Tag: transfer payments

Lindbeck’s Law: The Self-Destructive Nature of Expanding Government Benefits

Relevant foresight from Swedish economist Assar Lindbeck, “Hazardous Welfare State Dynamics,” American Economic Review, May 1995:

The basic dilemma of the welfare state …  is that the more generous the benefits, the greater will be not only the tax distortions but also, because of moral hazard and benefit cheating, the number of beneficiaries. This is a field where Say’s Law certainly holds in the long run: the supply of benefits creates its own demand… .

Serious benefit-dependency, or ‘learned helplessness’, may … emerge only in a long-run perspective. Possible examples of such gradual adjustments are an increased tendency to apply for social assistance, less job search and greater choosiness among unemployed workers, more absence from work for alleged health reasons, more applications for (subsidized) early retirement due to alleged inability to work, and more time and effort devoted to tax avoidance and tax evasion.

P.S. A 2007 empirical study by Friedrich Heinemann supported Linbeck’s hypothesis, finding that “transfer expansion or increasing unemployment tend to be associated with a larger readiness of the country’s population to cheat on benefits.”

Subsidies and Votes — in India and the United States

When Americans suggest that government transfer programs might affect the way people vote, the mainstream media react with the indignation that greeted Mitt Romney’s “47 percent” comment. Of course, in other contexts the media certainly know that programs like Social Security, Medicare, and farm subsidies impact voting, but Republicans seem to get pounded for making that point.

But when it comes to other democracies, such as India, journalists don’t seem to have any trouble seeing the electoral advantages of government spending. Jim Yardley reports from India for the New York Times:

Frustrated by delays in Parliament, and eager to gain favor with rural voters ahead of national elections, India’s cabinet has approved a sweeping executive order that establishes a legal right to food and will create what is likely to be the world’s largest food subsidy system for the poor….

For the governing Congress Party, the new ordinance fulfills a campaign pledge made by Mrs. Gandhi and provides her party with something tangible to offer voters as the country prepares for national elections next year. The coalition government has been battered by corruption scandals and a sinking economy. With polls suggesting a loss of public support for the Congress Party, the food ordinance is good politics, some analysts say, if uncertain economics.

I noted a few months ago that the Washington Post had made a similar point:

Trying to rekindle the fire of India’s economy, Finance Minister P. Chidambaram promised Thursday to rein in a runaway deficit even as he raised spending on welfare schemes that the government hopes will woo voters in elections scheduled for next year….

“The finance minister faced two counter-veiling pressures: to present a populist, voter-friendly budget and also control the huge fiscal deficit,” said Vir Sanghvi, a political analyst. “What he presented was a ‘this-is-the-best-we-can-manage-under-the-circumstances’ kind of a budget. . . . He is hoping that the economy will improve and prices will come down by the time of the election. That is a big political gamble.”

Chidambaram promised to increase spending on rural welfare schemes, rural roads and jobs, food guarantees for the poor, women’s safety programs, tax breaks on loans for first-time home buyers and a women’s bank.

Is it really so hard to imagine that American politicians might also see transfer programs as measures that would benefit them on election day? Of course, the more fundamental impact of transfer programs may be to make both parties afraid to cut spending. What politician in either party wants to propose cuts in Social Security, Medicare, student loans, or farm subsidies? It’s not that transfer recipients all vote for the same party; it’s just that both parties fear the loss of votes if they interfered with the flow of subsidies. And not just in India.

President Obama’s Dubious Claims about Incomes of the Top 1% vs. the Bottom 90%

“In the last decade, the average income of the bottom 90 percent of all working Americans actually declined,” Obama said on April 13. “The top 1 percent saw their income rise by an average of more than a quarter of a million dollars each.”

Politi-Fact, partly on the basis of my own research, generously rates the president’s claim as “Half True.”

The truth is that the President’s source, Thomas Piketty and Emmanuel Saez, refer only to pretax, pretransfer income reported on individual tax returns (as opposed to being sheltered inside a corporation or IRA or simply unreported), and they have no data on the bottom 90%. Worst of all, they leave out transfer payments, which amounted to $2.3 trillion last year — 44% as large as all private wages and salaries ($5.2 trillion). The data also excludes refundable tax credits, which added about $170 billion to low and middle incomes in 2009 according to the the Joint Committee on Taxation (the EITC, child credit and Obama’s “making work pay” credit). And the Bureau of Economic Analysis estimates that gross income reported on tax returns is about $1 trillion less than actual income.

As for the top 1%, my research shows that top investors report more capital gains and dividends when those tax rates go down, which is why they paid such a big share of income taxes (up to 40%) in 1997-2000 and 2003-2007.  Raise the tax on dividends and capital gains to 23.8%, as Obama hopes to do by 2014, and somebody else would have to pay the taxes now paid by the top 1%. Using income reported to the IRS to measure actual living standards is foolhardy at best.

Tax Cuts vs. Government Checks … NRO Conclusion and Correction

VerBruggen signs off on the tax cut/government check debate by doubling down on the core issue; he believes that there is no meaningful difference between government spending and a tax cut.  I will quote him in full: “If some libertarians want to keep insisting that there’s a meaningful difference between (A) the government spending $500 on something and (B) a person “donating” $500 to that thing and then getting a $500 break on his taxes in return, there’s nothing I can do to stop them.”

In this, he has the company of the 9th Circuit and the Progressive wing of SCOTUS.

VerBruggen has also rightly asked for a correction to one of the numerous quotes I pulled from his blog posts on tax cuts vs government spending. I thank him sincerely for reading through to the end of my interminable post. The correct quote is below, with the omitted, qualifying language in italics, a new note on charitable giving and government spending, and my otherwise unchanged commentary:

He insists that “much (most?) deducted charity spending does not offset government spending in the slightest,” yet also agrees that “voucherizing the tax subsidies for charity would remove the incentive to donate” to the range of charitable and social welfare activities the government supports. [Note: There is much evidence that government spending on “charity” crowds out charitable giving. And most, not to mention much, charitable giving in the U.S. is devoted to health, educational, social welfare and religious organizations which in turn focus on assistance to the poor, health and educational activities. Needless to say, the government is deeply involved in health, education and welfare spending. See the index of Arthur Brooks’ fascinating book, Who Really Cares, for more details.]

Charity does not reduce pressure on the welfare state? The billions of dollars donated to health, education, welfare … these offset nothing in the public sector? In the absence of tax expenditures for employer-provided health care, how likely is it that the U.S. would have retained a relatively robust private medical market?

The charitable deduction allows the people who earned the money our governments spend on public “charity” to keep some portion of what the government would otherwise have spent on government “charity” or some other wasteful project.

If VerBruggen is concerned that the tax burden will marginally increase on some citizen as the result of another’s charitable deduction then the answer is to balance that lost revenue with a reduction in government “charity,” not to eliminate the deduction.

Perhaps most concerning is VerBruggen’s breezy assumption that all income belongs to the government. He insists that “taxpayer money is already allocated” in the form of deductions for charity, and therefore that “voucherizing the total amount of the deductions wouldn’t change that …”

Really? Tax credits and deductions belong to the taxpayer who earned them. They are not government funds; that is a legal and logical statement. To insist otherwise is to argue that all income is the governments, and what it does not claim is ours. The money that a taxpayer spends is HIS money, not the government’s.

And, as is noted above, voucherizing charitable deductions will convert a huge portion into direct welfare payments and eliminate the core of the charitable act; giving away one’s own money.