Our 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.
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Do youthink state taxes are regressive because they’re generally sales taxes and flat income taxes? That’s my best guess. At least state education spending is generally progressive, in that it balances out total spending between districts with high property tax revenues per student (generally suburban districts) and districts with low property tax revenues per student (rural and urban districts).
I favor means-testing benefits and am surprised by its lack of popularity.
What do taxation trends in the Nordic countries imply for this idea?
What do taxation trends in the Nordic countries imply for this idea?
As I understand it, the trend in Nordic countries (and in European countries generally) has been to move away from taxes on capital and towards taxes on income. This needn’t make taxes less progressive, but it probably will have that effect.
We are almost certainly in for something similar here, though politicians have and no doubt continue to find inventive ways (lotteries, cap and trade, etc.) to mask what they are doing.
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…Social Security, for example…
BZZZZZ!!! Wait right there!!
Here is the issue. Social Security is not a social assistance program. It is social insurance program. And it performs very well as a social insurance program.
Now, BA, put the car in reverse, go back to this fork in the road, and let’s continue from there. You can’t damn a program because it doesn’t do what it was never intended to do.
Now, understandablely, conservatives are often hostile to social insurance. But that’s a different issue. Mischaracterizing a social insurance program as a social assistance program isn’t justified.
Social Security is not a social assistance program. It is social insurance program. And it performs very well as a social insurance program.
It performs lousy as a social insurance program.
Coyote needs to re-run those numbers. Just to start with the obvious factors needing no math, he leaves out the disability insurance protection, the inflation adjusted benefits after retirement and the benefits for spouses, widows, orphans and dependent parents. These benefits are 37% of the program (apart from the inflation protection).
The private market has been unable to develop an annuity that has all of the features of Social Security. And certainly nothing in the private sector can compare with the modest 1% of program costs in administrative expenses.
The Social Security bend points give the program progressivity. And the earnings cap limits it from offering insurance coverage above an excessively high wage base.