The US Federal Government’s response to COVID-19 has created the greatest redistribution of wealth in US history. The financial programs the US Government has implemented in response to the economic fallout caused by the COVID-19 global health crisis will ultimately move significant wealth from those in the upper tier of economic status to those in the lower tier. Whether this is a good thing or a bad thing or exactly who will benefit the most is for others to debate. But understanding the economic implications of the current stimulus programs should impact how people spend, save, vote, and plan.

The US Federal Government has provided many stimulus benefits during the COVID-19 pandemic. One example was sending $1,200 checks to most adults with an additional $500 for each child. Individuals earning over $99,000 a year did not receive checks. This stimulus program cost $300 billion. Since the Federal Government runs a deficit, it had to borrow the money paid out through the program. The question remains: how will the Government collect funds to pay back this stimulus program?

It is important to recognize the US Federal Government is just a conduit of the money it collects. It collects funds from various sources and then gives the money to different people and entities through various government spending programs. The Government is not in the business of making a profit, which is obvious considering the current $23 trillion debt (www.gao.gov). It simply collects money and gives it away. Whether it gives it to individuals or entities makes a minimal difference because funds to entities ultimately flow through the entities to individuals such as employees, owners, investors, and vendors.

The COVID-19 stimulus programs gave funds to those in the lower tier of economic status and will ultimately collect funds from those in the upper tier of economic status. The $300 billion used for the $1,200 stimulus checks went to individuals making under $99,000. Obviously, those in the lower tier of economic status received the money from this stimulus program. The question is from whom will the Government collect the $300 billion? Initially, the funds came from government-backed securities. This means the $300 billion stimulus program funds were borrowed from those who purchased the securities. Since the US Government has no savings, funds needed for stimulus programs have to come from either borrowing or raising taxes and fees. The $300 billion was borrowed, which is a debt that will eventually need to be paid back. The US Government will eventually need to collect funds to pay off its creditors.

When the US Government decides to pay off this debt, it will need to decide from whom to collect the funds. There really is only one option, from those in the upper tier of economic status. Of the total funds collected by the Government each year, about 51% comes from income taxes collected from people (45%) and corporations (6%)3. Of the total income taxes collected by the US Government, the top 1% wage earners (1.4 million people) pay 38%, and the top 25% wage earners to pay 86%4 of the total revenue collected. The top 1% earn over $515,000 and the top 25% earn over $84,0005. About 44% of Americans do not pay taxes. Thus, if the $1,200 stimulus check program is paid back by raising income taxes, the top 1% wage earners would pay an additional $114 billion in taxes ($300B x 38%). The top 25% wage earners did not receive a $1,200 stimulus check but may end up paying 86% of the $300 billion. Consequently, $300 billion was given to those making under $99,000, while 86% ($260 billion) will end up being collected from those making over $99,000. Therefore, the stimulus checks alone will create a $260 billion wealth redistribution from those in the upper tier of economic status to those in the lower tier. The other government benefits provided in response to COVID-19 will make the wealth redistribution much higher than $260 billion.

 

Article written by Ronald Myer, President, Summit Advisory Inc.