Tag Archives: political economy

Social Engineering Taxes

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The efficacy of these taxes are amply demonstrated by their extremely regressive nature.  For instance, the payroll taxes for Social Security and Medicare/Medicaid hit the lowest income folks the hardest.  They’re taxed at the same nominal rate as everyone else (except the well-off in the case of Social Security: there’s an upper limit on the income taxable for this purpose).

However.

Someone making the Federal Poverty Guideline income ($22,350 for a man in a four-person family in 2011) was taxed at 4.2% of that income (6.2% when the cut expires next January, but we’ll stick to the lower rate here)—$938.70.  A man making $100,000 paid a tax of $4,200, including that same $938.70 on his first $22,350 of income.  Who do you suppose was hit harder by that $939 tax?

The poor man already is living at the edge of his income; the dollar taxed to him—the very same dollar that is taxed to our better off man—is far more important to the poor man.

So it is with income taxes, whether those taxes are for Article 8 purposes, or some of them are for other government-determined—social engineering—purposes.

Legitimate taxes must be evaluated for their impact on what Wretchard of Belmont Club has described as the design margin: how much safety is left for handling the unforeseen when a tax dollar is taken away from a man?

The correction, of course, is not to raise taxes on everyone else—the well-off already are paying far more than their share, while the half [sic] at the “bottom” of the distribution are paying next to nothing.  Moreover, this would do nothing to reduce the importance of those tax dollars that are in the poor man’s margin of safety between what he has and what he needs for an emergency.  No, the answer is to lower tax rates—to increase the width of the design margin—and to move to a flat tax with no deductions.  Taxation for government-mandated social engineering purposes just hammers at that design margin, shrinking it, no matter the good intentions behind the assessment.

A tax dollar always will be more important to the poor man than to the better off man; no amount of attempted progressivity in a tax code will reduce this.  A flat tax will reduce the difference in relative importance, though.

The American Welfare State

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James Pethokoukis, of AEIdeas, an affiliate of the American Enterprise Institute, has an article that shows the economic devastation extant in the policies of the Federal government.  It’s important to note that, much as I dislike the present administration, these results also flow from the “efforts” of a long string of administrations.

I don’t have much to add, so here is the complete article, reprinted with the kind permission of AEI.

6 charts that show the Welfare State run amok

The original purpose of Medicaid was to provide improved healthcare access for poor people, while not turning the safety net into a trap. Under President Obama’s Affordable Care Act, Medicaid will be greatly exapnded beyond what Congress originally intended.

In fact, as these charts show, it has already expanded beyond what Congress surely originally envisioned and, in the process, has created a terrible fiscal problem for the United States. (These charts and graphics come from a briefing today here at AEI, conducted by Gary Alexander, secretary of public welfare for Pennsylvania.)

A few scary factoids:

– In the 1960s, there were 18 workers per Medicaid recipient. Today that number is 2.5.

– The number of Americans on disability has risen 19% faster than jobs created during this recovery.

– There are just 1.2 private sector workers per 1 person on welfare or working for government.

– There are now just 1.65 employed persons in private sector per 1 person on welfare assistance.

Check out the charts and graphics for yourself:

1. Fewer workers and their tax payments have to support more and more Medicaid recipients.

2. The number of takers is now approaching the number of makers.

3. Medicaid and other welfare enrollment has exploded.

4. Medicaid enrollment is growing faster than economy.

5. Medicaid spending? You ain’t seen nothing yet.

6. Disability enrollees have exploded and are rising faster than job creation.

These charts show an out-of-control welfare state that is about to get even bigger, increasing both budget costs and dependency.

Dependency of America

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Greg Mankiw, a Harvard University economics professor (OK, he’s the Chairman of the Department of Economics), has on his blog some hard numbers that show the increasing dependency of Americans on government.  Here’s what he says [bold emphasis added; italic emphasis in the original]:

Because transfer payments are, in effect, the opposite of taxes, it makes sense to look not just at taxes paid, but at taxes paid minus transfers received.  For 2009, the most recent year available, here are taxes less transfers as a percentage of market income (income that households earned from their work and savings):

  • Bottom quintile: -301 percent
  • Second quintile: -42 percent
  • Middle quintile: -5 percent
  • Fourth quintile: 10 percent
  • Highest quintile: 22 percent
  • Top one percent: 28 percent

The negative 301 percent means that a typical family in the bottom quintile receives about $3 in transfer payments for every dollar earned.

The most surprising fact to me was that the effective tax rate is negative for the middle quintile.  According to the CBO data, this number was +14 percent in 1979 (when the data begins) and remained positive through 2007.  It was negative 0.5 percent in 2008, and negative 5 percent in 2009.  That is, the middle class, having long been a net contributor to the funding of government, is now a net recipient of government largess.

The CBO report can be read here or here.  The supplemental tables, which contain the Table 7 from which Mankiw made the calculations above, are here.

I recognize that part of this change is attributable to temporary measures to deal with the deep recession.  But it is noteworthy nonetheless, as other deep recessions, such as that in 1982, did not produce a similar policy response.

Again, I ask: what are we to make of the motives of the politicians that are doing this, knowing as these highly intelligent and rational human beings do, what the outcome is?

A Thought on Failure

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Or at least President Obama’s quasi-admission of his own.  This excerpt is from Sunday’s CBS News interview with Charlie Rose.  There’s also more, including Obama’s whining that he hasn’t been able to “change the atmosphere” in DC, with his partisan, character-assassinating politics.

Rose: But suppose, I mean he clearly would say, ‘Let’s look at your record; let’s look at the fact the unemployment is at 8.2%, and it’s unlikely to change.  Let’s look at how effective the stimulus was.  Let’s look at your management of the economy.  Yes, it was a bad hand you were dealt, but you have not made it to what it ought to be.  That is the centrality of their campaign.

Obama: Exactly.  That is his argument, and you don’t hear me complaining about him making that argument, because if I was in his shoes, I’d be making the same argument.

Hmm….

As an aside, it’s also interesting to see Rose’s mindset so plainly: government should be managing the economy.

It Misses the Question

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Ben Wattenberg wrote about demographics as a cause of our “entitlement crisis” in a recent Wall Street Journal op-ed.

As he pointed out, birth rates are falling drastically in the nations wealthy enough to have an entitlement régime.  Contradictorily, that’s a normal result of the development of widespread wealth within nations.  For a variety of reasons—delayed marriage, increasing education, increasing incomes, more effective means of birth control, lower stigmatization of terminating pregnancies, and so on—birth rates in developed nations have fallen below the replacement rate needed simply to maintain their existing population levels (generally, 2.1 births per woman).   The birth rates in Italy, Spain, Greece, Eastern Europe, Russia, the former Soviet republics, and South Korea, for instance, are all below 1.5.  Japan’s rate is a potentially catastrophic 1.2.  The US rate, at about 2.0, still isn’t quite high enough to maintain our own population; although until the current economic failures, we could count on immigration to make up the shortfall.  Sort of.

All this adds up to not enough people are entering the labor force to pay for the existing entitlements.  When the US’ Social Security entitlement program was created 75 years ago, there were 7 people in the labor force for every retired person, and that retiree could count on living about 6 years in retirement.  Today, the number of people in the work force is  around 2-3 (and falling), and the retiree being supported can count on living around 35-40 years in retirement (that longer support duration is a demographic that Wattenberg doesn’t mention).

This certainly does emphasize the proximity of the crisis that’s upon us.

Wattenberg identified two current solutions to this: cutting the entitlements or running massive deficits.  He then offered what he thinks is a better solution.  Harking back to the ’60s and ’70s worries about the population bomb and the meme that we need to reduce our birth rates, he wants a similar program, this time preaching the opposite: our new parents need to have more children.

But Wattenberg misses the crisis’ cause.  It’s not that birth rates are too low, or that there aren’t enough new workers entering the system to support the entitlement economy.  That argument proceeds from a false premise.

The real answer, the individual liberty- and responsibility-preserving answer, is to eliminate the entitlements and privatize them, instead.  It’s as wrong for government to try to “influence” the family timing and size decisions of free men and women as it is for government to try to “influence” any other family-related decisions made by free men and women—or any other decision founded in individual conscience.