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U.S. Tax System: Put a Dollar In, Get a Quarter Back

By Hal M. Bundrick

NEW YORK (MainStreet) Put a dollar in, get a quarter back. That's the payoff for America's highest income families from the social slot machine known as the U.S. tax system. A recent study by the nonpartisan Tax Foundation shows how $2 trillion is annually redistributed from the top 40% of families to the bottom 60% of families.

While the research compiled the impact of all taxes paid, including federal, state and local taxes, the study revealed that federal taxes and programs move more than two-thirds of the total income redistribution -- an amount that has been slowly increasing over the past 12 years.

Middle-income and working lower-income families receive the most benefit, a result of economic stimulus programs and generous tax credits, according to the study. Of the $2 trillion in income that was redistributed in 2012, nearly half was paid for by families in the top 1%.

As a group, the bottom 60% of American families receive more back in total government spending than they pay in total taxes.

"The goal is to compare how much families at various income levels pay in all taxes -- from state and local motor vehicle licenses to the federal individual income tax -- to how much they receive from government spending programs -- from cash and in-kind transfer payments like Social Security and Medicaid to public goods like national defense," says Tax Foundation president Scott Hodge. "Once we've figured out those numbers, we can measure how much tax and spending policies combine to redistribute income between different groups of Americans."

American's lowest-income families receive $5.28 worth of government benefits for every dollar they pay in total taxes. Middle-income families receive $1.48 in total government spending per tax dollar, while the highest-income families receive $0.25 cents in spending for every dollar of taxes paid.

"These findings have particular relevance to the current tax reform debate because distributional issues are one of the key sticking points to reform proposals that would cut marginal tax rates while broadening the tax base," says Tax Foundation adjunct fellow Gerald Prante, Ph.D. "But tax progressivity is only half the picture, because progressivity can be achieved through both taxes and spending. Thus, if moving to a flatter, more economically neutral tax code reduces progressivity in the tax code, overall progressivity of the fiscal system can be maintained with slight adjustments to federal spending."

--Written by Hal M. Bundrick for MainStreet

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