Follow the Money

By Kevin D. Williamson

Sunday, January 31, 2021

 

The coronavirus pandemic is a genuine emergency, one of the few occasions when there are things that simply must be done even at very high cost. But even when “What’s this all going to cost?” isn’t the first question, or even the second, it still needs to be about No. 3 or No. 4. Scarcity is real, and reality is not optional.

 

One way of getting some context for the federal government’s financial footprint is cost per household. Here, I’ll rely on pre-pandemic figures, from 2019.

 

The money the federal government raises from the federal income tax is about $28,000 per household — meaning that that is the figure you’d arrive at if you divided the total federal income-tax take evenly among every U.S. household. Because federal income taxes are borne disproportionately by the wealthy — disproportionate not only to their total numbers but to their share of income — the amount that the median family in the middle income quintile pays in federal income tax is a lot less than that, about $9,000. Add in state and local taxes and it’s about $16,000 — you can buy a new Nissan for less money.

 

But the federal income tax is not the only federal tax you pay. You also pay the payroll tax, which is an income tax that sometimes in the past has pretended to be an insurance premium or a “contribution” to Social Security. (When men with guns come to collect the money, it is not a “contribution.”) The payroll tax adds about another $10,000 in expense per year per household. That’s a little less than a year’s rent on the average apartment in cheap and sunny Las Vegas or Fresno — or Columbus, Ohio, or Arlington, Texas.

 

You may think you don’t pay the corporate income tax, but you do — you pay it in the form of lower wages and higher prices, and in other indirect ways. It is a relatively light burden compared to the income tax and payroll tax, only $1,870 per household per year.

 

Other federal taxes (excise taxes, estate taxes, etc.) come to about $2,300 per household per year.

 

Altogether — and not counting state and local taxes — that comes to about $42,000 and change per household per year. That’s the basic cost of maintaining the federal government as is — not counting public-health emergency measures or the Brobdingnagian expansion of the federal government dreamt of by Joe Biden et al.

 

Where does the money go?

 

On a per-household basis, federal spending comprises, among other things: about $400 to operate the State Department, $900 to fund scientific research, $2,000 for veterans’ care, and $150 on farm subsidies. The big-ticket items are: $7,500 for the military, $8,000 for Social Security, another $8,000 for various welfare programs (SNAP, TANF, Pell grants, Section 8, LIHEAP, etc.), and, topping the list, some $11,000 for Medicare and Medicaid.

 

Taxes aren’t spread evenly across all households, of course, and neither is income. But the lines are not as sharply drawn as you might imagine. As alluded to earlier, what the economists call “tax incidence” is complicated. For example, the payroll tax is split into an “employee share” and an “employer share,” but most economists believe that, in reality, employees pay most or all of the tax, with the “employer share” being recouped through reduced wages. Some businesses can pass costs along to their customers, but some can’t, especially when it comes to businesses such as Walmart or McDonald’s, which operate in very price-sensitive environments. But those businesses can still pass along tax costs to employees, contractors, business partners, vendors, landlords, etc. The thing to keep in mind is this: Theoretical tax burdens are set by law, but actual tax burdens are determined by markets.

 

Put another way: We all pay taxes together. Like it or not. Any time a politician tells you he is going to raise taxes but only on other people, he is selling snake oil. The truth is, politicians don’t know where taxes actually land. Nobody really does — and nobody but nobody knows in advance how that will shake out. When Senator Bernie Sanders talks about raising taxes on “the rich,” he is talking about raising taxes on everybody, whether he understands that or not. When Donald Trump promised that his tariffs — which are a sales tax — would be paid by the Chinese, he could not have been more wrong: Those costs were born by U.S. consumers and U.S. manufacturers, who were made to pay higher prices for their inputs.

 

You may not think you are paying 42 grand per annum for what Washington does, because that isn’t what it says on your 1040. But you are paying that, through higher prices, lower wages, lost opportunity, investments that never happen, and innovation that is never funded.

 

It matters how much government spends. But it also matters what it spends it on. Coronavirus response? Yes, of course. Military? As much as is needed, but no more. But windmill subsidies? Loan forgiveness for young M&A lawyers who went to Harvard? The myriad irreplaceable activities of the Small Business Administration?

 

I’d rather have the Nissan.