In Europe, many people believe that “pure capitalism” rules in the U.S. and that the country has no welfare state. The opposite is true. Nowadays, the welfare state and redistribution in the U.S. have reached such proportions that one could ask whether it still makes sense for middle-class Americans to work at all.
An analysis of incomes in the U.S. has shown that on a per capita basis the average bottom-quintile household (i.e. the bottom 20 percent of income earners) receives over ten percent more than the average second-quintile household and even three percent more than the average middle-income household.
This is one of the shocking results of research conducted by Phil Gramm, Robert Ekelund and John Early for their book The Myth of American Inequality. A member of an American middle-class family in which both parents work ends up with no more than the member of a family in which neither works at all. This sounds improbable, but is supported by the following figures:
Even at the household level, the differences within the bottom 60 percent of households (i.e. the bottom three quintiles) in the U.S. are small: Taking into account government subsidies to households (called transfer payments) on the one hand and tax payments on the other, the income of the lowest 20 percent is $49,613 per year, in the second quintile it is $53,924, and in the middle quintile $65,631.
On their own, transfer payments from the government to the bottom 20 percent of American households amount to $45,389, against only $3,996 of taxes paid by this segment per year. This means that government transfer payments to the bottom 20 percent of American households are $41,393 higher than tax payments!
In the middle class, the situation is quite different: Middle-class households receive, on average, $17,850 in government transfers annually, while paying $19,314 in federal, state, and local taxes. This means that middle-class households pay $1,464 more in taxes than they receive in government transfer payments.
And, contrary to what one might think, a bottom-quintile U.S. household has fewer people (1.69) than a middle-class household (2.51 people). Taking these differences into account, a person belonging to the bottom quintile gets three percent more than a person belonging to the middle class after transfers and taxes.
This has little to do with capitalism. The principle of merit is nullified because it hardly pays to work. Middle-class Americans work a lot more hours than those in the bottom quintiles, but don’t see any reward for their hard work. The entire redistribution system swallows up huge amounts of money and can only be halfway understood by statisticians.
There are 100 federal programs in the U.S. alone that each distributes more than $100 million a year, plus countless programs at the state and local levels. At the same time, there are federal, state, and local taxes, resulting in an unmanageable tangle of tax payments on the one hand and transfer payments on the other. The absurd result, as we have seen from the figures above, is that the typical middle-class household receives almost as much in government transfer payments as it pays in taxes.
Of course, the bureaucracy that runs this system swallows up a massive amount of money. Many middle-class Americans sense that there is something wrong with this system. It is largely financed by the top 20 percent of income earners, who have an average household income of $295,904 but pay almost $107,000 in taxes.
This refutes the widespread belief that America’s top earners get off lightly when it comes to paying taxes. No: More than every third dollar these households earn ends up in the government’s coffers. And the top 20 percent of households pay more than 60 percent of all taxes. If you look at federal income taxes alone, the top 20 percent pay 83 percent of the total income tax bill!
So the system fleeces higher earners and discourages the middle class by removing any financial incentive to work. And perhaps the most absurd aspect of all this is that it does nothing to help in the fight against poverty because since the War on Poverty began in the U.S. in the mid-1960s with government programs that have ballooned in size and scope ever since, the poverty rate has remained virtually the same, with slight fluctuations. In the two decades before the War on Poverty began, poverty in the U.S. had steadily declined from 32.1 to 14.7 percent.
The only people who benefit from the current system are politicians who first take money from American households and then make election promises to give it back to their own clientele.
