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Posts Tagged ‘Income redistribution’

I wrote last year about the way in which welfare programs lead to very high implicit marginal tax rates on low-income people. More specifically, they lose handouts when they earn income. As such, it is not very advantageous for them to climb the economic ladder because hard work is comparatively unrewarding.

Thanks to the American Enterprise Institute, we now have a much more detailed picture showing the impact of redistribution programs on the incentive to earn more money.

It’s not a perfect analogy since people presumably prefer cash to in-kind handouts, but the vertical bars basically represent living standards for any given level of income that is earned (on the horizontal axis).

Needless to say, there’s not much reason to earn more income when living standards don’t improve. May as well stay home and goof off rather than work hard and produce.

This is why income redistribution is so destructive, not just to taxpayers, but also to the people who get trapped into dependency. Which is exactly the point made in this video.

P.S. Most of you know that I’m not a fan of the Organization for Economic Cooperation and Development because the Paris-based bureaucracy has such statist impulses. But even the OECD has written about the negative impact of overly generous welfare programs on incentives for productive behavior.

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In their never-ending efforts to buy votes with other people’s money (see the first cartoon in this post), politicians have been expanding the welfare state and creating more dependency.

This is bad for the overall economy because it means a larger burden of government spending and it’s bad for poor people because it undermines their self reliance and self respect.

It also has very worrisome long-run effects on the stability and viability of a culture, as shown by these two cartoons.

A stark example can be seen in the food stamp program, which has morphed from a handout for the genuinely poor to a widespread entitlement for everyone from college students to the Octo-mom, and for products ranging from luxury coffee to lobster.

Here are some of the unpleasant details about the fiscal costs from Veronique de Rugy’s column in the Washington Examiner.

When the food stamp program was first expanded nationally in the 1970s, just 1 in 50 Americans participated. Today, 1 in 7 Americans receive $134 each month… With the bipartisan Farm Bill going through Congress right now, these high levels of dependency may become permanent. Some 70 percent of the nearly $1 trillion Farm Bill recently passed by the Senate will be spent on food stamps — that’s $770 billion over ten years. …An estimated 45 million Americans received food stamps in 2011, at a cost of $78 billion. That’s a twofold increase from just five years ago when 26 million people received benefits at a cost of $33 billion. …food stamp enrollment increased and spending doubled, even as unemployment and the poverty level dropped modestly between 2007 and 2011. The more important part of the story comes from the eligibility changes implemented by the Bush and Obama administrations.

The last sentence is the key. Eligibility has been expanded dramatically. Food stamps are slowly but surely becoming mainstream and that should worry all of us.

But food stamps are just one form of income redistribution. Welfare spending also is a problem.

Here are some excerpts from a New Hampshire story, featuring a store clerk who got fired because she didn’t think welfare cards should be used to buy cigarettes.

Jackie R. Whiton of Antrim had been a six-year employee at the Big Apple convenience store in Peterborough until a single transaction sent her job up in smoke. The store clerk was fired after she refused to take a customer’s Electronic Balance Transfer card to pay for cigarettes. …Whiton said she did not think EBT cards could be used to purchase cigarettes and refused to sell to him. The two “had a little go-around” as the line got longer behind him, said Whiton. “I made the statement, ‘do you think myself, that lady and that gentlemen should pay for your cigarettes?’ and he responded ‘yes,’ ” Whiton said. …Charles E. Wilkins, the general manager of the C.N. Brown Co. that runs the stores, said the EBT cards in the cash phase could be used for any items, including alcohol, tobacco and gambling. Wilkins said the company gave Whiton the option of staying but she said she would not accept the cards anymore. “She didn’t think it was right and just wasn’t going to sell to people in that program anymore,” Wilkins said. Whiton said when she came to work the next day, her manager asked her how much notice she was giving. When she responded “a week,” she was told the home office had just called and fired her.

Ms. Whiton is now one of my personal heroes, joining Mr. Mothershead, another store clerk who had the right reaction when confronted by someone who tried to get something he didn’t earn (albeit using a different tactic).

Last but not least, here’s something that arrived in my inbox yesterday.

A bit harsh, but we have gotten to a strange point where the Obama Administration is bribing states to add more food stamp recipients and even running ads to lure more people into food stamp dependency.

So, yes, Billy Fleming (assuming he’s real) has a right to be upset.

P.S. Here’s some more welfare humor.

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In past posts, I’ve groused about food stamp abuse, including people using them to buy luxury coffee at Starbucks and to purchase steaks and lobster. I’ve complained about college kids scamming the program, the “Octo-Mom” mooching off the program, and the Obama Administration rewarding states that sign up more food stamp recipients.

Well, the Obama White House is doubling down on creating more dependency, spending tax dollars to increase the number of people on food stamps.

Here are some of disturbing details from a CNN report.

More than one in seven Americans are on food stamps, but the federal government wants even more people to sign up for the safety net program. The U.S. Department of Agriculture has been running radio ads for the past four months encouraging those eligible to enroll. …The department is spending between $2.5 million and $3 million on paid spots, and free public service announcements are also airing. The campaign can be heard in California, Texas, North Carolina, South Carolina, Ohio, and the New York metro area. …President Bush launched a recruitment campaign, which pushed average participation up by 63% during his eight years in office. The USDA began airing paid radio spots in 2004. President Obama’s stimulus act made it easier for childless, jobless adults to qualify for the program and increased the monthly benefit by about 15% through 2013.

Last year, I semi-defended Newt Gingrich when he was attacked for calling Obama the “Food Stamp” President. Citing this chart, I wrote that, “It certainly looks like America is becoming a food stamp nation.”

But my bigger point is that welfare is bad for both taxpayers and the people who get trapped into relying on big government.

The ideal approach, as explained in this video, is to get the federal government out of the business of redistributing income. We are far more likely to get better results if we let states experiment with different approaches.

House Republicans, to their credit, already want to do this with Medicaid. So why not block grant all social welfare programs?

The icing on the cake is that no longer would the federal government be running ads to lure people into dependency.

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Maybe I’m just old fashioned, or maybe I’m a bit stiff-necked, but I will never relent in my opposition to tax increases so long as the crowd in Washington is spending money on things that are not appropriate functions of the federal government.

But that’s just one obstacle that has to be overcome. I will also be dogmatic in my fight against higher taxes so long as there is massive waste, fraud, and abuse in federal programs.

And sometimes, to really get me upset, we have massive waste, fraud, and abuse for programs that are not legitimate functions of the federal government.

Here’s an excerpt from a story in Time magazine, but don’t read it if you have high blood pressure.

The Social Security Administration made $6.5 billion in overpayments to people not entitled to receive them in 2009, including $4 billion under a supplemental income program for the very poor, a government investigator said Tuesday. In all, about 10 percent of the payments made under the agency’s Supplemental Security Income program were improper, said Patrick P. O’Carroll Jr., the Social Security inspector general. …Throughout the federal government, improper payments totaled $125 billion last year, up from $110 billion in 2009, O’Carroll said. In 2009, only two other agencies — the Departments of Health and Human Services, and Labor — had more improper payments than Social Security, he said.

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Not that we needed any additional evidence that the government wastes money in truly spectacular fashion, but this story from the Detroit Free Press is especially disgusting and outrageous.

A man who won $2 million on a Michigan lottery show has told a TV station that he still uses food stamps. Leroy Fick of Bay County admitted he still swipes the electronic card at stores, nearly a year after winning a jackpot on “Make Me Rich!” He told WNEM-TV in Saginaw that more than half the prize went to taxes. Fick says the Department of Human Services told him he could continue to use the card, which is paid with tax dollars. He told WNEM: “If you’re going to … try to make me feel bad, you aren’t going to do it.” The TV station says people have seen Fick driving a new Audi convertible.

Normally I fell sorry for people who have 50 percent of their money confiscated by the tax authorities, but in this case I’ll make an exception.

The real lesson is that the federal government should get out of the redistribution business. State and local governments are far less likely to be this profligate. And if they do waste money, migration is a feedback mechanism that will penalize them for excessive handouts.

(h/t: Amanda Carpenter)

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Economists often do a crummy job of teaching people about the impact of fiscal policy on the labor force, largely because we put people to sleep with boring discussions about “labor supply” decisions (my blog post from last year perhaps being an example of this tendency).

From now on, I will try to remember to use this cartoon. It’s a parody of Obama’s policies, but the last slide (or is it a panel?) is a great teaching tool about what happens when politicians turn the safety net into a hammock.

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One of the big problems with statists is that they define compassion incorrectly. They think they are being compassionate when they take other people’s money and give it to somebody that they define as being less fortunate. But genuine compassion occurs when you spend your own money. Another problem is that they define compassion by the number of people getting handouts from the government. A truly compassionate person, however, should strive for a society where the less fortunate are able to climb the economic ladder and no longer are dependent on redistribution programs. So it is definitely bad news that a record number of people – one out of six – now are on the dole in some form or fashion. Part of this growth in dependency is due to the economic downturn, but USA Today also notes that politicians have expanded eligibility and lured more people into dependency.
Government anti-poverty programs that have grown to meet the needs of recession victims now serve a record one in six Americans and are continuing to expand. More than 50 million Americans are on Medicaid, the federal-state program aimed principally at the poor, a survey of state data by USA TODAY shows. That’s up at least 17% since the recession began in December 2007. …More than 40 million people get food stamps, an increase of nearly 50% during the economic downturn, according to government data through May. The program has grown steadily for three years. Caseloads have risen as more people become eligible. The economic stimulus law signed by President Obama last year also boosted benefits. …Close to 10 million receive unemployment insurance, nearly four times the number from 2007. Benefits have been extended by Congress eight times beyond the basic 26-week program, enabling the long-term unemployed to get up to 99 weeks of benefits. …As caseloads for all the programs have soared, so have costs. The federal price tag for Medicaid has jumped 36% in two years, to $273 billion. Jobless benefits have soared from $43 billion to $160 billion. The food stamps program has risen 80%, to $70 billion. Welfare is up 24%, to $22 billion. …The steady climb in safety-net program caseloads and costs has come as a result of two factors: The recession has boosted the number who qualify under existing rules. And the White House, Congress and states have expanded eligibility and benefits.

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I’m normally not a big fan of the Paris-based Organization for Economic Cooperation and Development since it is an international bureaucracy that persecutes low-tax jurisdictions. But the economists at the OECD sometimes do good work (the same can be said of the IMF and World Bank, not that this justifies taxpayers subsidies for any international bureaucracy). Here’s a good example. While researching tax rates in different nations, I came across this description of how welfare programs and other income-redistribution schemes result in punitively-high implicit tax rates on productive behavior for low-income people. The result, of course, is that many people are discouraged from working and lured into lives of dependency. The article is not recent, so the specific examples may no longer be accurate, but the economic analysis is spot on and still applies. The economic damage described in the article, by the way, is in addition to the harm caused by high explicit tax rates on taxpayers who finance the income redistribution and the harm caused by government spending diverting resources from the productive sector of the economy.

Another rather curious situation which does not show up when studying headline rates is that low earners can find themselves confronted with very high marginal tax rates, in some rare cases exceeding 100%. The reason for this is that lower earners not only pay more tax when their income goes up, but in many cases they lose part of their means-tested tax relief, subsidies and benefits as well. The loss of this income acts as an “implicit” tax at the margin. The rational response of workers who find themselves in this situation is to reduce the number of hours they work. Their gross wage would of course be lower if they did, but in return they would pay less tax and receive more means-tested subsidies and benefits. As a result, their net disposable income would increase despite putting in fewer hours. This type of situation occurs to varying degrees in different OECD countries, depending on the peculiarities of various social protection programmes. Take the example of an unemployed couple with two young children. Suppose that after five years’ unemployment, one of them takes up a lowly paid job. In Finland or Sweden net income in and out of work would be the same in that case, since each unit of income earned is cancelled out by a unit of benefits foregone once employment is taken up. In other words, there is an implicit tax rate of 100%. In the case of Denmark and the Czech Republic, the implicit rate in a similar case would be almost 100%, and in Germany and the United Kingdom it would be around 80%. In France and the United States the implicit rate would be about 50%, since half the increase in earnings is wiped out by a loss of benefits. In Japan, the implicit tax actually exceeds 140%, meaning our one-earner couple would be worse off with the new job than without it. What’s more, they may have to be wary when it comes to staying in the job itself, since small wage increases can expose low-wage earners to high implicit tax rates as their means-tested benefits get cut further.

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A Washington Post columnist reports on a group of limousine liberals who are lobbying to pay more taxes. Of course, there’s no law that prevents them from writing big checks to the government and voluntarily paying more, so what they’re really lobbying for is higher taxes on the vast majority of investors and entrepreneurs who don’t want more of their income confiscated by the clowns in Washington and squandered on corrupt and inefficient programs. I debated one of these guilt-ridden, silver-spoon, trust-fund rich people on CNN last year and never got an answer when I asked him why he wanted to pull up the ladder of opportunity for the rest of us who would like to become rich some day. Here’s what the Post reported on the issue:

A group of liberals got together Tuesday and proved that they, too, can have a tax rebellion. But theirs is a little bit different: They want to pay more taxes. “I’m in favor of higher taxes on people like me,” declared Eric Schoenberg, who is sitting on an investment banking fortune. He complained about “my absurdly low tax rates.” “We’re calling on other wealthy taxpayers to join us,” said paper-mill heir Mike Lapham, “to send the message to Congress and President Obama that it’s time to roll back the tax cuts on upper-income taxpayers.” …For them, Obama’s plan to “spread the wealth” (by raising taxes on families earning more than $250,000) is too conservative. “The Obama plan we don’t think goes far enough,” Lapham protested. “We think probably more like the top 5 percent should have their taxes raised.” That would be those above $200,000. “Or go beyond that,” he suggested. … They are among 50 families with net assets of more than $1 million to take a “tax fairness” pledge — donating the amount they saved from Bush tax cuts to organizations fighting for the repeal of the Bush tax cuts. According to a study by Spectrem Group, 7.8 million households in the United States have assets of more than $1 million — so that leaves 7,799,950 millionaire households yet to take the pledge. …Of course, if millionaires really want to pay higher taxes, there’s nothing stopping them. The Treasury Department Web site even accepts contributions by credit card to pay the public debt. …His donation will, however, ease the sense of guilt that comes with great wealth, described poignantly by the millionaires: “In 1865, my great-great-grandfather Samuel Pruyn founded a paper mill on the banks of the Hudson River in Glens Falls, New York,” Lapham explained. Judy Pigott, an industrial heiress on the call, added her wish that her income, “mostly unearned income, be taxed at a rate that returns to the common good that I have received by a privilege.” Confessed Hollender, who now runs the Seventh Generation natural products company: “I grew up in Manhattan on Park Avenue in a 10-room apartment.”

P.S. It’s also rather revealing that Massachusetts had (and maybe still has) a portion of the state tax form allowing people to pay extra tax, yet very rich statists like John Kerry decided not to pay that tax while urging higher taxes for mere peasants like you and me.

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A former colleague from my days at the Heritage Foundation, Robert Rector, has a very disturbing article at National Review Online. Robert explains that the Obama Administration is putting together a new – and rigged – definition of poverty that has nothing to do with material deprivation. This new system instead will be a measure of income distribution, thus creating a public policy bias supporting spread-the-wealth type policies:

…the Obama administration announced it will create a new poverty-measurement system that will eventually displace the current poverty measure. This new measure, which has little or nothing to do with actual poverty, will serve as the propaganda tool in Obama’s endless quest to “spread the wealth.” …The current poverty measure counts absolute purchasing power — how much steak and potatoes you can buy. The new measure will count comparative purchasing power — how much steak and potatoes you can buy relative to other people. …In other words, Obama will employ a statistical trick to ensure that “the poor will always be with you,” no matter how much better off they get in absolute terms. …The weird new poverty measure will produce very odd results. For example, if the real income of every single American were to magically triple over night, the new poverty measure would show there had been no drop in “poverty,” because the poverty income threshold would also triple. …Another paradox of the new poverty measure is that countries such as Bangladesh and Albania will have lower poverty rates than the United States, even though the actual living conditions in those countries are extremely bad. …For most Americans, the word “poverty” suggests destitution: an inability to provide a family with nutritious food, clothing, and reasonable shelter. But only a small number of the 40 million per­sons classified as poor under the government’s current poverty definition fit that description. Most of America’s poor live in material conditions that would have been judged comfortable, or even well-off, two generations ago. …Clearly, “poverty” as currently defined by the government has little connection with “poverty” as the average American understands it. The new Obama poverty measure will stretch this semantic gap, artificially swelling the number of “poor” Americans, and severing any link between the government’s concept of poverty and even modest deprivation. In honest English, the new system will measure income inequality, not poverty. Why not just call it an “inequality” index? Answer: because the American voter is unwilling to support massive welfare increases, soaring deficits, and tax increases to equalize incomes. However, if the goal of income leveling is camouflaged as a desperate struggle against poverty, hunger, and dire deprivation, then the political prospects improve. The new measure is a public-relations Trojan horse, smuggling in a “spread the wealth” agenda under the ruse of fighting real material privation… In effect, the Obama poverty measure sets a new national goal of class warfare and income redistribution.

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Politicians in Washington have come up with something far more impressive than turning lead into gold or water into wine. Using self-serving budget rules, they can increase the burden of government spending and say they are cutting taxes instead.

This bit of legerdemain is made possible, thanks to the convolutions of the personal income tax, by adopting or expanding refundable tax credits. But in this case, “refundable” does not mean the government is returning money to taxpayers. Instead, it means that money is being redistributed to people who do not earn enough to be subject to the income tax.

This is hardly a trivial issue. According to the Congressional Budget Office, the amount of income redistribution being laundered through the tax code is now so large that the bottom 40 percent of the population has a negative “effective” income tax rate. In simple terms (though perhaps with profound political implications), the income tax is a revenue generator for a big share of the population.

And the problem is going to get worse if the President’s budget is approved. Buried in the fine print, on pages 188-189 of the Analytical Perspective of the Budget, you will see that the President is proposing to increase this hidden form of spending by more than $152 billion over the next ten years.

It is worth noting that proponents argue that it is okay to classify this new spending as tax cuts because it somehow offsets other tax payments, especially the payroll tax. I’m sympathetic to lower taxes on everybody, including the poor, but surely it is better to be honest and simply cut the taxes that people pay. The current methodology, by contrast, is open to abuse. Heck, I’m surprised politicians don’t classify other forms of spending as tax cuts. Maybe corporate welfare can be reclassified as a corporate tax cut (I better stop lest I give the political class any ideas).

Defenders also assert that some so-called refundable tax credits, particularly the earned income tax credit, are designed to encourage work. That is partly true, but credits like the EITC are withdrawn as income climbs, and this means poor people face punitive marginal tax rates, so the overall effect on hours worked may be negligible.

The right approach, of course, is to get the federal government out of the racket of redistributing income.

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