Bryan Caplan  

Means-Testing Really Is Relatively Awesome

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David's not convinced by my case for means-testing.  I'd like to reply to his objections, point-by-point:
1. The phase-out issue.
Bryan recognizes that you wouldn't want to give benefits below income threshold x and then zero benefits to people above that threshold... So what's the alternative? Phase out the benefit over some income range... Take Bryan's proposal of giving a benefit to the bottom decile and then phasing it out over the next decile. Let's say the benefit is a $5,000 government check. Just eye-balling the data, I estimate that the bottom decile (about 8 million families) in 2008 had income between $0 and $17,500 and the second from the bottom decile had income from $17,500 to about $28,500. So that's $11,000 of income over which to phase out a $5,000 benefit. The implicit marginal tax rate from that phase-out alone is, therefore, $5,000/$11,000 or 45%. That's on top of other tax rates.
This isn't nearly as bad as it seems. 

First, marginal rates on the poor are relatively low, so even a 45-percentage-point boost leaves tolerable work incentives. 

Second, as free-market people rightly emphasize, most people in the bottom quintile don't stay there for long.  One of the main payoffs people in low-paid jobs get, in fact, is upward mobility; by putting their foot on the first rung of the economic ladder, they have a much better chance of graduating to a much better life.  Since this massive hidden benefit would remain untaxed under means-testing, there would still be decent work incentives for people in the second-to-last decile (and even the bottom decile).

Third, to be brutally blunt, the lower deciles don't contribute that much to the economy, anyway.  Suppose means-testing led half of the second decile to stop working.  That destroys a lot less value than higher overall taxes that lead to 5% less work effort across the entire income distribution. 

2. What are means?
Without exception, every time I've seen someone advocate means testing, he uses income as his measure of means. This completely ignores wealth... Therefore means testing would discriminate in favor of wealthy people with low income. Because the most expensive programs for which means testing is advocated tend to be for the elderly, this is an even bigger problem. Among the retired population, the correlation between income and wealth is even weaker, I believe, than among the population in general.
Actually, Medicaid already means-tests funding for nursing homes on the basis of assets as well as income.  There's no reason this practice couldn't be broadly extended.
3. The fairness issue.
Again, because the programs at issue tend to be for the elderly, there can be huge differences in income because one family saved a large percent over the years, and is earning interest and dividends on that income, and the other family saved 0 and relies on Social Security. This could be so even though the two families had a similar age-earnings profile. It's unfair. I know that the program per se is unfair, with or without means testing, but this one seems particularly unfair.
Think about it this way: Universal programs are basically just (means-tested programs + accounting fiction + waste).  There's almost always some genuine redistribution.   But to preserve the illusion of universality, universal programs primarily take money from the non-poor, waste some resources in administration, then return the remainder.  I don't see how the accounting fiction and waste make means-testing "fairer" for the non-poor.  Indeed, don't they just add insult to injury?

Of course, I'd rather just abolish the welfare state.  I suspect David agrees.  But as long as the welfare state is around, means-testing is a common-sense way to keep it under control.

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COMMENTS (9 to date)
Matthew Gunn writes:

On the topic of means testing, there was a long standing debate between Milton Friedman and Gary Becker over whether vouchers (eg. health care, education) should be given to everybody or only given to the poor.

As I recall, Becker wanted to only give vouchers to the poor and limit direct government interference in markets while Friedman wanted universal vouchers, arguing that programs only for poor people were poor programs. Neither Friedman nor Becker could ever convince the other.

Ilya writes:

Should that second decile stop working, the immediate outcome is sharply increased welfare costs (even in a relatively unsupportive system such as the US), reduced social cohesion and increased inequality, both leading to major political economy problems, and a decrease not increase in social mobility. Does not look that great to me...

Randy writes:

Means tested programs have the advantage of placing those who collect in opposition to the larger part of the electorate. They are thus inherently controlled. Universal programs, which do exactly the opposite, are inherently uncontrolled.

As for the wealth vs income issue, I see no reason why wealth should not be considered in means testing (e.g., home equity above a certain amount).

Blackadder writes:

Another point is that Medicare and Social Security benefits are typically received many years after the work by which they accrue. Given the high rate of discounting most people engage in, it's hard to see how adjusting the amount of the benefit would have a substantial effect on incentives.

Pat writes:

Pointing out that lower deciles don't contribute much to the economy isn't blunt, it's painfully obvious by definition. (They wouldn't be in the lowest 10% of income if they contributed more to the economy.) We should want the entire distribution to move to the right. High marginal rates on the poorest people doesn't accomplish that.

floccina writes:

Almost no one thinks you should be legally required to financially assist your relatives - even your indigent parents who raised you.

And yet we are required to financially assist your parents through SS.

I think that an argument can be made for Gov. forced or provided insurance thus my plan would be to give everyone the same minimal SS payment in old age. On the same grounds I could see allowing the government to provide true health insurance. By true health insurance I mean insurance with a very high deductible. (My compromise health insurance plan would be to have gov provide health insurance with a deductible equal last years adjusted income minus the poverty level income.)

On the other hand I think that Gov provided school should be means tested by charging most people for Gov. schools. The government schools seem very inefficient and so to pay for middle-class and rich people's children's schooling through taxes seems like a huge waste. IMO we really need to encourage middle-class and rich to take their children out of the inefficient Government schools.

tom writes:

Against what Blackadder and Bryan are saying, isn't means-testing the ultimate form of discouraging earning and savings?

Increasing marginal income tax rates discourages people from earning more income. But means-testing huge retirement and medical care benefits discourages people from accumulating capital and encourages them to hide/divest themselves of whatever they have. Isn't that much more destructive?

People with multiple kids already go through this worry on college financing assistance, and older people go through it with residential care (as Bryan noted). But it seems very risky to make every big risk in life (the main retirement income program, the main retirement nursing home program, college tuition, real estate financing) into a High-Low poker game where most everyone will want to go Low.

Steve writes:

My understanding is that the marginal tax rates on the poor are already very high. Social security and medicaid are about 10%, the phase out on the EITC is around 20%, if the health care bill passed you lose 22%, this would add 45%, and then there are other benefits you lose like food stamps.

Dan Weber writes:

Actually, Medicaid already means-tests funding for nursing homes on the basis of assets as well as income. There's no reason this practice couldn't be broadly extended.

This sounds horrible to me. It shouldn't be anybody's business what my assets are.

I'll repeat my suggestion: make a finitely-budgeted Medicare available to everyone, but give a small tax credit to anyone who gets out.

This means that the Medicare administrators don't have to look at my income or, even worse, my assets to decide if I "deserve" their help.

You wouldn't have the upper-class in it anyway, because they wouldn't want to be limited to a finitely-budgeted Medicare. But anyone would have it available at the drop of a hat, so your middle-class family that suddenly goes through a layoff could easily hop back into it.

Phil Greenspun wrote about ideas like this over 10 years ago and there's a lot to go for them. I'm not sure it would work with food, but it could work for medical care and housing.

If I were to try to put this into two short sentences, let me try this:

Success should not cut you off from a social program. Success should make you want to leave the social program.
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