Wednesday, December 8, 2010

Who Gets Paid by Big Government?

Copyright, The New York Times Company

One of the myths of big government is that most of its spending goes to the poor.

Last week I examined tax payments by income distribution decile in France and the United States. France’s bottom decile (the 10 percent of French households with the lowest incomes) paid more than half of its income in various taxes, compared with less than 20 percent paid by America’s bottom decile. France’s top decile is taxed at a rate that looks more like the rate in the United States – less than 40 percent.

Taxes help finance, among other things, government transfer payments and other social-welfare expenditures like medical spending. These payments are more generous in France than in the United States, and some of them are received disproportionately by low-income people.

But there are two reasons we cannot immediately conclude that low-income people get their money’s worth from big government that, as in France, takes more than half of their income in various taxes.

First, much social-welfare expenditure goes to the elderly, in the form of public pension benefits and medical spending. Some of the elderly are poor in every sense of the word. Others receiving medical and public pension benefits are only technically poor (by the definition of the tax incidence studies I cited two weeks ago), because they no longer generate income on a job, but enjoy above-average living standards (which they afford by owning their own homes and receiving pension payments from their former employers).

Indeed, the fact that someone has been able to live until her or his elder years may itself be evidence of some amount of affluence: good health is something enjoyed disproportionately by higher-income people.

Public pension benefits have been so generous in France that the elderly have obtained a disproportionate share of the nation’s labor income through the pension system, while France’s young people did a disproportionate amount of the labor.

The amount of public pensions paid has exceeded one-fifth of the nation’s labor income (and this does not even begin to count any private-sector incomes received by elderly people), even when France’s elderly were less than one-fifth of the population.

As a result, the average elderly person in France has a better living standard than the rest of its population does. Even in the United States, the elderly poverty rate is below the poverty rate for other adults and below the poverty rate for children (see page 16 of this Census Bureau publication).

This is not to say to say that the elderly do not deserve their public pension payments, for which they worked many years. But it is incorrect to characterize many payments they receive as payments to poor people (for this reason, a few economists have attempted the difficult exercise of relating taxes and public spending to people’s lifetime incomes).

Second, taxes and transfers cannot be simply subtracted to determine the net position of the poor and other groups vis-à-vis the public treasury, because the government benefits often come with strings attached — that is, because the government spends poor taxpayer money in different ways than the poor would spend it themselves, government spending is less valuable to them than the equivalent number of dollars they may have paid in taxes.

The phenomenon of “topping off” illustrates how higher-income people derive more value from various types of government spending than low-income people do. High-income people seem to value pensions, which is why they “top off” Social Security: they accumulate pensions above and beyond what the government forces them to accumulate though the Social Security system. You might say that pensions are easy to accumulate when your income is high — and that’s the point.

Low-income people, on the other hand, often accumulate no pension beyond what Social Security forces them to accumulate.

That’s why the taxes being paid are that much more burdensome on the poor — snatching money from people trying to pay their bills. Big government is taking money from people when they need it most; what consolation is the promise that government will help out later in life?

Big government leaves both poor and rich taxpayers with less to spend on themselves, and more to be spent at the discretion of big government.

1 comment:

Alessandro Machi said...

There still is a significant amount of consumer debt in the United States, and much of that debt is at very high interest rates.

Instead of focusing the discussion to taxation, why can't the discussion be expanded to include lower interest rates for credit card debtors THAT WANT TO PAY DOWN their debt.

That is key to the point. If lowering interests rates allows millions of americans to lower their debt, they can become mini engines towards rebuilding local economies.