Bryan Caplan  

The Inanity of the Welfare State

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When most people stare at this table (courtesy of Greg Mankiw), they see strong evidence that the U.S. tax system is highly progressive.
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If you calmly peruse the table, however, a stranger pattern emerges - a pattern neither liberals nor conservatives will expect.  Look closely.  While taxes are highly progressive, transfers have an upside-down U-shape.  Households in the middle quintile get the most money.  The richest households actually get more money than the poorest.  Think about how many times you've heard about government's great mission to "help the poor."  Could there be any clearer evidence that such claims are mythology?*

If government really wanted to help the poor, it wouldn't tax everyone to fund everyone.  It would raise only taxes required to help the genuinely poor, then say "mission accomplished."  Relative to the status quo, that means big tax cuts and stringent means-testing.  Picture a world where the lowest quintile continues to receive whatever it gets now, all other quintiles get zero, and the government refunds all the savings with tax cuts.  Then ask yourself, "Why not?"

* Yes, I know that rich households have more people, but the basic pattern remains.


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COMMENTS (19 to date)
Randall Parker writes:

What form are these transfers taking? To put it another way, how is the household that is earning $50k per year getting $16k in transfers? For what?

This doesn't sound feasible unless these are retirees using Medicare while getting private pensions and Social Security.

DangerMan writes:

Taxing the middle class provides extremely important political cover for transfers:

"I PAID for my benefits!"

Nathan Becker writes:

Federal Taxes for Revenue has been Obsolete for over 80 years now. Written 80 years ago

What Taxes Are Really For

Federal taxes can be made to serve four principal purposes of a social and economic character. These purposes are:
1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;

3. To express public policy in subsidizing or in penalizing various industries and economic groups;

4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.

Tom writes:

Randall Parker has nailed it. Bryan has simply misunderstood the table. This table tells you nothing specifically about welfare. The government transfers line is mostly Medicare and Social Security, which of course pay to all quintiles.

Also the table itself is somewhat misleading. Effective federal tax rates are actually a crooked bell curve that peaks within the top quintile and slopes downward again as you move from highly paid professionals to capitalists.

DangerMan writes:

"This table tells you nothing specifically about welfare. The government transfers line is mostly Medicare and Social Security, which of course pay to all quintiles."

See, told ya.

Bryan writes:

Medicare and SS can certainly be considered "welfare." They are certainly large budget items.

I'd be interested in what is missing (i.e. what programs aren't included in the transfers line and how they compare to Medicare and SS).

AS writes:

@Nathan, that is one theory, but I think many people would agree that revenues should match taxes to some extent. Otherwise two bad things happen: (1) It is too easy for government to overspend on wasteful activities if not bound by revenues, and (2) overspending is paid for via an inflation tax i.e. printing money. This chart really needs to include the inflation tax too to be more accurate.

Floccina writes:

Politicians are experienced paid professional voters are rationally ignorant. With that as it is things turn out as one would expect.

BTW the public schools should be included in welfare. They exists because the voters think that the welfare of poor people's children requires it.

Floccina writes:

Tom and Randle how are SS and medicare not welfare programs? They exists because voters are afraid that if they do not some people will not fare well in old age.

SS is a welfare program that was disguised as a Ponzi scheme to make it more palatable to the voters.

But for incentive reasons I think that SS should not be means tested but that everyone should get the same amount in retirement.

Cody writes:

I guess I'm confused. Total transfers does have an upside down U but transfer per dollar of taxes paid is exactly how you would expect, and isn't that metric more important? The poor receive much more per dollar paid into the system than the rich.

Charley Hooper writes:

I was just reading about this last night in Alan Greenspan's book, The Map and The Territory.

In 1983, Greenspan was part of the task force looking at how to shore up Social Security. Greenspan thought that the group would be averse to raising SS taxes or cutting SS benefits, and that the solution chosen would be to raid the Treasury.

Claude Pepper, (D, Florida), a huge proponent of SS, was indignant. He argued that such an action would brand SS as "welfare" and therefore taint it.

Even today, in its promotional literature, AARP has a retiree stating, "I earned my Medicare and Social Security."

MikeP writes:

Social Security and Medicare take 15% of the first dollar and every dollar earned by 18 year olds and transfer it directly to the richest age cohort. And all so the actually poor elderly can pretend they are not on welfare.

Complete abominations.

MikeDC writes:

In practice, isn't the tax system de facto means testing? I believe this table, derived from the posted one, is the obvious rebuttal:

	1st	             2nd          3rd	             4th	5th
G	 $9,100 	 $15,700 	 $16,500 	 $14,100 	 $11,000 
T	 $500   	 $3,200 	 $7,400 	 $14,800 	 $57,500 
G-T	 $8,600 	 $12,500 	 $9,100 	 $(700)  	 $(46,500)

Yes, you get a bump at the 2nd Quintile, which is readily understandable in terms of the goal to not totally kill marginal tax rates.

But otherwise, this is the means tested result. The poor are net recipients and the rich are net payers.

Now, the real kicker... a system of means testing benefits entirely separate from means testing taxes is less efficient than the current system in practice.

Why spend the time and effort designing a means testing scheme for, say, Social Security payments, when the tax system already claws back a big chunk of the wealthy's social security benefit.

And, while it might seem inefficient to cut a Social Security check to Thurston Howell III every month and then have him cut one right back every quarter in taxes, the benefit itself acts as insurance for the many folks who are wealthy but not Thurston Howell III.

Suppose we have another major recession and fixed income funds and job opportunities crash. The current system automatically handles this. The old folks get their SS checks and simply end up paying less in taxes.

Under some sort of direct means testing program, these folks would be in for a major hassle, since they would both have to apply for benefits (costly and embarrassing) and a means-testing program would likely have to be smart enough to figure out that their historical income pattern wasn't going to carry forward for the short term.

Such a system would be an absolutely pointless and expensive disaster, while the current system achieves pretty much the same result without causing chaos.

Ryan Murphy writes:

I thought that there was talk that increasing transfers to the lowest quintile would require a significant increase in transfers to the middle class because otherwise many people would be facing implicit marginal income tax rates of 100%.

Social security and medicare are so ingrained in the culture that nearly all rank-and-file Republicans get viciously angry if you even bring up cutting them or means-testing them.

So, if you control for age, I would be very surprised if you didn't see a monotonic relationship between transfers and quintile. And we would probably need to have some amount of transfers to the second quintile if we want to keep the level of transfers to the lowest quintile where it is right now. There were low hanging fruits for issues like these back in like 1980 but I'm skeptical of how many there still are today, setting aside making Obamacare less bad perhaps.

Mark V Anderson writes:
Also the table itself is somewhat misleading. Effective federal tax rates are actually a crooked bell curve that peaks within the top quintile and slopes downward again as you move from highly paid professionals to capitalists.

It is true that the very top bracket dips slightly at the highest income, but not that much, and only when you are very high. I did an analysis of the 2008 individual tax statistics. The top effective rate is at 25.26% for those between $1.5 million and $2 million, and then it dips to 21.12% for those over $10 million. Those over $10 million are above those that are $200k-500k.

Tom writes:

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Cameron M writes:

"The richest households actually get more money than the poorest. Think about how many times you've heard about government's great mission to "help the poor." Could there be any clearer evidence that such claims are mythology?*"

Completely agree. The poor act as the foundation on which those households in the upper quintiles might establish their wealth (especially truer the higher up you go). The composition of these payment transfers act as yet another smokescreen
to hide this innate foundation of thriving capitalism. Within the confines of this syster, economic prosperity exists only in the presence of (whether it be at home or abroad) ceaseless poverty amongst a sizable portion of the population.

Under the pretenses of complementary government spending designed to bring about reform to prevent and/or combat conditions more susceptible to poverty, then i would agree with your latter proposed notion. However, the required radical ideological shift contradicts that upon which modern day society has been built. Ipso facto, totally infeasible . . .

Scott Freelander writes:

Bryan,

Or, instead of only giving the poor what they get now, we can give them more, at the expense of those at the top and in the middle.

MikeDC writes:

"The richest households actually get more money than the poorest.

But they clearly do not! If you put $5 in my left pocket while taking $10 from my right, you have in no meaningful way given me any money. You've taken $5. That is all.

Completely agree.

Why? This seems completely myopic.

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