for no other reason than demographics. The aging baby-boomer generation is poised to receive big payments from Social Security and government healthcare programs.

"New Deal programs persist," despite the Reagan revolution and its aftermath, says James Galbraith, an economist at the University of Texas in Austin. "They persist because they are largely successful and highly popular."

Mr. Shilling's analysis found that about 1 in 5 Americans hold a government job or a job reliant on federal spending. A similar number receive Social Security or a government pension. About 19 million others get food stamps, 2 million get subsidized housing, and 5 million get education grants. For all these categories, Mr. Shilling counted dependents as well as the direct recipients of government income.

Many Americans, in surveys, say they don't like the way their tax money is spent. And a majority now says, in a reversal from a year ago, that their federal income taxes are too high, according to an April Gallup poll.

Yet at the same time, much of US population is on the receiving end of that tax-revenue stream.

Government has always created jobs, of course, as it provides everything from national defense to roads and schools. It is another type of spending, however, that is really growing in scale: Government is in the insurance business.

Healthcare and Social Security are the big programs poised for growth, thanks to the arc of the baby-boom generation, longer lifespans, and rising medical costs. Insurance-style programs also include farm subsidies and efforts to relieve poverty.

The list could grow.

Some lawmakers hope to offer "wage insurance," a temporary benefit to cushion the transition toward new jobs for workers laid off due to global competition. At the state and federal levels, politicians are also considering government's role in extending healthcare coverage to more of those who are now uninsured.

All this reflects an ambivalent America. As a rich nation, it sees the opportunity to offset financial risks faced by its citizens.

But if the concept of social insurance is popular, so is limited taxation among the people who spawned the Boston Tea Party.

More than many of its European counterparts, the United States esteems the benefits of economic freedom. "The era of big government is over," President Clinton declared as he prepared to put new limits on welfare spending in 1996.

And today, 44 percent of Americans say the Bush tax cuts should be made permanent, compared with 41 percent who oppose such a move, according to a Los Angeles Times/Bloomberg poll conducted early in April. The other 15 percent were unsure.

"You do have the yearning for cradle-to-grave paternalism, but as Americans you also have the carry-over of the frontier spirit" of individual opportunity, says Shilling. That's the trade-off that will define the scope of government, he says.

This balance will be tested in the years ahead.

The Congressional Budget Office, in a long-range forecast prepared in 2005, outlined a baseline scenario in which entitlement programs push federal spending to 25.3 percent of GDP by mid-century, up from about 18.4 percent today. That number could go higher still if medical inflation doesn't edge downward.

Similarly, Shilling predicts that the number of "government beneficiaries," as he defines them, will grow to 60 percent of the US population by 2040 Against this backdrop, many Americans are understandably uneasy about the fiscal path of their politicians.

Some want to scale back the federal budget. Others see new priorities for spending, such as scientific research and global warming.

"It pays to invest in early education programs," says Fran Smith, who works for an education-oriented community organization in Boston.

To afford it, she says, government needs to use money more wisely, more for public goods and less for what she says are the "profit motives" that now pervade Washington.

"For … working class people, the last thing we want is more taxes," Ms. Smith says as she hurries to an afternoon meeting.

One challenge for the nation is to define what is wise spending and what is not. Some government largess is showered more on the well-to-do than the needy. By giving a tax break for the interest homeowners pay on their mortgage, for example, the government is effectively spending money to encourage homeownership. But the deduction is far more valuable to people in higher tax brackets than low ones.

"Arguably the mortgage interest deduction actually reduces the number of homeowners, because it pushes up the price of housing," Len Burman of the Urban Institute said last week in a seminar titled "Stupid Tax Tricks."

But, stupid or not, don't expect that popular deduction to bite the dust anytime soon.

By some other measures – such as taxes or spending as a share of the overall economy –the federal government isn't particularly large now. Even a controversial war in Iraq hasn't changed that.

But as insurance programs embrace an aging population, government is on track to grow.

For his analysis of government beneficiaries in the US, done last year, Shilling looked at data from 1950 through 2004. His tally was conservative on several fronts – including the care he took to avoid double-counting anyone.

He added up the number of federal, state, and local government workers, plus private sector workers who owe their jobs to government. He then tallied the recipients of transfer payments (like pensions) and a few other substantial programs (like food stamps). And he tacked on the dependents of these direct beneficiaries.

He divided his total by the US population to get a "government beneficiary" ratio for each decade. The ratio has risen, he found, from 28.3 percent in 1950 to a peak of 55.0 percent in 1980. It edged down in 1990 and again in 2000, and now has begun climbing again.

Looking at the big picture, especially entitlements for older Americans, some experts worry about a fiscal undertow.

"I fear that we may be on the path to becoming a decrepit, high-unemployment welfare state," says Daniel Mitchell, an economist at the libertarian Cato Institute in Washington. Economists differ regarding whether, or at what level, a high tax burden acts to dampen economic growth. European nations have shown, for example, that advanced economies can maintain generous social-welfare programs.

But Mr. Mitchell says these nations pay a price of more tepid growth. Sweden, he says, has in recent years dropped off the global Top 10 list for per-capita output. Ireland, by contrast, has kept the government burden low and enjoyed rapid economic growth.

[Editor's note: The original version repeated a quote.]

You've read  of  free articles. Subscribe to continue.
QR Code to As US tax rates drop, government's reach grows
Read this article in
QR Code to Subscription page
Start your subscription today