Carpe Diem

America’s real long-term fiscal problem: The federal government has become a gigantic wealth-transfer machine


The charts above illustrate two disturbing trends that help frame the long-run fiscal challenges confronting the U.S. that far outweigh any possible near-term fallout from the pending “fiscal cliff” that the federal government faces at the end of this year.

1. The top chart above (data here, see Table 6.1) displays the increasing share of the federal government’s spending on “payments to individuals,” based on actual data from the Office of Management and Budget (OMB) for the years 1952 to 2011 and its projections through 2017.

In 1952, less than one out of every six dollars spent by the federal government represented payments to individuals.  By 2010 payments to individuals had increased so dramatically over time that roughly two out of every three dollars (66.1 percent) spent by the federal government in that year were payments to individuals for programs like Social Security, Medicare and Medicaid, public assistance, food and housing assistance, and unemployment assistance.  Last year, payments to individuals as a share of federal spending decreased slightly to 65 percent, and that category was more than three times larger than the share of 2011 federal spending on defense (20.1 percent), and more than ten times larger than the share spent by the federal government on interest payments for the national debt (6.4 percent).  The OMB estimates that payments to individuals will exceed 68 percent of federal spending in 2014, 2015 and 2016, before falling slightly to 67.5 percent in 2017 when payments to individuals will exceed $3 trillion for the first time.

2. At the same time that payments to individual Americans consume an increasing share of federal spending, the burden of taxes to finance federal spending is falling on a shrinking group of American taxpayers.  According to a recent study by The Tax Foundation, 41 percent of federal income tax filers in 2010 had a zero or negative federal income tax liability after taking deductions and credits, which was a slight decrease from the previous year when 41.7 percent of tax filers had no tax liability (see bottom chart above).  In both years, the number of nonpaying tax filers exceeded 58 million.  After fluctuating in a range between roughly 20 and 25 percent for the fifty year period from 1950 to 2000, the percent of Americans filing tax returns but paying no federal income taxes has increased sharply over the last decade to record-setting levels above 40 percent in the two most recent years.

So why does this matter?

Our long-term fiscal problems won’t be fixed until we address what might be our nation’s most serious fiscal-related problem: we’re increasingly becoming a European-style “entitlement nation,” with “payments to individuals” increasing both in absolute dollar amounts and as a share of total federal spending, while at the same time the share of Americans who face a zero or negative tax liability is above 40 percent and rising.  In other words, a declining share of American taxpayers is being forced to finance the rising cost of the federal government, which is increasingly being spent on payments to individuals.

John Merline (now at Investor’s Business Daily) described the situation this way in an AOL News editorial last year:

“When you put these two trends together, what you find is that the federal government has over the years essentially turned into a gigantic wealth-transfer machine — taking money from a shrinking pool of taxpayers and giving it out to a growing list of favored groups.  This situation will make getting the federal budget under control increasingly difficult, since it will invariably involve pitting those writing checks against those cashing them.”

More recently, AEI’s Nicholas Eberstadt wrote in last Saturday’s Wall Street Journal:

“Within living memory, the federal government has become an entitlements machine. As a day-to-day operation, it devotes more attention and resources to the public transfer of money, goods and services to individual citizens than to any other objective, spending more than for all other ends combined.”

That’s the long-term fiscal cliff that should have us all very concerned – the fact that the federal government over time has turned into a gigantic entitlements and wealth-transfer machine.

6 thoughts on “America’s real long-term fiscal problem: The federal government has become a gigantic wealth-transfer machine

  1. The average productive person in the American Economic Class works until the 1st week in August to pay all their taxes:Federal,State,Local plus fees,tolls and all other government taxing methods combined. This figure does not include the hidden Tax of Inflation nor the costs of regulations and tax compliance. With that said is it any wonder that the average productive American Family has to have both spouses working full time to make ends meet. Of course,as the above article makes plain the Political Class now out numbers and out votes the shrinking,productive Economic Class. So the politicians make up the difference by either borrowing or by money printing. The borrowing steals from coming generations and the printing destroys our currency. Eventually the Nation will bankrupt itself which will result in one of two choices for America. 1. Repeal the New Deal and the Great Society plus other transfer programs and return America to fiscal sanity by dismantling the Welfare/Warfare State. 2. Or turn America into a Police State with Constitutional Rights a thing of the distant past. Its either or. You cannot have freedom and free handouts. In the end the fabric which made America great will be ripped asunder and replaced with the gulags.

  2. Thank you for this information! I have been trying to teach people who just don’t seem to get it that we have been moving further and further to the left and this is just one more piece of (excellent) evidence!

    It is going to be very difficult to wean ourselves off of the government teat, but, somehow, it has to be done. Sometimes, I wonder if it’s like the band-aid dilemma. Do we slowly peel it back, little by little, trying to keep it from hurting even if it takes a long time, or do we just rip it off and endure a lit lf short term pain?

  3. How about Homeland Security taking up billions every year since it’s inception, how about a decade long war in two countries, how about tax breaks for the rich, how about the repeal of the Glass/Teagil act that allowed mortgage companies to give loans to people they knew couldn’t pay it back which in turn caused the housing crisis and the banking crisis? How do these things fit into this republican drivel about how all our problems are due to intitlement programs? Did you know social welfare programs (PROGRAMS TO HELP SOCIETY) are what pays for people with disabilities, pays for the elderly’s food and shelter, pays for your kids medicine, and that before the social welfare programs hundreds and thousands of disabled and elderly people died from starvation and tens of thousands of children died from sickness?

    • Sounds good on paper but those who work and produce cannot sustain this model forever. Look at Europe, especially Greece, Ireland, and Spain. Also note that people will just stop working if they can get away with it and go on unemployment and disability even if they aren’t disabled. Eventually the money runs out and you can make up stuff and wish and hope but the fact remains.

    • Poor Matthew,
      Obviously you are not only tragically misinformed, but woefully illiterate in that you can’t read facts and information when it appears on the written page. Fact, 66% of the populous leeches off the production and profits that 34% of the nation produces. Not one dollar of that amount goes to feed and clothe our soldiers, inspect suitcases for suicidal religious zealots, or finance the investment of “rich” folks who risk it all to create more products and services to make our lives less strenuous and more enjoyable. Never in modern American history have “hundreds of thousands” of disabled or elderly died because of a lack of funds nor have “tens of thousands” of children ever succumbed to illnesses because money wasn’t spent that could have been. Get your head out of your posterior and try to find a country anywhere in the world that should be building fences to keep everyone that wants to be here out, but instead allows even its enemies to enter at will! Socialist pigs like you need to be driven from our shores and into the utopias of China, N. Korea, or Russia, or into the caves of freedom quashing despots of the Muslim world long enough for you to be educated to learn just how ignorant you are.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>