Better Than Taxes

In the course of a recent post on Warren Buffett and the Efficient Market Hypothesis, Scott Sumner made the following aside:

Bill Gates essentially taxed middle class consumers all over the developed world, and is giving almost all of the money to the disadvantged in poor countries. That’s something governments don’t do, and yet for his “monopoly profits” he is despised by many on the left.

This prompted a hearty Amen from Arnold Kling, who added:

There is a huge contest going on between politicians and rich people over who should get to spend their money. Most of us have no direct stake in the outcome–as neither politicians nor rich people, we will not have the choice.

But I think we really ought to be rooting for the rich people. That is, we should root for lower taxes and less government spending. Government is one of the worst charities in the world. It advertises that it is going to give money to worthy causes, but very little money goes to programs that are aimed at people in need, and not many of those programs hit their targets. All of the bleeding hearts who are thrilled by the idea of government closing tax loopholes and taking more money from rich people should do an empirical analysis of who benefits from government spending and who benefits from the spending of rich people.

I’m not aware of any empirical analysis comparing the results of private charity versus government spending, but I suspect Kling is right that, dollar for dollar, you get more bang for your buck from private charitable spending than you do from government spending. If your average rich guy decides he wants to give away his money in the most beneficial way possible, he’s probably not going to just give it to the government, and I don’t think that’s just because he’s being foolish.

The Regressive Welfare State

Let’s start with what I would expect is an uncontroversial sounding principle (call it the progressive principle): if the government is going to run a social assistance program, the average income of the people paying for the program should be higher than the average income of the people benefiting from the program.

The justification for this principle is, as I say, common sensical. Most people support the idea of redistribution, but it’s usually redistribution from the rich to the poor that they have in mind. Redistribution from the poor to the rich (or from the poor to the poor) would, I think, strike most people as perverse. Yet the odd thing is that quite a large portion of the modern “social assistance state” violates this very principle. Both Medicare and Social Security, for example, involve redistribution not to the poor, but to the old, who are statistically speaking much wealthier than the average American (here is one analysis of the question regarding Social Security; I’m confident that if you ran the numbers for Medicare you’d get the same result). Not only that, but the funding for Social Security and Medicare comes mainly from taxes that are highly regressive. Similarly, funding for education tends to be only slightly progressive at best, and in many cases (such as funding for higher education) is downright regressive. Much of the funding for public schools comes from property taxes, which means that the people paying for the schooling (either directly or indirectly in the form of increased rents) are the same people getting the benefits from the schools. An increasing proportion of education spending, however, comes from state taxes, which as Ezra Klein notes, tend to be regressive overall. Indeed, a recent trend has been to use revenues from state lotteries (a particularly egregious form of regressive taxation) as a source of education funding. Thus you have a strange situation of states bragging about taking money from the poor to improve the educational experiences of the well to do.

I could go on, but you get the idea.

If we want to reform the social assistance state to bring it in line with the progressive principle, we have two options: we can change the structure of benefits or we can change the structure of how those benefits are funded. For things like Social Security and Medicare, changing the benefits would mean instituting some sort of means testing, to ensure that people aren’t receiving government assistance if they don’t actually need it. The typical argument against means testing is that it will erode public support for the programs. If the wealthy don’t themselves benefit from a program, it is argued, they will agitate for it to be abolished. The problem with this argument is that it has almost no empirical support. We don’t send food stamps to Bill Gates, yet somehow the food stamps program has not been eliminated. Social security remains popular in countries where benefits are means tested (like Australia), and do not seem to be in any danger of being repealed on that account. And if the argument were really true, then it would be hard to see how any attempt to make the funding of these programs more progressive wouldn’t be doomed to failure.

For reasons that I don’t quite fully understand, many people would prefer to keep paying benefits to the rich, while raising their taxes even more to do so. I’m not opposed on principle to the idea of making taxes more progressive, but realistically there are limits to how far one can go with this. States didn’t resort to lotteries because they hate the poor or are just dumb. They did it because there is a wide spread anti-tax sentiment in this country, and that isn’t likely to change soon. Even discounting issues of political viability, it really is the case that higher taxes discourage productivity and growth, and these effects are only going to increase as a global economy makes it easy to move capital from one country to another (one reason, I suspect, that state taxes are so much less progressive than federal taxes is the ease of moving from one state to another). I would therefore submit that if a progressive social assistance state is your goal, it’s going to have to come largely by means testing benefits rather than by raising taxes on the rich.

The Tax Man Cometh

A couple of things here.

First, note the lyrics “There’s one for you/Nineteen for me,” and “Should five percent/Appear too small/Be thankful I don’t/Take it all.” Unbelievable as it may now seem, the marginal tax rate in Britain at the time was 95% (and the American rate wasn’t much lower). Today no country has marginal rates anywhere near that high (so quit yer complainin’ – things could be a lot worse!)

Should The Government Stop Dumping Money Into a Giant Hole?

From the Onion (there’s a bad word used towards the beginning, but otherwise it’s safe). It’s a pretty effective parody, I think (I particularly liked the bit about “personal money holes”). But it did get me thinking: suppose that the government were to dump gasoline on a bunch of dollar bills in a giant hole and then just set it on fire.

Two Ways to Help Poor and Low Wage Workers

Suppose that an employer pays some or all of his workers the minimum wage. If the minimum wage is raised, he might respond by raising the wages of his workers to this new minimum. But this is hardly his only option. Instead of raising wages, he might decide to move the jobs in question to a place where the minimum wage law in question does not apply. He might decide to automate the jobs, so that they are done by machines instead of workers. He might decide to lay off workers (or to hire fewer new workers than he otherwise would have done), and indeed he may be forced to do this if the higher labor costs imposed by the new minimum wage law render his business unprofitable.

To deny that an increased minimum wage law decreases employment is to claim that no employer would respond to an increase in the minimum wage in any of these ways, or that any employer who did respond in one of these ways would be canceled out by other employers who responded to the minimum wage hike by hiring more workers than they otherwise would have. This, needless to say, does not strike me as being very plausible.

This negative employment effect is one argument against minimum wage laws, but it isn’t the only one. Another common argument involves demographics. Minimum wage laws aim to help poor workers, yet they apply to low wage workers, and these are not always the same people. Around half of minimum wage workers, for example, are teenagers, many of whom, presumably, do not rely on the wages from these jobs for their daily bread. This is a particularly vexing problem for those who want to use minimum wage laws as a proxy for a just wage, defined as a wage sufficient to support oneself and one’s family, since a just wage will be higher for those with families than for those without.

A Gas Tax Holiday: It Could Be Worse

As my co-blogger at Vox-Nova Katerina noted last week, Senators Clinton and McCain favor a temporary suspension of the federal gasoline tax, as a means of lowering voters pain at the pump. Senator Obama, by contrast, is opposed to such a measure, favoring instead a “windfall profits” tax for oil companies (Clinton favors a windfall profits tax in addition to the gas tax holiday, while McCain is opposed).

To say that economists aren’t supportive of Clinton and McCain’s gas tax holiday idea would be an understatement. Indeed, there wasn’t a single economist who appeared ready to defend the idea. Until now, that is. Yesterday’s New York Times contains an op-ed by Bryan Caplan, an econ professor at George Mason, arguing that considering the alternatives, the gas tax holiday is a pretty good deal:

[T]he tax holiday is a relatively cheap symbolic gesture that makes truly bad policies less likely. The main causes of high gas prices are probably factors beyond our control, like rapid growth in China and India and low real interest rates. But voters don’t want to hear this; they want politicians to “do something!”

During our last big energy crisis, in the 1970s, “something” turned out to be a salad of populist nonsense: price controls, rationing, windfall profits taxes, arcane loopholes and lots of lawsuits. That political response turned an inconvenience into a disaster.

A Tenth, I Say Unto You, A Tenth!

He will take the tenth of your corn, and of the revenues of your vineyards, to give to his eunuchs and servants. Your servants also, and handmaids, and your goodliest young men, and your asses, he will take away, and put them to his work. Your flocks also he will tithe, and you shall be his servants. And you shall cry out in that day from the face of the king, whom you have chosen to yourselves: and the Lord will not hear you in that day, because you desired unto yourselves a king. – 1 Samuel 8:15-18.

Today is tax day, which, like spring, doth turn young men’s fancy to tax reform. Here is one proposal:

I don’t think it’s a healthy situation for the electorate when a large majority is voting for spending that costs them nothing. To the minds of someone who pays no income tax, there’s no cost/benefit analysis to be made; they’re getting stuff for free. Even something of trivial benefit to them is thus better than not raising taxes. So we end up spending money on a lot of crap, because most of the voters don’t care — it’s not their money.

On the other hand, liberals have a point about fairness. It isn’t fair to say that some guy who brings home $20K should pay the same quarter of his income as Warren Buffett. The decrease in Joe Schmoe’s standard of living represented by that 25% is much greater than the decrease in Warren Buffett’s SOL from taking a quarter of his loot.

A negative income tax increases fairness, removes perverse incentives from the current benefit system, and makes sure that everyone has to think about whether they really want that new spending they’re voting for — enough to give up some of their cash.

Here’s another:

Charity: Luxury or Necessity?

Via DarwinCatholic, Arthur Brooks has an article up at NRO exploring the poor giving record of Barach and Michelle Obama:

After Mr. and Mrs. Obama released their tax returns, the press quickly noticed that, between 2000 and 2004, they gave less than one percent of their income to charity, far lower than the national average. Their giving rose to a laudable five percent in 2005 and six percent in 2006, with the explosion of their annual income to near $1 million, and the advent of Mr. Obama’s national political aspirations (representing a rare case in which political ambition apparently led to social benefit).

According to an Obama spokesman, the couple’s miserly charity until 2005 “was as generous as they could be at the time,” given their personal expenses. In other words, despite an annual average income over the period of about $244,000, they simply could not afford to give anything meaningful.

When Government Passes the Collection Plate

In his last State of the Union address, President Bush had a nice laugh line in response to recent pleas by some of our citizens to have their taxes raised. Noting that some “have said they would personally be happy to pay higher taxes,” Bush responded, “I welcome their enthusiasm. I’m pleased to report that the IRS accepts both checks and money orders.”

It seems that the Commonwealth of Virginia (and the state of Arkansas) have already beat him to the idea. From the Washington Times:

State lawmakers can rule out Virginian’s offering up more of their hard-earned money to fix the $1.4 billion budget shortfall Gov. Tim Kaine announced this week.

At least that is what a peek at the so-called “Tax Me More Fund” suggests.
Since its inception in 2002, the fund has collected a total of $10,217.04.

It was established a year after Republican presidential candidate Mike Huckabee challenged proponents of higher taxes to contribute to a similar program when he was governor of Arkansas.

Both programs provide generous taxpayers with a way to contribute more of their money into the state’s coffers and allow lawmakers to highlight the hypocritical nature of higher-tax advocates.