The wealthier give up a greater share of their earnings so that the less wealthy can forfeit a smaller portion of theirs; in this way, our progressive tax code is redistributive. The table below displays the effective tax rate defined as total federal taxes paid — including payroll taxes to fund Social Security and Medicare — divided by total income earned for different segments of the income distribution.
It also shows the share of the nation's total federal tax burden shouldered by each income group. The table depicts an immense project of redistribution. State income taxes also tend to be progressive, though to a lesser degree than federal taxation and to varying degrees in different states.
Whether the progressivity of the federal tax code is excessive depends on what one considers an appropriate degree of burden-sharing — a question that is of course not purely economic. But no one can deny that the burden of taxation today is highly uneven across income groups, and that our tax system is therefore highly redistributive especially since roughly half of federal revenues are used to pay for anti-poverty programs that provide additional support to low earners.
Beyond anti-poverty spending and progressive taxation, the federal government also intervenes in specific markets with the implicit or explicit goal of shifting income toward poorer segments of the population. These interventions include among others special protections for unions, limits on prescription-drug prices in Medicaid, agricultural subsidies, trade protections, and mortgage guarantees and subsidies.
In each case, the policy in question undoubtedly harms economic productivity rather than improving it: Union protections, for instance, artificially raise the cost of skilled labor; limits on drug prices discourage research and development on new procedures and medicines; farm subsidies reduce agricultural production and increase food prices; trade protections distort the decisions of domestic producers and consumers; and mortgage subsidies lead to over-investment in housing and, as we have learned all too painfully in recent years, can result in dangerous bubbles.
The interventions are nevertheless justified with claims that they promote "fairer" prices or other positive outcomes for low-income participants in the relevant markets. These three pillars of our system of redistribution are not equally problematic.
But to understand which are more justifiable and which less so, we must first ask why our government redistributes income at all — and why the public, on the whole, believes that it should. The first common argument for anti-poverty spending is that the alleviation of poverty is what economists call a "public good" — something everyone would like to see provided, but which few people provide voluntarily because they hope others will do it for them.
According to this view, private charity alone would reduce poverty less than everyone would like; only government can address this under-provision, by levying taxes on the non-poor and making transfers to the poor.
The poor benefit from such government policy because they receive a higher standard of living, and wealthier people benefit because they value helping the poor more than they resent their higher taxes for reasons of sheer compassion, or because they believe that helping the poor is a way to achieve other desired ends, like reducing crime.
As far as the "public good" advocates are concerned, government redistribution leaves everyone better off. A second argument for anti-poverty spending holds that private markets do not allow people to insure themselves against the misfortune of being born into poverty. None of us can choose the circumstances into which we are born, but if we were to develop a society that took account of this uncertainty and so was constructed behind a "veil of ignorance," to borrow the language of the late Harvard political philosopher John Rawls , most people would design it in a way that allowed them to purchase some kind of insurance against poverty.
They would, in other words, accept the obligation of paying higher taxes if they were to end up rich in exchange for protection against being left thoroughly destitute were they to end up poor. Private markets do not provide this "income insurance" because the people who might benefit from it are generally not able or not motivated to demand it in advance. Those not yet born, of course, are not around to demand it; their parents could buy the insurance, but the parents whose children would need it most are too poor to afford it.
And markets might not even supply this insurance — because insurers would fear that their product would be purchased disproportionately by parents who know, for some reason, that their children will end up poor much as health insurers either deny coverage, or charge significantly higher rates, to people with costly pre-existing medical conditions.
Young workers who might someday benefit from such protection, meanwhile, are often not aware of the risk until it is too late. The conditions simply do not exist for a real market in private anti-poverty insurance to emerge.
Government, however, can address this problem by compelling everyone to participate in social insurance. The "premium" payments consist of the requisite taxes; the payouts consist of welfare benefits distributed to those "enrollees" who end up with low incomes.
The imposition of social insurance would not necessarily raise everyone's welfare; people with minimal prospects of ending up poor might regard such insurance as all cost and no benefit.
By and large, though, many who are not born poor — as well as those who are — would benefit from this policy. The third argument for redistribution which combines some elements of the first two is a moral one. It asserts that helping the poor is simply the right thing to do. This view assumes that differences in income are driven mostly by luck rather than by effort.
And it presumes that the poor benefit more from receiving wealth transfers than the non-poor suffer from paying for the transfers — such that redistribution is a net good for society as a whole.
Each of these arguments for anti-poverty spending may be reasonable as far as it goes, but that alone is not enough to justify such spending. While these perspectives suggest that anti-poverty programs can generate benefits, any responsible evaluation must balance these benefits against the programs' costs.
A thorough assessment of redistribution, then, requires a serious examination of the negative consequences of our anti-poverty efforts. And a look at the way redistribution generally plays out in America today indicates that those downsides can be significant indeed. In looking at the drawbacks of anti-poverty programs, it is important to consider both the direct costs and the less tangible, but still potentially serious, indirect costs.
One of the chief direct costs is the way anti-poverty spending alters incentives: Such programs reduce the reasons for potential recipients of income transfers to work and save, because the availability of aid — and particularly of aid that is available only as long as one remains below a certain level of income — can discourage people from striving to rise above that income level.
On the other side of the ledger, the taxation required to pay for anti-poverty programs discourages effort and savings by those who pay for the transfers. People are less inclined to work hard when they know that a large portion of the income they generate will go not to them or to their families, but rather to total strangers.
Whether these effects on economic productivity are large depends on the generosity of the anti-poverty spending, as well as on the magnitude of the taxes required to pay for it. A promise of subsistence income will induce only a few people to live off the dole, while a more substantial guarantee will cause many to reduce their efforts to support themselves. Likewise, the distortions caused by the taxation required to pay for anti-poverty programs increase with the amount of anti-poverty spending, such that a small program will have only small effects on taxpayers' work and saving.
As we have seen above, however, American anti-poverty programs are rather generous. The actual distribution of the money is of course less direct; overhead, waste, and other inefficiencies are intrinsic to the operation of these government programs. Moreover, much of the redistribution goes to middle-class families, so the poor are not really provided with a middle-class income.
Even so, the support they do receive is substantial. It is hard to believe, therefore, that this generosity — and the tax burden imposed on the rest of the population to pay for it — does not reduce effort among the poor and everyone else, as abundant evidence confirms.
Anti-poverty spending has more subtle downsides, too. Income support for the poor generates envy and demand for transfers from the near-poor. This effect can be seen in programs that have expanded eligibility requirements to well above the poverty line, such as Medicaid in many states, along with the new federal health-care law.
The result is further disincentive for effort at the margins of poverty, and additional burdensome taxation beyond. Anti-poverty programs also promote the view that low income is someone else's fault — a notion that, once enshrined in public policy, can reduce many people's work ethic, initiative, and self-reliance. Rather than devoting themselves to increasing innovation and productivity, people throw their energies into chasing government transfers.
By my count the current administration used every single one to help insure that labor costs were held in check and that corporate profits soared. Actions taken by this administration during the past eight years include:. The irony is that what was true in is true today—redistributing wealth to the already wealthy in the end punishes not just workers but also corporations, their shareholders, and their managers.
Bush as inaugurated. Last Friday it closed at —a 30 percent decline over eight years and one of the most remarkable destructions of wealth in our lifetime. The United States has remained one of the most capitalistic countries in the world in large part because its leaders have recognized that to protect markets government must round off some of the roughest edges of capitalism.
That is why Republican progressives like Theodore Roosevelt supported the progressive income tax, why Franklin Roosevelt pushed Social Security and Unemployment through Congress in , and why Richard Nixon won approval of the Supplemental Security income program and proposed a national minimum income plan. All of these proposals served to make the outcomes of ordinary Americans a little more even than they might have been if left solely to the markets. But they also served to create greater social cohesion and promote stronger economic growth within a system that remained very fundamentally free market.
Whether or not you view that effort to redistribute wealth as fair, you have to concede that it has been a total failure with respect to creating jobs, raising living standards, generating sustainable wealth, and maintaining fiscal discipline. It is too bad that those who have finally risen to speak against the evils of wealth redistribution did not do so much sooner.
You Betcha! Download this column with full graphs pdf Read more: Understanding Bushonomics: How We Got Into This Mess in the First Place Our nation was just treated to an entire weekend of conservative commentators talking about the evils of income redistribution and class warfare.
Actions taken by this administration during the past eight years include: Refusal to adjust the minimum wage for inflation for 10 years, driving it in inflation-adjusted terms to the lowest level in half a century.
Who is most affected? Does it matter? Scholars arrive at different answers to these questions, sometimes because they use different datasets, or apply different methods. Technical decisions—defining households, handling those recording zero income, applying an inflation adjustment, and so on—can make a big difference to final numbers.
A particularly tricky issue is whether to include government-provided services, such as Medicaid, in estimates of income, and if so, how to calculate their value. One of the most robust series on income trends is produced by the Congressional Budget Office CBO , albeit it with a multi-year delay: the numbers for were released in November CBO provides careful estimates of income across the distribution and over time, as well as before and after taxes and transfers.
Importantly, CBO takes full account of government-provided health care, which makes a big difference in the results, especially on the lowest income rungs. See the technical note below for more details on their approach. CBO presents data for both average income and share of income. Since , the households right at the top of the distribution, the much-vilified 1 percent, have seen their incomes rise fastest, more than doubling since even after taxes:.
On this chart, any differences in the remaining 99 percent are harder to see, simply because the left-hand axis has to stretch to accommodate the big rise at the very top. Fortunately, the CBO also provides data for the top quintile minus the top 1 percent i. This allows us to shrink the left-hand axis and see more clearly what is going on in the bottom 99 percent:.
The top quintile has been pulling away from the middle class, even without the top 1 percent in the mix. But not from the bottom quintile, according the CBO. In fact, income growth for the poorest group has been as great as for the upper middle class 79 percent versus 78 percent growth between and , while the middle class have experienced sluggish growth by comparison 46 percent.
Further, because many of the consequences of government income redistribution share the common aspect of impoverishing the society, even those who get a bigger slice than they surrender are cutting into a smaller pie. In the transfer society the general public is not only poorer but less contented, less autonomous, more rancorous, and more politicized.
Individuals take part less often in voluntary community activities and more often in belligerent political contests. Genuine communities cannot breathe in the poisonous atmosphere of redistributional politics.
Most importantly, the society that allows its government to redistribute income on a wide scale necessarily sacrifices much of its liberty. Finally, one must recognize that, notwithstanding what some regard as the institutionalization of compassion, the transfer society quashes genuine virtue.
Redistribution of income by government coercion is a form of theft. Its supporters attempt to disguise its essential character by claiming that democratic procedures give it legitimacy, but this justification is specious.
Theft is theft whether it be carried out by one thief or by million thieves acting in concert. And it is impossible to found a good society on the institutionalization of theft. Council of Economic Advisers, Annual Report , p. Gwartncy and Richard L. Stroup, Microeconomics: Private and Public Choice , 6th ed.
Fort Worth: Dryden Press, , pp. By Robert Higgs. Also published in The Freeman « Show Fewer. Myth versus Reality It is tempting to think about government transfers in a simple way: one person, taxpayer T, loses a certain amount of money; another person, recipient R, gains the same amount; and everything else remains the same.
Neglected Consequences 1. Culmination Ironically, in the full-fledged transfer society, where governments busy themselves redistributing income by means of hundreds of distinct programs, hardly anyone is better off as a result. Notes: [1] U. Reprinted with permission from The Freeman December Before posting, please read our Comment Policy. Stay Connected.
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