Arnold Kling  

Who Cares About the Poor?

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Break the Buck!... Murray, Frum, and the Hurrican...

Scott Winship writes,


Whether politicians ignore the poor and pander to the middle class or scare the middle class into thinking they are as bad off as the poor, the result is likely to be the same. Most of our policies will continue to be mis-targeted, as analyses by the Pew Economic Mobility Project and CFED have demonstrated. In turn, they will explode the deficit, leaving less money to promote upward mobility among the poor. And those policies that take the form of tax breaks for investing in savings or education will further price the poor out of markets for mobility-promoting assets--whether higher education or homes--by subsidizing investment the non-poor would have made even without tax incentives. Think "mortgage interest deduction".

This strikes me as a stable political equilibrium. If either political party goes too far in taking away benefits from the affluent and giving more to the poor, the other party will take up the plight of the affluent. The affluent are more numerous and are more likely to vote.

Timothy Taylor has more on the politics of tax reform. We could make our tax system more progressive and more efficient at raising revenue. But it is always in the interest of political entrepreneurs to claim that the affluent are threatened as it is, so we cannot take away their precious mortgage interest deduction or make the tax breaks for education expenses and health insurance less regressive.


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COMMENTS (5 to date)
Chris Koresko writes:

Arnold Kling: This strikes me as a stable political equilibrium. If either political party goes too far in taking away benefits from the affluent and giving more to the poor, the other party will take up the plight of the affluent. The affluent are more numerous and are more likely to vote.

At some point -- I hope -- people will realize how destructive our current tax system is:

* It's so progressive that when combined with widespread, large, means-tested benefits, it makes the marginal tax rate close to unity for a broad swath of the middle class. That means there's no direct material benefit to industriousness.

It also means that if someone whose income falls in that range gets into debt, it's not possible for him to get out of debt by getting a raise or a second job: the government just takes the extra income away. So his only choices are to reduce his already low consumption, or default on the debt. It's a really nasty trap.

* It's also horribly inefficient. I just saw a claim that tax compliance costs our economy about 30% of the total tax revenue, and that's more than we spend on medical care in the U.S.

* It's also horribly unfair. No mortal man can understand the tax code, and yet we are all subject to vigorous and intrusive enforcement of it.

* It's full of target breaks and loopholes for special interests, which (I suspect) is costing us something on the order of the compliance costs again in lost productivity.

Floccina writes:

The irony is that in the end even the middle class do not benefit, they just think that they do. Take schooling, I sent my children to a private school that cost half what my county spends per student (The education may be slightly worse but you cannot tell that by me.) So if we were all charged directly for each child we send to the Government schools we would be better off but try convincing people that charging them is better than them "getting it for free".

Even SS which is a simple transfer may not be so utility maximizing or even neutral. IMO SS has changed our culture such that more older Americans live on their own than otherwise. So a simple transfer from children to their retired parents must produce less utility from some else it would be what the would do absent that program. I think the same is true for medicare and low deductible insurance in general. When we have medicare or low deductible insurance we use more care than we otherwise would and if we are middle class or rich we surely most of us (i.e. those of us without exceptionally high life time medical spending) of us pay the full costs either way.

Here is a related blog entry on my blog:
http://un-thought.blogspot.com/2011/09/why-eliminating-deficit-is-easy-but.html

Thomas DeMeo writes:

The mortgage interest deduction is not good policy, but it is built into real estate valuations and it is significant. The more important public interest is in promoting economically stable real estate valuations. This won't be easy to fix.

mark writes:

Timothy Taylor's post is really good and I hope more people will read it. But, from the chart at the bottom, I took away something different from his intent. The chart at the bottom shows, contrary to his point and popular wisdom, that the lenient treatment of tax expenditures reduces the tax bill of the poorest half of the nation much more, on a percentage basis, than the top half of the nation. If you look at the bar graph, once you are into the third quintile and upwards, tax expenditures represent about 50% of one's taxes (that is, if all tax expenditures were eliminated, the effective tax rate of people in the top three quintiles would increase 50%; said another way, tax breaks cut their taxes by a third). But, if you look at the bottom quintile, tax breaks reduce their effective tax rate from 8% to 0.5%, or about 93% of their taxes are eliminated. The second quintile is also one where tax breaks exceed taxes paid. This is very different from what you would see if you just look at absolute dollars, where you might say "the rich get all the breaks". In fact, on a proportional basis, tax expenditures have pretty much the same effect on rich people's taxes as middle class people's taxes.

Justin Bowen writes:
It also means that if someone whose income falls in that range gets into debt, it's not possible for him to get out of debt by getting a raise or a second job: the government just takes the extra income away. So his only choices are to reduce his already low consumption, or default on the debt. It's a really nasty trap.

Not to take this off-topic, but this paragraph - as well as most of the rest of your comment - could have been written word-for-word about the child support system.

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