Doing the math: The numbers on assistance

In the 2012 presidential election, Mitt Romney famously told a group that 47 percent of Americans pay no income tax. Although that number may have been accurate, he went on to say, inaccurately, that these people see themselves as victims and entitled to various government benefits.

The U.S. Census Bureau recently released data indicating that nearly 110 million Americans out of nearly 319 million receive government assistance of some kind. At the end of 2012, for example, 51.5 million were enrolled in the SNAPprogram (formerly known as “food stamps”) and 83 million were collecting Medicaid — with some benefitting from multiple programs.

Some of these benefits vary by state and it is estimated that the eight most generous states provide benefits equal to or exceeding a $20 per hour wage, basically more than $40,000 per year per household.

Let’s do some mental and mathematical exercises. The average household income in the United States is a little more than $50,000. To make the math simple, let’s pretend our country has 100 households and only provides the one function of offering assistance.

If you are ready for a Sunday math exercise, if 99 households are earning the average income and one household is receiving government assistance, what rate of tax is necessary to pay for the assistance? The answer is a tax rate of 0.8 percent.

If the ratio is 95/5, the tax rate must be 4.2 percent. If the ratio is 90/10, the rate must be 8.9 percent. Notice that the tax rate goes up exponentially, not linearly. At 80/20, the rate must be 20 percent. At 70/30, it’s 34.3 percent. At 60/40, it’s 53.3 percent. Finally, at 45/55, essentially every dollar earned by the 45 households would have to be paid in tax to provide the benefit for the 55 households receiving assistance.

I hope you stayed with me to see how a slight change in this ratio causes a significant change in tax rate, in a balanced-budget world. This is why it is so difficult for a state, for example, which must have a balanced budget, to provide assistance when unemployment rises from 4 percent to 8 percent. That may mean the difference between 75 households paying in and 68 households paying in, requiring an increase in tax rate of more than 10 percent.

In real life, of course, states don’t increase their tax rates by 10 percent, so the money must come from somewhere else. That is why state employees don’t get raises and school systems have their budgets cut.

These ratios are also wreaking havoc on our Social Security system. Shortly after the program started, 159.4 people were paying in relative to each person receiving benefits. Today the ratio is less than 2.9 paying in for each person receiving benefits.

Now let’s introduce psychology to our very basic model. Most Americans are willing to support other people who cannot support themselves — either through a permanent period because of disability, a term-specific period such as a stretch of unemployment, or a stage-specific period such as old age.

The primary question for today is: What percentage of people will continue to pay in as the percentage of people receiving increases? No one knows the answer to that question.

We do have data points such as the largest number of wealthy people in history revoking their U.S. citizenship to avoid U.S. taxation and corporations (most recently Burger King) relocating their headquarters to another country to avoid U.S.taxation.

When the state of Oregon imposed a “millionaire’s tax,” the number of millionaires dropped from 38,000 to 28,000 the following year. Maryland had the same experience a couple of years earlier. These data points suggest that we need to increase the ratio of those paying in to those needing assistance in order to thrive as a society.

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