Tax Law

Measuring the Public Benefits From Taxes

Who benefits from the taxes we pay seldom gets examined, but two reports on the redistributive effects of taxes and transfers shed some revealing light on this issue. One report deals with the United States and the other with Canada.

In America, taxes and transfers have a significant impact on income inequality, which has been rising since 1980, according to a report by Thomas L. Hungerford of the Congressional Research Service. You can see the report here.

Hungerford warns that new tax policies, aimed at bringing what we levy in line with what we spend, need to be evaluated in terms of the redistributive effects to avoid unintended consequences.

But for taxes and transfers, America would be the 19th most unequal nation in the world, if you apply Hungerford's data to the annual CIA World Fact Book report on income inequality.

Inequality, keep in mind, is the result of many factors, including how government rules shape economic outcomes. Policies that artificially raise prices, for example, or that favor some with quality education affect how much money individuals can save, make in profits, and earn in the labor market.

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This brings us to the Canadian study, "Canada's Quiet Bargain: The Benefits of Public Spending," which asks the audacious question, "Are taxes saving you money?" (For the Canadian report, see

The authors of the study, which was based on Statistics Canada's data and simulation models, say that it "adds a dimension that has been missing to the public debate over taxes and public spending in Canada. It weighs the benefits of public services provided by federal, provincial, and municipal governments against the benefits of recent tax cuts."

That issue is also largely missing from American debates -- what are the losses in public benefits because of tax cuts, and how do the benefits of public spending stack up against the benefits of reduced taxes?

The study comes from the Canadian Centre for Policy Alternatives in Toronto and is designed to build public support for government spending and weaken support for tax cuts, which is not surprising given that public employee and other unions are behind it.

Authors Hugh Mackenzie, a union economist, and Richard Shillington, a statistician, assert, "Tax cuts implemented by federal and provincial governments over the past 15 years have reduced the living standards of the majority of Canadians. The majority of Canadians would be better off if their governments had invested in improving and expanding local public services instead of cutting taxes."

Mackenzie said, "It's amazing how often you see 'analyses' of the tax system from economists that talk about every purpose and potential impact of the tax system except the most important one -- raising money to pay for public services."

He is right. But what I also found fascinating, from my own reanalysis of the study data for the chart accompanying this column, is that except for those making less than C $30,000 -- the poor and the near poor -- the distribution of benefits per person comes remarkably close to what people would get with zero redistribution.

At C $40,000 to C $50,000, government benefits equal 95 percent of what this group would get with a 1:1 distribution ratio, as shown by the line marked "Ratio: Share of Benefits to Share of Population." Just below this, at C $30,000 to C $40,000, benefits are 105 percent of what that group would get based only on its share of the Canadian population.

The top 3 percent, who make C $200,000 or more, get 88 percent of the benefits they could expect with no redistributive effects.

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America needs research that goes much deeper than the Canadian study. We need to look beyond transfers alone, as the Canadian study did, and to examine them in the context of time so that we can measure what are really investments and what are giveaways. That research would add enormously to the quality of our debate on the costs and burdens of government.

It would also help us recognize the costs of tax cuts and not just the immediate benefits to those who receive them. It would help to know whether a dollar saved by the richest Americans through a tax cut benefits society or costs us several dollars in lost productivity because of inadequate education of the young, as well as inadequate infrastructure to move goods and services and maintain public health.

And what of the effect of tax cuts, and the design of the tax system, on crime?

Is a 10 percent tax cut worth the price if it results in a 1 percent increase in murders? Would you trade an extra $50 a week in your pocket after taxes for a 1 in 50,000 chance that a criminal will shoot your spouse or child or you? How about one in a thousand -- or a million? What is the tax price point?

With more information, we would determine what role, if any, taxes play in these facts:

  • Canada's murder rate is one-third that of America's.
  • Canada's homeownership rate is virtually the same as America's even though mortgage interest is not deductible in Canada.
  • Canada has not had to bail out its banks or investment houses.
  • Canadian business owners do not have to divert any time from making a profit to dealing with healthcare for themselves and their workers, giving them a competitive edge.

Could a redesign of our tax system to encourage more investment and more labor income lower crime rates, reduce drunk driving and other social pathologies, and make us a more productive and healthier society?

We cannot begin to answer these questions until we have information that enables us to take a comprehensive look at tax policy that goes beyond the burden of taxes to understand public benefits across income classes and across time.

View TaxAnalysts' David Cay Johnstons's opinion in its entirety on


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