Taxes — January 6, 2013 at 10:19 am

Busting the “Federal budget is just like a family budget” myth


Let’s get some perspective on this, shall we?

One of the most widely prevalent myths being perpetrated on the right is that the federal budget should be seen as just a much larger version of a family budget. “American families are forced to live within their budget every day,” we’re told. “The federal government should do the same.”

Laura Clawson at Daily Kos has a marvelous piece up this morning that shows just how fail that argument is, mainly because it leaves out some very inconvenient truths about what our federal government looks like.

Her piece is titled “You want to compare the U.S. budget to a family budget? Let’s be real about it.” It stems from a piece making the rounds on Facebook that said it’s easier to look at the federal budget if you lop off eight zeros and then look at it like a family budget. Then it looks like this:

Annual family income: $21,700
Money the family spent: $38,200
New debt on the credit card: $16,500
Outstanding balance on the credit card: $142,710
Budget cuts so far: $38.50

Clawson then goes on to show just how farcical this way of looking at it is. First she says, no family would look at this dire situation and try to solve it by cutting their budget. They would try to increase revenues. Take on new jobs, try to get better-paying jobs, ask those who can to contribute more, things like that. As she points out, this view forgets to take into account that this mythical family has several very wealthy relatives living with them that consume as much or more than the others in the house but contribute less:

First off, this set of numbers tips its hand by only talk about cutting budgets, not increasing income for this fictional family. Which is interesting, because one of the big problems the America-family has is that a bunch of rich relatives are living in the house not doing their fair share to cover expenses. We’ve got an uncle who’s down in the kitchen all the time telling the rest of us to eat nothing but beans and rice because we can’t afford fresh vegetables and meat, and telling us to turn down the heat in the house if we’re having trouble covering the power bill. And no, he’s not going to share his giant steak because it’s his and he bought it with his own money. But meanwhile, we’re paying the electric bill for that space heater he’s always running in his room, because he’s not gonna be cold even if the rest of us are. And we’re paying the gas bill for cooking that steak he didn’t share. So a big part of that spending problem we allegedly have is that some people aren’t acting like we’re a family where everyone contributes to the income side.

She also points out how this family of ours has smartly made some investments in the future: better education for the kids so that they can help bring in more money than just working at Walmart, a load to the family furniture-making business to grow it and its revenue potential.

She reminds us that our family go hit by a pretty nasty storm that destroyed part of the house and had to pay for that.

In other words, you can’t just take a bunch of numbers out of context and pretend that they represent the larger reality of why we are where we are today. She actually skips over one major factor: not only are the wealthy relatives living with us not contributing their fair share, about ten years ago one wealthy uncle that lived in the house made sure that the amount of revenues coming in to the family from the wealthiest members would ALWAYS be proportionally lower than the rest of us. Even though that rich uncle is now gone and not living in the house, the impact of his move is that the family can’t possibly meet its family budget because they are all but guaranteed to not have enough money coming in. The remaining wealthy residents are doing fine, though, thank you very much.

She finishes with this caution against oversimplifying this discussion:

So, yeah, it’s been a tough year what with the storm and all the rich relatives living in our house, running up the bills, but only contributing like 13 percent of their money to the family budget while a lot of us with much less money are contributing more like 30 percent. We’re trying to invest for the future, though, and fighting to get those rich relatives to contribute a little more to the family budget. We’ll see how things go with that, but meanwhile, it’s not helpful to just strip the numbers down without any context for why we took in so little, or why we spent what we did.

It’s a smart piece and commend your attention to it.

  • I want to agree with this and do in principal, but the example of the rich uncle is just stupid and will get ripped to shreds by conservatives. If he’s rich, he wouldn’t be living with his deep-in-debt family.

    I think a better way to look at it is to look at how much debt the average household has. Using a conservative guestimate number that most family households have a mortgage that isn’t paid off and the average house in the U.S. costs in the vicinity of $200,000, let’s assume most households only have this half paid off. So that’s $100,000 in debt for each household, even if they don’t have a second mortgage, credit card debt or an equity loan.

    Now, in order to pay back that mortgage debt back and improve your credit rating, one needs to make the monthly payment. If the debt ceiling is not lifted, that payment doesn’t get made and your credit is now worthless. You’ve just cut off your nose to spite your face.

    • “…the example of the rich uncle is just stupid and will get ripped to shreds by conservatives. If he’s rich, he wouldn’t be living with his deep-in-debt family.”

      That is the primary reason the analogy is so inadequate, right? On one hand they use it to justify severe austerity measures because the budgets are conflated to being the same but on the other hand, they say, “that’s not realistic”. Trying to have their cake and eat it, too.

      But, yeah, your point about the mortgage issue is an excellent one and I agree 100%.

    • Andrew

      I know this is an old post, but…

      You obviously don’t own a house. If you only have $100,000 left of a $200,000 mortgage, you are more than 20 years in. You don’t even TOUCH the principal of a 30 year mortgage for at least 5 years. It’s ALL interest. And even then, there is more to consider than just principal and interest (things like equity, tax credits, etc).

      You are arguing a complex point WITH a complex point… problem is you don’t seem to understand either of them.

      • James Cook

        Why, yes, I do own a house. Thanks for assuming everyone else knows nothing of the real world.

        And no, it is not “ALL” interest for 5 years. “Mostly” would be correct, but it is definitely not 100%, unless you happen to have an interest-only loan. I’m 5 years in on my mortgage and have about $60,000 in equity already.
        So you’ve proven been wrong twice so far in just one post. Care to go for strike three?

  • In addition, most families don’t spend 20% of their household budget on home defense, every year.

    Most heads of the household also don’t spend $20,000 to break into their neighbors’ house and trash the place because they mistook them for someone else who wronged them.

    Just sayin’.

  • Bill Cole

    The most important missing bit of analysis in that otherwise solid piece is that household budgets have an evolutionary arc that government budgets simply don’t. A well-managed family budget is likely to run a surplus for many years to pay off long-term debts like a mortgage or to save up for college tuition, or simply to save for retirement, periods when running in deficit due to

  • government can print money, legally. all govs have deficits and always will because they rely on revenue and their ability to create money.

  • Hoopster

    Why is she suggesting that the rich are only contributing 13% to the family budget while people with less money are contributing 30%? Last time I checked people in the top income brackets paid a higher average effective federal tax rate than people in the lower/middle brackets.

    • Bill Cole

      It depends a great deal on how the “income” fits into the tax system. For the past decade the maximum rate on capital gains income has been 15%, which has encouraged a lot of schemes that recast compensation as capital gains instead of regular income. This has allowed many very high income people (especially in the financial sector and in corporate officer positions) to structure their employment compensation to pay very low tax rates. There was also a system of limitation on itemized deductions (known as the “Pease” rule) that was phased out between 2001 and 2010, making it possible for people with very high income to deduct very large parts of it from their taxable income, sometimes in highly questionable ways.

      • Hoopster

        Agreed, although the expiration of the Pease rule and other deduction rules will impact people with as little as $250k.

        And although some people (like Warren Buffett and Mitt Romney) are fortunate enough to have the bulk of their income in capital gains and other investment income, the average effective federal tax rate paid by the upper middle class and the “rich” is much higher than the middle class or below.

        • “… although the expiration of the Pease rule and other deduction rules will impact people with as little as $250k.” Must be tough, huh? As to PEP and Pease deduction cap, I won’t be losing sleep over Mitt Romney not being able to deduct all of his mandatory 10% of income tithed to the LDS Church and his dancing horse while paying 13% in taxes.