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July 16, 2012

Mankiw: Middle Class Receives More in Government Benefits Than They Pay in Taxes

N. Gregory Mankiw (Harvard University, Department of Economics), The Progressivity of Taxes and Transfers:
Because transfer payments are, in effect, the opposite of taxes, it makes sense to look not just at taxes paid, but at taxes paid minus transfers received. For 2009, the most recent year available, here are taxes less transfers as a percentage of market income (income that households earned from their work and savings):

Bottom quintile: -301%
Second quintile: -42%
Middle quintile: -5%
Fourth quintile: 10%
Highest quintile: 22%

Top one percent: 28%

The negative 301% means that a typical family in the bottom quintile receives about $3 in transfer payments for every dollar earned.

The most surprising fact to me was that the effective tax rate is negative for the middle quintile. According to the CBO data, this number was +14 percent in 1979 (when the data begin) and remained positive through 2007. It was negative 0.5 percent in 2008, and negative 5% in 2009. That is, the middle class, having long been a net contributor to the funding of government, is now a net recipient of government largess.