Sources and Methods

The tax calculation methodology is based on an extraordinary paper published by the Tax Foundation and authored by research economists Andrew Chamberlain and Gerald Prante on March 22, 2007 titled Who Pays Taxes and Who Receives Government Spending? An Analysis of Federal, State and Local Tax and Spending Distributions, 1991-2004.

The tax calculator used to by MyGovSpending.com to estimate total taxes per family in both the Basic Budget and Wonk's Budget was designed and built by Andrew Chamberlain and Gerald Prante of Chamberlain Economics LLC. See the paper by Chamberlain Economics, LLC of April 2009 titled MyGovSpending, Inc. Tax Calculator Model: Methodology and Data Sources (pdf). This model is a remarkably accurate estimator for something as devilishly complex as US taxes.

Most of the numbers used in the budgeting tools are published by government agencies and updated regularly. Since most of these figures are published for years that have ended, we update them for the current year using government forecasts when available. When government forecasts are not available, we use historical trends to forecast the current year.

Numbers used in the discussion pages of the site come from a wide variety of sources, public and private. We've tried to footnote all. If footnotes are missing and you would like a citation, let us know.

Government expenditure and revenue numbers are compiled from a variety of tables from the Bureau of Economic Analysis (BEA) at the US Department of Commerce. They are subsets of the National Income and Product Accounts (NIPAs)1. We use these numbers rather than budget numbers from the Office of Management and Budget or the Congressional Budget Office because the BEA numbers are organized neatly by function and, more importantly, because they include state and local governments. There are some minor differences between the BEA's compilation and other official sources of government budget data2.

Economic numbers. Gross domestic product (GDP), personal income, and related numbers come from the NIPAs produced by the BEA. Inflation numbers used in the projections come from the Bureau of Labor Statistics at the US Department of Labor3.

Household income numbers originate with the Census Bureau. It publishes various income statistics including median household income.

Government debt numbers come from a variety of sources. Our "Hard Debt" number is the equivalent of the oft-used "Debt Held by the Public". These are contractual obligations of government. Estimates for the current fiscal year come from the Congressional Budget Office5. We adjust them for the current calendar year.

Numbers for the contractual debt of state and local governments come from the Bureau of Census. There are some complications with these numbers as the reporting entities do not use uniform fiscal years. We project the current year using the average growth rate of the last five years for which Census publishes historical data.

"Semi-Hard" debt is primarily the obligation of governments to their employees for retirement, for which government has not yet set aside funds. These may or may not be contractual obligations. The federal government reports it's portion of this sum annually6.

The semi-hard debt of state and local governments is hard to pin down as some governments do not report it. A new requirement by the the Governmental Accounting Standards Board (GASB) requires them to quantify and report these obligations beginning in the spring of 2009 although GASB has no means of enforcing its rules. Some states do not comply. USA Today's excellent public finance journalist, Dennis Cauchon, reports his newspaper's estimates of the unfunded medical liabilites of state and local governments in a February 15, 2009 article titled "Benefits neglected for civil retirees". We use these numbers.

These figures are presented in present value terms, meaning that the value quoted is the amount that should be set aside now to fully fund the program's future payments. Like a credit card balance upon which no payment is made, this obligation grows by the rate of interest each year.

Unfunded Entitlements are the soft obligations of Social Security and Medicare. They are soft because citizens have no property rights to the payments— so said the Supreme Court in 1960 in Flemming vs Nestor. Government programs can be altered by legislative processes and people have no legal recourse, except that of the ballot box.

Social Security7 and Medicare8 both face enormous shortfalls; i.e. the benefits scheduled to be paid under current law far outweigh the taxes in place to fund them. Official numbers report this shortfall for two time horizons - one that ends in 75 years and one with an infinite time horizon.

Some people might dismiss the time beyond 75 years from now as too far in the future to matter. We use the longer time horizon for several reasons. First, without changes to the law, children living today are eligible to receive Social Security and Medicare 75 years from now and beyond.

Second, thinking about a problem that is still 75 years out from today may make it easier to generate ideas that can be applied to the same problems much nearer in time.

Third, with each passing year government forecasts a new 75 year time horizon, dropping the year that has just concluded and adding a new year 75 years in the future. The shortfall for the completed year that drops off is less than that for the new year added 75 years in the future, so the problem grows as time passes, assuming all other factors remain the same. Chopping the analysis off at 75 years assumes there is no problem beyond 75 years when, indeed, there is.

Fourth, we advocate a holistic view of government, believing that a broad scope of understanding can result in proposals more likely to succeed. Including the infinite time horizon broadens the scope.

The government and MyGovSpending, Inc. presents these unfunded liabilities in present value terms, meaning the number quoted is the amount that should be set aside today to fully fund future shortfalls. If no payments are made - as is currently the case - this debt grows by roughly the rate of interest. That is $4.5 trillion annually, or $40,000 per household per year.

Such long range projections are volatile. Small changes in the inputs to the equation result in large changes in the present value of the obligation. New estimates will vary widely from old estimates as inputs change from year to year. So keep in mind that these are soft estimates of soft debts. Nonetheless, these numbers are critical to managing the country's prosperity.

Allocating government revenue to households. Most government revenue is taxes and allocated as described by the Chamberlain Economics LLC paper discussed near the beginning of this page.

Government also collects revenues not often thought of as taxes. These are interest on money the government loans, fines and fees the government charges, and profits (and losses) from businesses the government owns.

We assign these equally to each family on the basis that there is no free lunch, i.e. someone, somewhere is responsible for every penny that changes hands. MyGovSpending.com assumes this money is generated by a government that each family owns in equal share with other US families.

Allocating Government Spending, Surplus (Deficit), and Debt. Each household is assumed to be responsible for a share of government spending in the same proportion that its taxes are to all the taxes collected in the country. If a household pays 0.00000067% of the country's taxes, it is allocated 0.00000067% of the country's government spending.

There are alternative allocation methods. For instance, some might argue that is it fair to allocate spending based on the voting record of households and how the candidates they supported voted on spending bills. While such an approach might be theoretically compelling, there are significant obstacles to implementation.

Additionally, one might offer an alternative method of allocating government debt, based on a household's lifetime of tax payments instead of a single year's taxes. This approach is laudable, but for our purposes it is not feasible. The task of collecting a lifetime earnings history for each interested household would quickly disinterest most households.

Allocating spending and debt by the amount of government spending each household consumes, too, is theoretically attractive. Rich households would generate enormous surpluses on average, and poor households would show large deficits. Since neither rich households nor poor households control tax and spending policies by themselves, we assume that financially all Americans are in this together, proportionate to taxes paid. Rich households pay more, poor households pay less.



notes:

1 Of special interest are the #3 series tables available at http://www.bea.gov/national/nipaweb/SelectTable.asp?Selected=N

2 For more detail, see the paper from the BEA titled Government Transactions - Methodology Paper: U.S. National Income and Product Accounts September 2005, beginning at page II-8.

3 www.bls.gov

4 This excellent analysis is available at http://www.taxfoundation.org/research/show/2282.html

5 Available from http://www.cbo.gov/ftpdocs/90xx/doc9015/Selected_Tables.pdf

6 See the US Treasury, US Government Financial Report 2007, page 3 available at http://www.fms.treas.gov/fr/07frusg/07frusg.pdf

7 See discussion beginning on page 60 of the 2008 Annual Report of the Social Security Trustees, available from http://www.ssa.gov/OACT/TR/TR08/tr08.pdf

8 See the 2008 Annual Report of the MedicareTrustees, available from http://www.cms.hhs.gov/reportstrustfunds/downloads/tr2008.pdf