20 percent of welfare spending goes to tax households to fund it

A new report finds that about one in five dollars that passes through the federal welfare system ends up back where the system started.

He doesn’t steal from Peter to pay Paul. It’s more like “robbing Peter to pay Peter,” wrote report author Judge Glock, director of research at the Manhattan Institute.

As the federal welfare state has grown to the point where many middle-class and even some high-income households receive benefits, it has become possible for the same household to both pay federal taxes and collect federal transfers. became more common. Glock’s paper shows how important that overlap is. About 20 percent of the federal welfare system’s annual funding is simply returned to households that paid that amount in federal taxes.

And if you do not count households receiving Social Security (the largest federal welfare program, although it is rarely recognized as such), the proportion of welfare offset by taxes in the same year is Glock research shows that 29 percent.

It would be better for such individuals and families not to pay much tax in the first place.

“This system of levying taxes and getting back the same amount is a total waste,” Glock wrote. This is because “both taxes and transfers limit the choices of households, and there are bureaucratic costs to circulating income from households to government and back” to households. ”

Economically, these transfers and taxes simply offset each other, leaving households at least on the balance sheet, but no worse off than they would have been if the money had been taken by the government and not returned. .

Glock argues that perspective lacks important but often overlooked details. Dollars returned in the form of welfare transfers are often restricted—for example, food stamps can only be used for certain purchases—and the dollars from your paycheck are never taxed. Alternatively, funds may only be available at certain times of the year, as in the case of welfare provided through refundable tax credits. There is also a cost to circulating that money through the system. It costs money to have the IRS collect the money and have various bureaucrats elsewhere oversee the return of the money.

Given the size of federal welfare states, that 20% would be a huge amount of money returned to the same households that paid it. In 2022, Gluck estimated that these so-called net taxes will be worth about $800 billion, or 3% of gross domestic product.

This relationship between federal taxes and the federal welfare state has little to do with recent efforts to expand the welfare state. Congress is currently working on a plan to expand the child tax credit program and make a full refund available to low-income parents who don’t qualify for the full tax credit under current law.

Currently, a single mother with three children making $10,000 a year will receive a $1,250 refundable tax credit, while a mother with three children making $150,000 a year will receive a $6,000 tax credit. I can. washington post I got it. The proposed changes would not affect wealthy parents, but would instead allow poor mothers to collect $3,750.

Since the mother, who earns only $10,000, owes very little federal income tax, increasing the transfer payment to the mother does not increase the amount of taxes “withheld.” But wealthier mothers are a good example of Glock’s argument in a different context. When the per-child tax credit was temporarily expanded to $3,000 per child during the pandemic, the extra payments came in the form of checks, even for families with six-figure incomes. In many cases, the federal government simply returned funds that the same families paid in taxes throughout the year.

The same would likely apply to other expansions of welfare programs to middle- and high-income households.

“A large welfare state inevitably ends up taking tax dollars from the same people it supports,” Glock said. reason“And the larger the welfare state, the greater its welfare will be.”