Arnold Kling  

Redistribution vs. Paternalism

PRINT
Giles and Stereotype Accuracy... The Summers Speech...

Tim Worstall argues that big government is not compatible with only taxing the rich.


For the fact is that the rich don't have enough money to pay for all of the things that are being demanded from the State. We can see this quite clearly in the US in the way that things like Social Security and Medicare are funded. They are not paid for out of general tax revenues, not funded by the rich paying more than the poor. Quite the contrary, the poor pay more as a portion of their income for them than do the very rich...I doubt whether Bill Gates even notices his FICA deductions while someone on $10 an hour most definitely does, especially as it's the only tax he is paying.

If you want government to be redistributive, then you want to tax the rich without taxing the middle class. But, Worstall argues, if you want government to be paternalistic, with broad-based programs like Social Security and Medicare, there is not enough money available from the rich to fund such programs.

Notwithstanding the arithmetic, I think that some people believe that we can always enlarge government by raising taxes on the rich.

For Discussion. Does Worstall overstate the incompatibility of redistribution and paternalism?


Comments and Sharing


CATEGORIES: Income Distribution



COMMENTS (18 to date)
KipEsquire writes:
"the poor pay more as a portion of their income for them [Social Security and Medicare] than do the very rich"

This is a total misrepresentation of the issue, at least with respect to Social Security. The Social Security system is, in toto, already an excruciatingly progressive redistributionist scheme. The declining rate of benefit accrual (e.g., someone who earns twice as much wages and pays twice as much FICA taxes receives far less than twice as much Social Security benefits) is an extremely steep progressive income redistribution that totally overwhelms the "regressive" impact of the wage cap (as does the fact that Social Security benefits are now subject to the income tax, which only higher-income households pay anyway). As the cap increases, the progressivity of the entire scheme is of course exacerbated.

Randy writes:

I think he understates the problem. The problem with taxing the upper classes is that they have the power to adjust for higher tax rates. The power to lay off workers, lower wages, raise prices, raise their own salaries, stop expansion, outsource jobs, replace labor with equipment, manipulate the government, etc. You would have to raise taxes very high to compensate for this power to adjust - and if you did, many would simply take their ball and go home. It isn't so much that redistribution and paternalism are incompatible, its that redistribution isn't really possible.

Nigel Kearney writes:

Even worse, the rich could leave the country altogether. Singapore is nice this time of year. And there's less incentive for wealthy people in other countries to move to the U.S.

On top of that, above a certain income the rich don't spend much more money on themselves. They invest most of it. If higher taxes led to the rich spending less on themselves then there might be some real redistribution. But they'd probably just invest less.

Of course, if your real goal is to increase govt revenues and reduce the value of businesses, until the govt can just buy all the businesses, then you wouldn't care about these objections.

Movie Guy writes:

"The problem with taxing the upper classes is that they have the power to adjust for higher tax rates. The power to lay off workers, lower wages, raise prices, raise their own salaries, stop expansion, outsource jobs, replace labor with equipment, manipulate the government, etc."

"Even worse, the rich could leave the country altogether. Singapore is nice this time of year. And there's less incentive for wealthy people in other countries to move to the U.S."
----

My gosh. Is there no end to the extent of how far the "don't touch the rich" whining game will be played out?

Fearing the supposed power of the rich to retaliate takes the cake.

Move to Singapore? Leave the country? I'll help you pack. Move. Take the first flight and don't come back.

We don't need you that badly. I would rather be surrounding by neighbors I can trust.

Social Security, your current whining issue, is nothing more than a whole life insurance program indexed to wages. If you become disabled, the program covers you to a minimum extent. If you stay healthy, you end up with a small permanent flow annuity revenue stream over the remainder of your life.

Stop crying so loudly... It's unbecoming of adults. Particularly adults earning far in excess of $100,000 per year.

Big government? We're not talking about bigger government. You know it, too.

You don't care about the struggling small wage earner workers. You only care about your class of people. Disgusting.

I would be ashamed.

Raising taxes on the rich? What, all of 1% or 2%. Good grief. Such immature whining. The rich will easily make that up with some new tax loophole.

Randy writes:

Movie Guy,

1. I make $40k per year, I just don't believe in theft.

2. You are missing the point. Taxing the rich doesn't really tax the rich - it taxes the poor.

Bob Knaus writes:

Movie Guy - class warfare rhetoric doesn't help the issue much.

I've been many things in my life. Sharecropper, business owner, management consultant, boat captain, now I'm semi-retired at 42. I am Exhibit A for the notion of income mobility, having occupied every quintile (plus negative income a few years) at some point. I don't consider myself to belong to an income-defined "class". I'll wager many Americans feel the same way.

We are a nation of optimists. Most of us know many people outside our "class" as you would define it, and we know that but for the grace of God there go I. Whether that person is above or below our "class". Call it adaptive thinking if you will, we have a tendency to be happy with our current state. You should try it.

I do have a friend or two who practice the politics of envy. I value them for characteristics other than their political judgement. Takes all kinds.

Most of my exposure to the rich has been to the "new rich" who are of the generation that made the money, rather than the "old rich" who inherited it. Again, very American in outlook. These folks are, by and large, just like you and me. Very accessible, very trustworthy, no more foibles than your neighbor next door who's a janitor. They just happened to have a good idea, or good execution, and they profited from it. They can't eat their money, they have to spend it somehow, it's up to you and me to provide them with valuable ways to spend it.

You didn't ask for advice, but I'll give it to you anyway. Take off your classes glasses and make friends with people you wouldn't ordinarily. You'll be surprised at how much you'll learn.

Capt. Bob Knaus
S/V PELLUCID

Lawrance George Lux writes:

Does Worstall overstate the incompatibility of redistribution and paternalism?

His basic emphasis is only misplaced. The fundamental question is: 'Does paternalism actually raise the Living Standard of the Poor?' The Answer remains highly questionable.

I often speculate that Government intervention costs more than potential Private supply of the same Support. It has led me to suggest the nature of Welfare payments should be altered so that the Individual is left with discretionary Power. I think I will develop that Concept at my blog. lgl

Movie Guy writes:

Bob Knaus and others

Let me be very clear. My remarks aren't about envy. Hardly the case, as I will paying the higher taxes without complaint. But if I struck a nerve, so be it. Kindly pull up a chair and let's be honest for a minute.

I am more conservative than you realize. I'm just not oblivious to to the value and "true net cost" of social safety nets in society.

My point is about whether we believe in ANY responsibilities associated with governmental insurance programs designed to serve as social safety nets. Any at all...

The problem with the argument that Arnold has established is where the focus is being placed with regard to Big Government and government spending in general. All too conveniently narrow in my opinion.

Arnold knows very well that the existing Social Security system is based on a pay as you go basis. Current program income pays for the benefit provided to current retirees and disability recipients.

So, let's broaden the argument. Let's cut to the chase. Do Americans, by income class or group, believe in the concept of providing ANY social safety nets to the American society as a whole?

Let's broaden the argument a little further. Do American or American-based corporations and their governing boards believe in the concept of providing ANY governmental social safety nets to the American society as a whole? Do foreign-based corporations operating in America believe in the concept? They represent a growing presence, so their corporate views should be on the table, too. They fund lobbying groups just like the U.S. corporations on matters pertaining to tax code and other government regulations.

So, what are answers? Why aren't these honest questions being put directly on the table? Where are the national news media polls on this central issue?

Where are the truthful blog presentations by those who want to eliminate the very social safety net programs we are discussing? Just the blunt truth, please. No masking, no hiding, no secret agendas, no squirming. Just the bottom line. Where do you stand?

Do you believe in providing ANY social safety nets to the American society as a whole?

Poll groupings and results by secret ballot:

1. Individual/family income below $50,000:
2. Individual/family income below $100,000:
3. Individual/family income above $100,000 to $250,000:
4. Individual/family income above $250,000:
5. Individual/family income above $1,000,000:
6. Corporate boards:
7. Business owners:
9. State government elected officials:
10. County government elected officials:
11. City/town government elected officials:
12. County sheriffs/City police chiefs:
13. Religious ministers:
14. Arnold: (just for fun)

Let's be honest about where we're headed.

Yes, the existing federal and state level social services safety net programs, directly funded by citizen participation or not, will be cut. Cut many times. The programs of Social Security, Medicare, Medicaid, and all other social programs will be cut or "adjusted" a number of times between now and 2015, 2020, and 2030. If some have their way, many or all programs would be eliminated. (I can hear the cheering...)

Fine. There are consequences, though, should the social safety net programs be eliminated or crushed to such levels as to cause lower income citizens substantial difficulty in surviving on a day to day basis. We should be prepared to address those situations. We can not afford to build and operate enough prisons and internment camps to handle the volume of "below the minimum safety net" citizens who resort to crime or homelessness if programs are wiped out. Don't think that we will allow these citizens to linger on the streets. Never happen. Never again. We will sweep them away.

Sometimes one should be careful about what it is that you're asking for or demanding. There are consequences.

Current probable courses of action:

Social Security? Is there any question that the indexing will be switched from wage to price indexing? That is going to happen, once the smoke clears. I don't have a big problem with that, but I do caution that inflation might outrun wages for a couple of decades. Of course, we'll offset that with the Chain Index CPI, won't we?

Private accounts? The current proposal involves substantial transition costs, all of which are unnecessary. Switch over to a Social Security Plus model at minimal cost to the government and improve national savings. The declining benefits in the existing Social Security system will serve as sufficient incentive to eventually abandon it in favor of the new system.

Medicare/Medicaid? I expect major program cuts and restrictions. In the end, the program will only provide coverage for catastrophic major surgery. At worst, the program will vanish. Viagra coverage...you have to be kidding. What a sham.

HUD? Education? They're probably on the way out. Eventually. Too much money.

Tax code? We'll see.

Do you believe that the fairly wealthy ($250,000 -$1,000,000), wealthy ($1,000,000 plus) and corporations/companies would support a flat tax? Say 17% or 22% for individuals. Just a flat tax for those earning over $25,000 or $30,000. No exceptions. No deductions whatsoever. None. A different flat rate for corporations and companies.

I suspect that the answer is NO. Their accountants would go crazy. And would be out of work if a flat tax was enacted into law. My accountant would fall out of his chair.

It is my conclusion that the fairly wealthy and wealthy among our society have no intent to be subjected to such a taxation system. If true, it says much about what our real problem is in our society.

Other federal program cuts and eliminations?

Once we have eliminated most of the social programs, perhaps proper attention will be turned to the rest of the Federal programs and fiscal budget outlays. Without question, there are plenty of nonsocial safety net program cuts and eliminations that should be undertaken in any serious efforts to rein in projected governmental spending. We should be taking $300 billion out of the existing budget each year for the next few budget reviews. The program cuts wouldn't be hard to identify.

Of course, if we were serious about reining in all other forms of government spending and existing tax advantages provided to key income earners (corporate and individual), we probably wouldn't be overly concerned about making a few direct contribution adjustments to an off budget program such as Social Security. Instead, we would be focusing on downsizing Medicare quickly.

Well, except for those individuals who simply hate social safety net programs.

Tim Worstall writes:

I don’t think I overstate it...but I’m also aware that I haven’t covered the whole issue. It was, after all, a short article. I simply found it an interesting concept when I first came across it a few months ago.

For KipEsquire at the top. If we were to leave SS pay outs exactly as they are but finance them with taxation raised only from the rich, would it be more or less redistributive (progressive) than it is now? More so, obviously. OK, can we raise enough from the rich to do that? Probably not. So, the basic thesis seems to stand. We cannot offer big government benefits and also be as redistributive as some might like. I also think that Arnold’s right, and that some don’t quite get it.

To the various people talking about the rich leaving the country. US tax law does not allow you to do that. You pay Uncle Sam wherever in the world you live. Even if you give up citizenship, they still get you...they charge you all the tax you would have paid over the next ten years.

Bob Knaus writes:

Movie Guy - social safety nets have existed for millenia. What is new is their government-administered nature.

That has always been the purpose of burial societies, religious orders, the Oddfellows, charitable organizations, and dozens of other examples. Man is a social animal.

In the small towns and countryside that my grandfather grew up in, you knew every strata of society -- the rich, the poor, the smart, the stupid. You helped them out as best you could. It is a defect of modern society that we stratify ourselves according to income, political orientation, intelligence, and a hundred other traits.

I can tell you plenty of stories to illusrate my thesis. It's how I illustrate all the lessons I try to pass on to others. Stories have morals.

Are government-sponsored safety nets better or worse than the tradtional ones? They are worse in that they are inefficient and involuntary. For fans of freedom and prosperity, these are cardinal sins. They are better in that they are impersonal, you don't have to jump the hurdle of "belonging" to any class other than citizen of the country. Maybe not even that, some nativists will cry!

Old people used to die at home, after moving in with their children, as my grandparents did. Social Security changed this, and resulted in an unforseen one-time bump in the housing stock as grandparents spent their twilight years in their own little homes. Their are lots of unforseen consequences of fiddling with government safety nets. But widespread social unrest seems an unlikely one to me. There aren't enough people who would feel it so grindingly unfair that they would resort to violence.

This kind of talk reminds me of the fundamentalist fulminations that I grew up with, predicting that the social upheavals of the 60's and early 70's marked a sign of the "end times". My parents still believe this, but it just didn't turn out to be true!

Class-based agitation didn't work then, and it won't work now.

Randy writes:

Movie Guy,

A good post - but too long for me to address each issue. So I will focus on a paragraph that seems to summarize your position.

It is my conclusion that the fairly wealthy and wealthy among our society have no intent to be subjected to such a taxation system. If true, it says much about what our real problem is in our society.

Of course not. Why would they? At least 50% of the population think the wealthy have a duty to support them and you expect the wealthy to respond with altruism? It does in fact say much about the real problem in our society.

But LGL asked exactly the right question,

'Does paternalism actually raise the Living Standard of the Poor?'

My belief is that it does not, because I look around and it seems to me that it does not. What I see is people losing jobs, recieving lower wages, and paying higher prices because of progressive taxation - and receiving a government hand out in return. I see a system that creates dependancy and destroys pride. But your point about the negative consequences of removing this system is very valid. The dependancy does exist. The pride is gone. It may be too late to turn it around.

P.S. To all:I would be interested in any studies done on this issue.

James writes:

The answer, I think, is that of course you can finance big government only from the rich, for sufficiently broad definitions of "rich". Simply lower the cutoff point far enough and you get the money you need -- it may need to come down to 100k or 80k or even 50k, but eventually you get enough revenue. It's just a matter of redifining the concept of a flat tax.


In answer to several other posts: I think it was Jefferson who made the point that charity, though respectable, is not and should not be the domain of the government. Thomas Sowell (I think) called "progressive" (redistributive) taxation another form of slavery, which it is -- you take the product of my work and give the benefits to somebody else. I do the work, you get the spoils.

And who was it that said "if you want more of something, subsidize it; if you want less, tax it"? We're subsidizing not saving for retirement, so we'll see more of it.

Now, I'm not saying that all safety nets are evil; in some ways, spending my tax dollars on social programs is like buying a safer neighborhood -- an earlier poster correctly suggested that a complete lack of social programs would result in higher crime rates. But I don't think that dependency is the answer -- Social Security is billed as an "insurance" program, but the fundamental nature of real insurance programs is that some people benefit from it but some do not. Everybody draws from Social Security, provided they make it to retirement age. Parameters need to change to make sure that most people pay a modest, acceptable sum as premium on insurance that if their savings go bust, they won't be completely destitute, instead of getting reamed in their early years to guarantee a benefit until they die.

Movie Guy writes:

Bob Knaus

You failed to acknowledge the role that corporate mobilization has played in reshaping and sometimes harming our communities, particularly smaller communities.

But you answered the question in your own way: "Are government-sponsored safety nets better or worse than the tradtional ones? They are worse in that they are inefficient and involuntary. For fans of freedom and prosperity, these are cardinal sins."

End of story. Your vote is in.

"Their are lots of unforseen consequences of fiddling with government safety nets. But widespread social unrest seems an unlikely one to me. There aren't enough people who would feel it so grindingly unfair that they would resort to violence."

Stay tuned. You will see more theft due to falling income levels. And from some people whom you wouldn't ordinarily expect to fall within such groups of concern.

Movie Guy writes:

Randy

Let me repost my original taxation question:

Do you believe that the fairly wealthy ($250,000 -$1,000,000), wealthy ($1,000,000 plus) and corporations/companies would support a flat tax? Say 17% or 22% for individuals. Just a flat tax for those earning over $25,000 or $30,000. No exceptions. No deductions whatsoever. None. A different flat rate for corporations and companies.

It is my conclusion that the fairly wealthy and wealthy among our society have no intent to be subjected to such a taxation system. If true, it says much about what our real problem is in our society.

Your response:

Of course not. Why would they? At least 50% of the population think the wealthy have a duty to support them and you expect the wealthy to respond with altruism? It does in fact say much about the real problem in our society.

My follow up:

The only logic reason such persons wouldn't jump at the chance to pay taxes at a lower marginal rate is that they and their accounts have already figured how to reduce their net taxes below the 17% threshold. Which raises the issue of how the tax code is structured and to the advantage of whom. This point then leads to legislative lobbying and monies behind such efforts. And so on.

When we shop in the same community, we are obliged to pay the same sales tax rate at the same stores. The clerk doesn't look up and say, "Oh, hi. Yes, let me give you the wealthy purchaser discount of 75% less sales tax."

A flat income tax provides for equal taxation for wage earners. If such an effort results in more income for the government, that's the way it is. Same story for less income. Similar to the current tax rollbacks, by the way.

Let's just stop playing around with the income tax perks, most of which are targeted to very high wage earners and high income families. The perks are nonsense, turned into law by pressures from expensive lobbying efforts.

Movie Guy writes:

Randy

You said:

"What I see is people losing jobs, recieving lower wages, and paying higher prices because of progressive taxation - and receiving a government hand out in return. I see a system that creates dependancy and destroys pride. But your point about the negative consequences of removing this system is very valid. The dependancy does exist. The pride is gone. It may be too late to turn it around."
---

I don't believe that the federal government's entitlement programs and progressive taxation are the primary causes of what you have described. If we were to eliminate both factors (and that's certainly on the table), corporations would still be faced with the labor wage differential, environmental costs, fuel costs, and other factors that go into the "let's go overseas" decisions. The labor wage differential is sufficiently large that overseas production of goods and outsourcing of services are likely to remain factors in our future economy for a long time.

Employment losses or declining real wages in the future, coupled with elimination of governmental social safety nets (minimum programs as opposed to what we have now) will continue to create more problems in our society. Higher productivity always sounds good, but it doesn't necessarily mean in a global competition market that U.S. wages and employment will continue to experience the gains of our past performance. We're competing against workers and standards of living in nations far from our shores in many instances. Our transnational corporations have no overriding loyalty to our citizens, and many would say that the corporations should not have any loyalty to American workers.

Essentially we are becoming the Merchant Princes and serfs described in Isaac Asimov's Foundation trilogy. We have primarily hitched our wagon to becoming salesmen. With few exceptions, we are sacrificing other skills due to non-use. Sure, there are exceptions, but the list is shortening. Sales and services in local communities is the only viable avenue for meaningful, stable future employment for the masses that I see. Start your own business and stick with it if you want a stable existence once you find a community that you like. Dump the corporate route unless you are willing to be displaced many times over a period of 20-30 years.

Our pride will grow once we are forced to be more self reliant. But the financial losses will be felt or substituted much in the way that the Chain Index CPI makes actual goods and products inflation rates look smaller.

We'll get through this. Have faith.

Movie Guy writes:

James

You said:

"Everybody draws from Social Security, provided they make it to retirement age."


Actually, that's inaccurate. A person has to apply for Social Security benefits. You have to raise your hand. Fill out forms and so on. A person has to be evaluated and qualify in order to receive benefits.

So, the wealthy recipients of Social Security must be raising their hands. Odd, that. Of course, the answer is probably simple: We're entitled to the money.

Yes, Social Security is an insurance program. No, it's not an investment program, nor was it designed to be one.

Ask any disabled worker or citizen who qualified for Social Security disability if it isn't an insurance program.

Social Security works like whole life insurance in some respects.

Dezakin writes:

Tim certainly doesn't understate the incompatibility of redistributionalism vs paternalism... If only the rich, say those who made over 200k per year, paid a whopping 75% on the margin, you still wouldn't have enough revenues to pay for the Great Society.

I favor taxing only the rich at a modest 25% above 200k, both as a means to cut spending and to drive economic growth: The poor and middle class consume more.

We need a government, and we need to fund a government, and honestly, the rich feel the pain of funding government the least. All the platitudes of taxation being theft and taxing the poor is fair is neither utilitarian nor idealistic; Unless the ideal is neo-fuedalism.

Randy writes:

Movie Guy,

We'll get through this. Have faith.

The worst case scenario is the arrival of the next depression in a society that has become dependant on a social services network brought about by the last depression. That network may very well collapse in the next depression. It is dependant on taxing the rich, foreign investment, and forced borrowing from working people. Imagine the result if the revenue from these sources were reduced by 25-30% within the course of a few months.

There won't be another depression? History says otherwise.

Contrary to popular belief, it wasn't FDR's New Deal that saved that generation, it was their strength and pride. What happens to a generation with neither?

P.S. Have you ever considered that the greatest thing about Social Security (for the government), is that it is a loan that the lenders cannot refuse and the borrower has no real obligation to repay? Want to save Social Security? Just default on some Treasury Bills. Won't happen will it - because a primary purpose of Social Security is to keep the government from defaulting on Treasury Bills.

Comments for this entry have been closed
Return to top