December 6, 2006

Tax Foundation: Tears for the ‘Bottom Quintile’ Are Almost Completely Wasted

OK, that’s not how THEY said it, but it’s a reasonable conclusion based on these four paras from the Foundation’s November 30 Tax Policy Blog post, where it also criticizes a New York Times article’s take (probably requires free registration) on the income distribution situation in the US:

….. the article attempts to show that low-income Americans rely on “$7 a day each” by looking at the bottom 20 percent of tax returns. There are three problems with this analysis. The first is that among the bottom 20 percent, over one-third of all tax returns are filed by dependents, a number of whom file a tax return just to get their money back from the IRS. These are mostly young people still living at home, declared as dependents on their parents’ returns. Obviously these young, part-time workers are not poor in the normal sense of the word.

The second problem is the way the article defines the total number of people in the bottom quintile. The article claims that 60 million people would fall into the bottom quintile by calculating 1/5th of the U.S. population (300 million). In reality, the number of people represented by total AGI in the bottom quintile is closer to 35 million (i.e., less than 12% of the USA’s total population — Ed.) due to the number of exemptions in that group. In addition, the income of non-filers is not represented in total AGI so they should be excluded when calculating per capita income.

Finally, the article flippantly mentions that the “$7 per day” figure ignores some government transfers like EITC and food stamps. Does it ever! In fact, this year the government will give low-income people $50 billion in refundable credits through the EITC and child credit – roughly equal to a quarter of the total AGI in the bottom quintile. Needless to say, $50 billion is a significant amount of income for the poorest Americans.

Astonishingly, it also fails to acknowledge Social Security benefits that are mostly tax-exempt for low-income individuals. The IRS does not count all of one’s Social Security income as part of Adjusted Gross Income, and for low-income individuals, a greater fraction of Social Security benefits are tax-exempt and thereby not included in AGI. The article flatly ignores a huge flow of money to retirees who may appear to be low-income when these benefits are not counted. In fact, retired couples who own a home outright and live mostly on Social Security are numerous in this group.

By the time you take the four items mentioned above into account, there are very, very few left in the kind of grinding poverty the New York Times and the rest of the WORMs (Worn-Out Reactionary Media, formerly known as the Mainstream Media) insist is still rampant. I would add a fifth (HT to Bill “Bellwether” Sloat in previous e-mails for the idea, though getting to the specifics is still an open challenge) — Even among those who are not dependents, I suspect that there are many in the lowest quintile who are students with little to no income who are getting by on student loans, savings, and temporarily frugal circumstances.

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