Sunday, August 21, 2011

Chart of the Day: Transfer Payments

Warren Buffett's recent column focused mostly on the "sources of government revenue" and the income taxes collected from the "super-rich," which he suggests should be immediately increased with higher rates on incomes above $1 million to reduce the national debt and deficit. 

But there's also the other side of the equation - the "uses of government revenue" that Mr. Buffett did not address.  The chart above shows "transfer payments as a share of government spending" from 1929 to 2010 (BEA data here), which has doubled from 22% in 1966 to 44% last year.  If this trend continues, we might reach a point where no amount of taxation on the rich or super-rich can finance an unsustainable "transfer society."  At some point, the mega-rich might just "go Galt." 

Exhibit A: "Controversial Ryanair boss Michael O'Leary has warned that he will leave Ireland and become a tax exile if rates for high earners become exorbitant. "Europe will realize, as they are in the US, that a tiny proportion of the working population supports a ludicrous amount of incentives and feather-bedding for people who don't want to or won't work," he said."


At 8/21/2011 11:24 AM, Blogger juandos said...

Aren't we seeing the movement of tax refugees moving in this country?

From the National Federation of Independent Business :As a share of population, New York said goodbye to more residents in the last decade than any other state. According to a stunning new report by the Empire Center, a project by the Manhattan Research Institute, more than 1.6 million New Yorkers moved out of state between 2000 and 2010...

From the NY Post: Thanks for the doctors, New York

According to the Texas Medical Board records, we’ve picked up 1,271 New York physicians since September 2003, when Texas voters approved the Proposition 12 medical-liability reforms...

At 8/21/2011 12:56 PM, Blogger Benjamin said...

I am glad to see such acute solicitousness to the needs of the richest Americans. The seemly endure too much.

What next? Drafting rich Americans to serve in the military?

At 8/21/2011 2:46 PM, Blogger morganovich said...


that is not true at all.

revenues there have not been doing anything like keeping pace with expenditures.

that's the whole problem.

the system has gone from big surplus to deficit.

At 8/21/2011 4:11 PM, Blogger marmico said...

In 1966 payroll taxes were 20% of federal revenues. In 2010 they were 40%. A double, just like the transfer chart.

See here.

At 8/21/2011 5:42 PM, Blogger Junkyard_hawg1985 said...


You missed morganovich's point all together. While payroll taxes were 20% of revenue in 1966, the budget was in balance so payroll taxes were also equal to 20% of government spending. Today, payroll taxes may be 40% of revenue, but total revenue only covers 60% of the government's expenditures. This means that payroll taxes only account for 24% of federal spending. In other words, they haven't changed much.

At 8/21/2011 6:40 PM, Blogger Stephen said...

If this trend continues, we might reach a point where no amount of taxation on the rich or super-rich can finance an unsustainable "transfer society."

Might? The recent deal increases the national debt to over $16 trillion.

I think we've blown past might.

At 8/22/2011 8:27 AM, Blogger morganovich said...



the problem is that federal expenditures have grown far more than revenues.


imagine that in 1962 revenues are 100 and expenses are 100.

today revenues are 1000 but expenditures are 1600.

then, FICA income was 20 and outlay was 20.

today it is 400 and 640.

see the problem?

if overall expenditures grow more rapidly than overall revenues, then even if %'s stay the same, you get insolvency.

At 8/22/2011 10:07 AM, Blogger Tom said...

"Transfer payments" are vote buying by welfare. People on welfare should not be allowed to vote. People who pay no income tax should not be allowed to vote.

At 8/22/2011 11:20 AM, Blogger morganovich said...


they do precisely that in the baltics.

you go on the dole, you lose you vote until you have been off for 3 or 6 months or something like that.

i agree that it seems like a good idea.

you can either live off me, or have a say in my taxes, but not both.

At 8/22/2011 11:48 AM, Blogger marmico said...

No, I think that you are missing my point. The social security component of payroll taxes are self-sustaining in the short run, but require adjustment (tax increase or benefit cut or combination) in the long run. The medicare component of payroll taxes are not self-sustaining in the short run and require immediate adjustment.

It is the income tax, corporate tax and other taxes that are not self-sustaining in the short run to run the balance of government operations.

Income taxes barely pay for defence expenditures and interest on the public debt. The decline in revenues is unprecedented. 2010 total tax receipts were barely above 2000 receipts.

So government must reduce expenditures by about 4% of GDP and increase revenues by about 3% of GDP to achieve a 3% deficit which is the post-WW11 average. Closing that gap is only going to happen if the economy grows above trend growth rate. It does not look promising when the trailing four quarter real GDP growth rate is 1.6%.

At 8/22/2011 1:15 PM, Blogger juandos said...

"The social security component of payroll taxes are self-sustaining in the short run, but require adjustment (tax increase or benefit cut or combination) in the long run"...

Hmmm, interesting way to describe a forced Pozi scheme marmico...

At 8/22/2011 1:37 PM, Blogger marmico said...

I did not know you were an actuary, juandos? Care enlighten me.

At 8/22/2011 3:07 PM, Blogger morganovich said...


i think you are neglecting to consider unfunded liabilities.

SS and medicare are nothing like self sustaining and have not been for decades. if you earn 100k, spend 100k, and run up 200k in debt every year, that is not sustainable.

you are mistaking the fictitious federal accounting (not even true cash accounting) with reality.

and even that is way out of line. fica brings in 900bn and ss+ medi spend 1500bn. that's a 600bn cash deficit. then they rack up another 1000bn or so in unfunded liabilities.

if you look at where spending has grown and will grow in the future, that's the killer issue.

entitlements are projected to be 2.5X the % of gdp they are now in 2040.

the 3% deficit you describe is a fiction. it exists only in the magical world of federal accounting.

under GAAP, it's averaged more like 13%.

the cuts we need are much sharper than the ones you describe, and the taxes essentially impossible.

hausers law show that federal revenue as a % of GDP reverts to 19% no matter what the tax rates are. the 3% increase you describe is essentially impossible. capital will flee, and peopel will work less and shelter more if you try. this brings the rate back down to 19% +/1 1% with strong reversion tenancies.

you cannot just up it 3% and keep it there. the economy adapts. the best yo can hope for it to drive more growth and get 19% of a bigger number.

we are certainly not headed that way at the moment.


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