Government figures show the true fiscal problem...

By Dr. Mark J. Perry, University of Michigan

Reprinted from “Carpe Diem”

Our long-term fiscal problems won’t be fixed until we address what might be our nation’s most serious fiscal-related problem: we’re increasingly becoming a European-style “entitlement nation,” with “payments to individuals” increasing both in absolute dollar amounts and as a share of total federal spending, while at the same time the share of Americans who face a zero or negative federal income tax liability is above 40 percent and rising.  In other words, a declining share of American taxpayers is being forced to finance the rising cost of the federal government, which is increasingly being spent on payments to individuals.

In 1952, less than one out of every six dollars spent by the federal government represented payments to individuals.  By 2010 payments to individuals had increased so dramatically over time that roughly two out of every three dollars (66.1 percent) spent by the federal government in that year were payments to individuals for programs like Social Security, Medicare and Medicaid, public assistance, food and housing assistance, and unemployment assistance.  Last year, payments to individuals as a share of federal spending decreased slightly to 65 percent, and that category was more than three times larger than the share of 2011 federal spending on defense (20.1 percent), and more than ten times larger than the share spent by the federal government on interest payments for the national debt (6.4 percent).  The OMB estimates that payments to individuals will exceed 68 percent of federal spending in 2014, 2015 and 2016, before falling slightly to 67.5 percent in 2017 when payments to individuals will exceed $3 trillion for the first time.

At the same time that payments to individual Americans consume an increasing share of federal spending, the burden of taxes to finance federal spending is falling on a shrinking group of American taxpayers.  According to a recent study by The Tax Foundation, 41 percent of federal income tax filers in 2010 had a zero or negative federal income tax liability after taking deductions and credits, which was a slight decrease from the previous year when 41.7 percent of tax filers had no tax liability (see bottom chart above).  In both years, the number of nonpaying tax filers exceeded 58 million.  After fluctuating in a range between roughly 20 and 25 percent for the fifty year period from 1950 to 2000, the percent of Americans filing tax returns but paying no federal income taxes has increased sharply over the last decade to record-setting levels above 40 percent in the two most recent years.