Is the tea party to blame for the downgrade of U.S. credit? Or perhaps President Obama? Try “the increasingly progressive nature of the federal income tax system.” A new working paper from two economists has the details.

Jody Lipford (Presbyterian College) and Bruce Yandle (Clemson University) take a look at several related topics: the thoughts of some of our early political leaders, the tragedy of the commons as applied to U.S. finances, Milton Friedman’s idea for welfare spending, the shrinking federal tax base, the rise of entitlement spending, and more, in their 31 page paper. It’s an interesting marriage of the tools of political science (which emphasizes the importance of political institutions in shaping policy outcomes), with some economic analysis thrown in.

The authors start out talking about James Madison (father of the Constitution) and James C. Calhoun (a leading senator from the early 19th century). Both were concerned about how to reconcile two competing notions: giving people some say over the laws that govern them, and making sure that the majority do not oppress the minority, especially in a way that makes the institution of government unsustainable.

Madison was concerned that a “universality of suffrage” could lead to “a dependence of an increasing number on the wealth of a few.” For his part, Calhoun wrote about the inevitable division of the population into “taxpayers and tax consumers.”

Writing much later (1962), Milton Friedman proposed a “negative income tax” (think of today’s Earned Income Tax Credit, but simplified) to replace the large number of welfare programs. He recognized the same problem that Madison and Calhoun noticed. He worried that the negative income tax might “be converted into [an arrangement] under which a majority imposes taxes for its own benefit on an unwilling minority.”

The problem noticed by Madison, Calhoun, and Friedman is not merely political. It’s economic as well. (Credit downgrading of the U.S. government, anyone?) Lipford and Yandle invoke one of the key items in environmental economics, “the tragedy of the commons,” to describe the financial risks of democracy: “In terms of economic theory, the budget has become a ‘commons’ and is subject to the tragedies of overuse and abuse.”

What is the tragedy of the commons? In the late 1968, Garret Hardin coined the term. A wikipedia entry sums up the concept nicely, calling it “a dilemma arising from the situation in which multiple individuals, acting independently and rationally consulting their own self-interest, will ultimately deplete a shared limited resource, even when it is clear that it is not in anyone’s long-term interest for this to happen.” Hardin was talking about the natural environment, but the term works pretty well if you think of the fiscal health of the nation as a commons, too.

So what has been the fate of the commons?

Federal spending, especially on entitlement programs, has exploded in recent decades. In 1962, “income security, labor services, health, and Social Security” took up 23 percent of the federal budget in 1962, but 61 percent in 2010.

Not only has the type of federal spending changed, so has the nature of the federal tax system. It has become more and more skewed: An ever-larger portion of the burden is carried by a small number of people, while more and more people carry, on balance, no burden. It’s certainly a politically popular move: Who doesn’t like “free stuff” and making someone else pay for it? Even “conservative” George W. Bush followed this logic, boasting that his income tax cuts wiped out federal income tax liability for millions of people.

In 1979, the top 10 percent of households (in terms of income) paid 41 percent of all federal taxes, and 48 percent of all income taxes. By 2007, the numbers were 55 and 72 percent, respectively. Starting in 1995 and continuing to this day, the bottom 40 percent receive more in federal benefits than they pay in income taxes. It’s not simply that they don’t earn enough to face a tax burden; we have (witness Bush) decided to reduce their obligations in law.

Federal tax receipts have, with minor exceptions, stayed at 21 percent of GDP over time, meaning that the increase in spending has had to be financed through increased debt. In 1979, federal debt was about 41 percent of GDP; in 2007 it was about 65 percent, and of course now, it’s an even higher number.

A sentence from the summary of the paper does a good job of telling us where we are and how we got here:

“As the distribution of tax liability has become more intensified on those with high incomes … the U.S. debt-GDP ratio has risen [translation: a sea of red ink is covering the nation], as have the ratios of entitlement spending to GDP and the total budget.”

“The decreasing share of tax liability borne by low-income households and the increasing share of tax liability borne by high income households is clearly associated with higher government debt and more entitlement spending ….”

As any student of statistics 101 will tell you, correlation of numbers does not prove causation.  The authors acknowledge that. But they also sketch out a theoretical reason why the numbers are the way they are (causation), and I believe they’re right.

So what should we do now? The authors say, “These results support the contention that if the U.S. is to get its fiscal house in order, the tax law will have to be changed to broaden the base, just as President Obama’s deficit reduction commission has argued.”

It’s not the only thing that should happen. I’d prefer some other steps (such as Medicare reform along the lines proposed by Paul Ryan) to restrain spending increases. But as Lipford and Yandle suggest, making sure that more people interact with the IRS — not just to receive a check, but to pay taxes — is a key to our national fiscal health.

Related: see yesterday’s commentary on the government spending bubble.