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Who Benefits from the Federal Government?
A common response to my post showing that The Rich Pay for the Federal Government was that the rich also get more benefits from the federal government. Let's go to the numbers. Here's a chart showing federal spending categories for 2007. (Click to expand.)
Social Security, the biggest category, doesn't benefit the rich at all because net Social Security payments are heavily biased against the rich. According to Eugene Steuerle and Adam Carasso of the liberal Urban Institute a two earner couple earning $230,000 a year (thus putting them at the mean household income for the top 20%) and scheduled to retire in 2030 will pay $227,886 more in social security taxes than they receive in benefits (in present value).
Defense is the next biggest category. To me a lot of "defense" spending doesn't benefit anyone but let's be generous and say that the rich benefit from military spending in proportion to their income share which for the top 20% means 55%. Thus $301b.
Medicare benefits the rich less than the poor since they are healthier (plus they must pay higher premiums) but let's say that Medicare benefits the rich in proportion to their population. If we say the top 20% are rich and assume that this is the same in the 65 and older category then 20% of Medicare goes to the rich. $78.8b.
Medicaid doesn't benefit the rich. The rich do use unemployment insurance but at far lower rates than the poor. Does welfare benefit the rich? Not directly but maybe from the warm glow. I don't think the benefits of charity are what most people mean when they say that the rich benefit from the federal government but who knows. Let's again be generous and say that the warm glow goes just to the rich and that it is worth 20% of the benefit to the poor. $73.4b
Everything else includes the example that people always seem to mention first, roads! Alas, the entire transportation budget is just $77 billion, not much there even if a lot of it goes to the rich. By my judgment a lot of "everything else" has low value but again let's be generous and say that the rich benefit from everything else in proportion to their income share (.55). $233b.
Excluding the national debt gives us a total of $687 billion out of $2597 billion going to the rich or 26%. If we assume that the division of the national debt is the same as for the government as a whole (since this is just past expenditures) the percentage is still 26%.
Thus in a generous accounting the rich get 26% of the benefits of federal spending and pay 68.7% of the costs. In percentage terms the rich get about 37 cents on the dollar.
Alternatively stated about 63 cents of every dollar in taxes paid by the rich is transferred down. Given that the median voter is a taxeater not a taxpayer we should not be too surprised, although this is a smaller number than I would have guessed before I did the calculation. From an efficiency point of view we should be happy that the rich don't get too much - transferring resources creates a lot of waste but transferring resources from the rich to the rich is especially wasteful.
The basic point is clear; In the United States, one can argue for taxing the rich on the ability to pay principle but not on the benefit principle.
Addendum: Thanks to Ted Frank for catching a math slip-up on my part which I fixed raising the total to 26%.
Posted by Alex Tabarrok on December 20, 2007 at 07:43 AM in Economics | Permalink
Comments
You could skew the numbers a little further, by assuming that the federal government provides to each citizen the potential to increase his income above some baseline, which could be achieved by each individual under anarchic conditions; and then by pretending that this baseline is the same for all people, and is significantly different from zero (neither of which is true in practice). This would let you perceive the poor as benefiting not at all, which is about what is required to believe that the rich benefit more than they pay.
Posted by: sammler at Dec 20, 2007 7:58:55 AM
Alex writes:
Defense is the next biggest category. To me a lot of "defense" spending doesn't benefit anyone but let's be generous and say that the rich benefit from military spending in proportion to their income share which for the top 20% means 55%.
Defense spending is the biggest government jobs program ever. Who do you thinks builds all those planes and bombs. It does benefit rich engineers, and maybe some owners of defense companies, but it provides a lot of jobs for regular folk. That is why the Democrats vote for as much military spending as Republicans. It is pork of the highest order.
Posted by: Mcwop at Dec 20, 2007 8:04:39 AM
"In the United States, one can argue for taxing the rich on the ability to pay principle but not on the benefit principle."
I have never been able to see why taxes should be levied any other way. It seems to me that if a government wants to make money, the best way to do so would be to tax people who have money.
Posted by: Aaron Fix at Dec 20, 2007 8:08:43 AM
Welfare and redistribution benefit the rich; they prevent more radical changes (Soviet Revolution) or anarchy (Russia today?). As sammler points out, it is all about the baseline. And determining the appropriate baseline is not really value neutral question that can be answered with more data.
Posted by: Archit Shah at Dec 20, 2007 8:13:04 AM
I can't quite imagine why one would separate the benefits of spending from the benefits of regulation. One typical argument is that the rich benefit a lot more from property rights protection and enforcement, since they have more to lose. I've never been very convinced of the "government benefits the rich because it prevents the poor from stealing from them" argument, but I still wouldn't say that it's primarily spending the rich benefit from.
Posted by: John Phillips at Dec 20, 2007 8:17:21 AM
There's a flip side to the argument that we should tax the rich based on their ability to pay. The annual incomes of the richest can be extremely volatile over time. If a politician's tax policy is to direct taxes collected from these people to specific programs benefiting a certain group of people (aka the "uninsured", "children", "the poor", "farmers", etc.) at some point, instead of just "soaking the rich", they'll be screwing over the "favored" group as well should the millionaires and billionaires paying the tax have a series of bad years (such as 2001-2004) and the tax revenues available to fund the programs are slashed right alongside the fortunes of the rich.
In other words, the rich don't necessarily have the sustainable ability to pay that a lot of people might think they do....
More thoughts (and data) here (same link as above)...
Posted by: Ironman at Dec 20, 2007 8:17:45 AM
I should mention that who pays more relative to income in actual dollars is a very poor indicator of who sacrifices the most.
1) It should be who pays more relative to income earned above some benchmark level (whatever level we decide is a reasonable standard of living). This would mean that some people are paying positive taxes on negative income above that level (i.e. their income is below the benchmark).
2) If you believe in concave utility, then the very rich could conceivably be on a much more flat portion of their utility function, and thus their actual decrease in utility from taxes is the same as that for a poorer person.
I am not suggesting to levy taxes this way, only that these are better ways to think about sacrifice. I don't know anything about public finance economic literature.
Posted by: Aaron Fix at Dec 20, 2007 8:18:53 AM
Alex,
A more fair apportionment of defence will be on asset value, not on income. Since Assets are skewed more than income , you should get a higher percentage of "benefit" to the rich.
warm regards,
Prakash
Posted by: Prakash at Dec 20, 2007 8:34:04 AM
It's not the taxing; it is the state that the rich benefit from.
A large state is a barrier to entry for small business (read individuals). A large state requires legions of administrators that would otherwise be at the lower paid mercy of overtaxed small business. Higher paid Lawyers and Academics all depend upon the large state.
The wealthy are able to quickly profit from large state changes such as port building and globalization. When a mill town closes, the savings of generations is wiped out.
It's the state and it's forms, not the taxes.
Posted by: Paul from Florida at Dec 20, 2007 8:36:56 AM
Alex: What kind of libertarian are you? You miss the main point of government: the protection of property rights.
Protecting property rights makes it POSSIBLE for we rich to be be rich. Without government, we'd all be at a subsistence level, or worse (Warren Buffett is on record doubting that he'd even survive at all). The rich have much and they would have almost nothing without government, and society more generally. Thus, those who have most, benefit most.
As Thomas Hobbes famously put it:
[W]herein men live without other security than what their own strength and their own invention shall furnish them withal... the life of man [is] solitary, poor, nasty, brutish, and short.
Posted by: A student of economics at Dec 20, 2007 8:41:59 AM
Alex--
Many of the posts on this web site argue that our democratic political system is not efficient at allocating revenue and that this process is skewed toward special interests. The special interests are usually wealthy--health insurance industry companies, defense contractors, AMA members, pharmaceutical companies.
Also, you are comparing net government spending with total effective tax rate. I don't think that's valid in the case of Social Security. Social Security tax is capped at around 90k, so it is quite small for high income individuals, but the indirect benefits of a minimum guaranteed pension to high net-worth individuals is significant--they don't need to provide it to their own employees.
But what really bothers me about this, your previous post, and many of your posts is this: I don't trust the rich, and I don't pity them, and I'm suspicious of those who argue their part and try to make me trust and pity them. Especially when they argue that the poor (i.e. the bottom 80%) are also somehow benefiting from the current state of affairs. You just sound mean, Alex.
Posted by: MostlyAPragmatist at Dec 20, 2007 8:42:48 AM
If only Alex thought like an economist, and applied the logic of markets
to the situation.
The real question is how much are the rich willing to pay in taxes to be
rich here in the USA? Plainly, they're willing to pay as much as they're
paying now, else they'd emmigrate. Perhaps we should let markets decide
the tax rates for the rich, by having them bid against each other (and
would-be immigrants) for the privilege of being rich in the US?
Posted by: Mike Huben at Dec 20, 2007 8:42:55 AM
Here's a more complete version of the Hobbes quotation:
[W]herein men live without other security than what their own strength and their own invention shall furnish them withal. In such condition there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.
Posted by: A student of economics at Dec 20, 2007 8:44:06 AM
Protection of property rights is in the everything else category, about 45 billion.
Posted by: Alex Tabarrok at Dec 20, 2007 8:45:38 AM
Alex-
Nice post. I especially enjoy the contortions that various commenters go through to cling to their belief that the rich benefit disproportionately from the state.
Posted by: Rich Berger at Dec 20, 2007 8:49:43 AM
Do you think that that value of protecting property rights in America is worth only 45 billion? That doesn't even cover one particularly well-off citizen in Bellevue Washington.
Surely you understand the difference between cost and benefit?
Posted by: A student of economics at Dec 20, 2007 8:54:30 AM
You're quite generous on a few points, but a little too tight on others.
- First, I am sure you are right that Social Security has negative *net* benefits, but this post was about *gross* benefits. You had previously calculated gross costs based on taxes, so for Social Security it would seem appropriate to calculate gross benefits. Or to put it another way, I think about 50-60% of SS costs are borne by the rich, and at least 20% of the benefits go to the rich. That doesn't make it a good deal, but it makes it better, by at least $120 billion, then you present here.
- Second, for Medicare, I would assume the denominator should not be total US population, but total US population paying taxes, so 2.8% would seem low for total group benefits. I also understand that the over-65 ranks skew rich. It doesn't bump things up much, but perhaps to 10% or even 20% of the benefits going to the rich.
Combining these, you might augment the benefits to the rich by $200 billion, or about 7%.
Posted by: Geoffrey at Dec 20, 2007 9:00:05 AM
For sake of argument, let's concede that our government spending benefits the rich much more than the poor. Let's also say that we need to do something to address growing income and wealth inequality. (Seems to me many of Alex's detractors take both of these positions.)
Lower taxes and reduce government spending! Evidently, money from the 'rich' gives them more benefit when spent by the government than when they keep it and spend it themselves, so why not reduce taxes and stop helping the rich get richer? Still time for a democrat candidate to adopt this platform and be swept into the White House by all of you who believe that government spending unfairly benefits the rich. Of course you would prefer to change the spending patterns to benefit the poor, but, as a start, let's stop spending so much to help the rich. Simply reduce taxes and spending, then watch the rich wiggle and scream as their wealth quickly evaporates, and our nation moves toward income and wealth equality.
Posted by: Fly Fisher at Dec 20, 2007 9:05:13 AM
This graph is such a red herring! This data tells almost nothing about whether the Government benefits the rich or the poor, because it represents a tiny share of what Government does. Only a fool would argue that the rich receive more direct transfers from Government spending - part of being rich is not needing to rely on these pathetic Government transfers.
The rich derive their benefit from Government policies, not from Government transfers. So we need to look at policies.
Tariffs that protect manufacturing workers probably benefit the poorer, at everyone's expense. Business-friendly environmental regulations benefit business-owners at everyone's expense. Foreign wars overwhelmingly benefit the rich (including through asset prices, as Prakash mentioned), and their costs are paid by soldiers who are often poor, and almost never rich. Post war recessions are much more harmful to the poor than to the rich, because they aren't able to hedge their risks.
It would be much more interesting to see on balance whether Government's policies help the rich more than they help the poor. But that is not as easy to write as a simplistic blog post.
Posted by: pnj at Dec 20, 2007 9:10:48 AM
I second Fly's comment. It's peculiar that when someone talks about cutting government spending then it's the poor who benefit from the government and who will be harmed. But talk about cutting taxes and suddenly it's the rich who benefit from government!
Posted by: Alex Tabarrok at Dec 20, 2007 9:13:38 AM
There's nothing like a post about distribution (and perhaps implicitly about fairness) to drive lots of comments. Throughout the discussion there are many, many confusions about what is the appropriate margin. One question is: if government increased spending by one percent, along the lines of its current mix, who would benefit? The rich don't do so great there. Another question is: if we take the entirely of government spending -- without which we would have Hobbesian anarchy -- who benefits from that? The answer to the second question is pretty much identical to people's expected lifetime wealth. You can criticize Alex by invoking this second consideration, but the real question is whether you can show him wrong on the first. Maybe he wasn't clear enough, but lots of you are jumping on him by invoking the second consideration rather than rationally trying to respond to the first. Sort out your margins, people!
Posted by: Tyler Cowen at Dec 20, 2007 9:20:13 AM
Tyler-
The chances of government being eliminated entirely - short of a cataclysm - are indistinguishable from zero. And if that happened, what would prevent voluntary arrangements filling the gap? Otherwise, I agree with your post.
Posted by: Rich Berger at Dec 20, 2007 9:49:07 AM
A folk tale from Nigeria:
Once there were two boys who were great friends, and they were determined to remain that way forever. When they grew up and got married, they built their houses facing one another. There was a small path that formed a border between their farms.
One day, a trickster from the village decided to play a trick on them. He dressed himself in a two-color coat that was divided down the middle. So, one side of the coat was red, and the other side was blue.
The trickster wore this coat and walked along the narrow path between the houses of the two friends. They were each working opposite each other in their fields. The trickster made enough noise as he passed them to make sure that each of them would look up and see him passing.
At the end of the day, one friend said to the other, "Wasn't that a beautiful red coat that man was wearing today?"
"No", the other replied. "It was a blue coat."
"I saw the man clearly as he walked between us!" said the first, "His coat was red."
"You are wrong!" said the other man, "I saw it too, and it was blue."
"I know what I saw!" insisted the first man. "The coat was red!"
"You don't know anything," the second man replied angrily. "It was blue!"
They kept arguing about this over and over, insulted each other, and eventually, they began to beat each other and roll around on the ground.
Just then, the trickster returned and faced the two men, who were punching and kicking each other and shouting, "Our friendship is OVER!"
The trickster walked directly in front of them, and showed them his coat. He laughed at their silly fight. The two friends saw this his coat was red on one side and blue on the other.
The two friends stopped fighting and screamed at the trickster saying, "We have lived side by side like brothers all our lives, and it is all your fault that we are fighting. You have started a war between us."
"Don't blame me for the battle," replied the trickster. "I did not make you fight. Both of you are wrong, and both of you are right. Yes, what each one saw was true. You are fighting because you only looked at my coat from your own point of view."
Posted by: anonymous at Dec 20, 2007 9:59:40 AM
To those saying that the benefit the rich receive is from protection of property rights - outside of intellectual property, that's not primarily a federal government responsibility/service. It's a local/state government service. It's the local cops and state judicial systems who respond to burglaries and create most law and order - not the feds.
If you want to invoke property rights protection as the primary/significant benefit to the rich, then you'll need to put it in context of the combined effects of all government, not just the federal government.
Posted by: Jody at Dec 20, 2007 9:59:54 AM
For those criticizing Alex on this point, exactly what are the costs of protecting private property and "allowing" the rich to get rich?
"Defense" could only be seen so in the loosest of terms, since there has been no serious attempts to invade and conquer the country from without in anything resembling recent history. Copyrights and trademarks would fall under the "other spending" category. None of the physical protection of private property or "enforcement" comes from the federal level.
So that skews far away from the rich benefiting, since it's obvious that the federal government can protect private property without levying a large income tax. In fact, there was no income tax for the majority of the country's history, yet people seemed to thrive.
Posted by: Jarick at Dec 20, 2007 10:04:01 AM
All of which assumes that the rich actually pay the taxes they turn in, as opposed to collecting them.
Posted by: Randy at Dec 20, 2007 10:05:50 AM
Tyler: Good point.
Which margin would you like to cut first? If you first cut $45 billion from property rights protection, it's pretty clear that the rich would suffer the most, having the most property to protect with the use of government force.
Some people seem to assume that this margin would not be cut until and unless those margins that benefit the poor and middle class were cut or eliminated first. Why should that be so? After all, that's not the way it happened in Russia in 1919 or China in 1945.
In the long run, one can wonder whether the median voter (for that matter, the bottom 90% of the wealth distribution) would long tolerate a property-rights only government that fostered an increasingly unequal distribution of the benefits of civilization. (Actually, it appears that many in the top 0.1% wouldn't be a fan of such a society either.)
In that sense, even the services and transfer payments, and the protection of state and local governments, are part of the grand bargain that preserves the wealth of those who do well in our current arrangement.
Posted by: A student of economics at Dec 20, 2007 10:07:55 AM
Don't get me wrong, I'm not at all in favor of taxing the rich more, because I am aware that taxing the rich more really means taxing me more.
Posted by: Randy at Dec 20, 2007 10:10:39 AM
In the long run, one can wonder whether the median voter (for that matter, the bottom 90% of the wealth distribution) would long tolerate a property-rights only government that fostered an increasingly unequal distribution of the benefits of civilization. (Actually, it appears that many in the top 0.1% wouldn't be a fan of such a society either.)
In that sense, even the services and transfer payments, and the protection of state and local governments, are part of the grand bargain that preserves the wealth of those who do well in our current arrangement.
To make the bargain more transparent: give us some of your stuff or risk us stealing all of your stuff.
My wife likes to call the government the only legal mafia (that's a real nice house you have there. Be a shame if something should happen to it.) Based on student's perspective, I'm afraid she's right.
Posted by: Jody at Dec 20, 2007 10:16:00 AM
Alex is basically correct no matter what incidence assumptions you make government spending.
Here a 2007 study that attempts to answer Alex's question in a more systematic way. Be sure to see the appendices with all the alternative incidence assumptions:
http://www.taxfoundation.org/files/wp1.pdf
Posted by: Andrew at Dec 20, 2007 10:17:31 AM
Do old people vote becuase they get money from Gov. or do old people get money from Gov. becuase they vote?
Posted by: Floccina at Dec 20, 2007 10:20:20 AM
Counting dollars spent is not the way to go, I think. The rich benefit from roads, a smoothly functioning legal and financial system, and from medical research and regulation. Every dollar spent at the SEC or FDIC, say, benefits the wealthy by sharply reducing costs for transactions that would otherwise be very expensive to verify. Predictable financial systems do not have gov't spending as their only basis, of course.
My main point is that benefits do not directly follow from outlays; the useful ones (roads, meat inspection, the SEC) produce benefits far exceeding money spent.
Posted by: lw at Dec 20, 2007 10:30:29 AM
One benefit not mentioned is the lower rate of taxes the rich face in the US in comparison to other well developed nations.
Another benefit the rich receive (however impossible to measure), is favorable policy. Large campaign contributions and political donations often skew public policy to favor the rich financially.
Posted by: Colin M at Dec 20, 2007 10:37:13 AM
I'm afraid the only way to reach a property rights utopia with a minimal government is to remove the vote from those pesky bottom quintiles.
Posted by: jim in austin at Dec 20, 2007 10:39:33 AM
I'm confused by the second paragraph in which social security outlays are not counted as a "benefit" for the wealthy. Just because they pay more into social security than they get out does not mean that they get zero return from it, any more than a $100 stock which falls to $50 is the same as one that falls to $0.
I don't know very much about the details of social security distributions, but assuming that it is uniform in its distributions, shouldn't the top 20% be counted as receiving 20% of the social security benefits? Under that assumption, the top 20% of income earners should be credited as getting an extra 0.2 * $586b = $117b, rather than the flat $0 attributed to them now.
Admittedly this doesn't change the core point that the wealthy pay more into the government than they get out, but it does raise their rate of return from 687/2597=26% to 804/2597 = 31%
Posted by: Antibob at Dec 20, 2007 10:41:55 AM
Alex, what sort of powerful mojo are you exerting here-- to make so many good liberals argue that a monopolist has the right to extract every ounce of consumer surplus that it possibly can?
Posted by: Paul Zrimsek at Dec 20, 2007 10:43:18 AM
lw,
Following the money is the best way to know who the owners are, that is, the people who are collecting the rent. What they do with it is irrelevant to separating the rent collectors from the rent payers. Take another look at the chart. Some of the recipients are wealthy and some less so, but they are all benefitting from the collection of rent. And that's the real division in this country. not rich and poor, but political and non-political, rent collectors and rent payers.
Posted by: Randy at Dec 20, 2007 10:48:14 AM
Maybe it is the politicians who benefit most from Gov. spending. Prestige the feeling that they are helping the needy access to Gov. property etc.
Posted by: Floccina at Dec 20, 2007 10:58:55 AM
The falicy in this is that it compares the cost of federal spending, and not the value that spending provides. In some cases the value to society of a federal service is far in excess of its cost (e.g., maintaining the rule of law), and in some cases the value is less than the costs (e.g., ethanol subsidies) or even negative (e.g., the War in Iraq). I think that while the costs may arguably in line with Alex's numbers, if you ran the numbers based on value provided, the rich would come out far ahead.
Posted by: Spike at Dec 20, 2007 11:12:40 AM
No question about it Floccina. I doubt that a tenth of the political class would hang around if there was no profit in the enterprise.
Posted by: Randy at Dec 20, 2007 11:15:28 AM
Spike,
I've considered the "value of government" argument, but I reject it on the grounds that the funds are collected under threat of violence. If I pay for a service willingly, then the service provider has the right and justification to claim that the service he provides has value. But if I am forced to pay for some supposed service, then the "provider" has no right and no justification to claim that his service has value.
Posted by: Randy at Dec 20, 2007 11:23:20 AM
Classic distraction. We have $2,841 in spending. Who collects this money that is spent? That's right, the rich!
Government collects money from everybody, and then uses it to buy goods and services from the rich, thus subsidizing their businesses and padding their profits.
The small amount of benefit allowed to the poor the a small bone tossed to the great unwashed to make this whole system seem palatable.
Posted by: Stephen Downes at Dec 20, 2007 11:25:12 AM
"Maybe he wasn't clear enough, but lots of you are jumping on him by invoking the second consideration rather than rationally trying to respond to the first. Sort out your margins, people!"
Wanting the discussion to be about "the first" does not make it so. Insisting that we stick to the margins doesn't change the fact that some of us find value in looking at the whole picture. I am rather suspicious of arguments which rely heavily on "no, no, don't look at that" regardless of whether "marginal" is included in that argument.
"Who benefits most?" is not the same question as "Who benefits most at the margin?" and it does seem that the initial question was "Who benefits most?" no matter how much that displeases Tyler. In fact, the calculations offered have to do with shares, rather than with changes, so the question iniitally presented is pretty obviously not "who benefits at the margin?"
There are ever so many risks in thinking about things from one's own perspective and denying the perspective of others.
Posted by: kharris at Dec 20, 2007 11:29:30 AM
Alex,
a two earner couple earning $230,000 a year (thus putting them at the mean household income for the top 20%)
That is a very misleading statement. A household making $230,000 a year is in the top 2-4%. This is according to the US Census. The top 20% cutoff is $97,500 for a household, not individual. I don't know why you insist to use the very inaccurate and misleading mean of the income ranges, rather than the actual percentile.
Posted by: Mo at Dec 20, 2007 11:30:14 AM
One big reason the rich do not benefit from social security is that if you earn a certain amount before counting your social security check, that social security check is taxed to the point of making it meaningless.
For anyone who is young and making decent money, just assume that the government will, at some point, confiscate your contributions for redistribution or that, due to inflation, it will be worthless by the time you would claim it. Either way, just be happy for that time in the year when you go past the 90K mark and you are no longer paying into a system worth zero for you.
Posted by: Patinator at Dec 20, 2007 11:33:32 AM
C'mon libertarians- no ones 'forcing' you to pay taxes, you've agreed to pay them by living here.
Posted by: mafiosa at Dec 20, 2007 11:37:00 AM
Can someone explain how we are accounting for the distribution of cash value from government spending? When the govt pays $30 million in unemployment compensation, the cash goes to the unemployed person. When the government pays $30 million in Medicare bills, the patient receives services but the cash goes to the doctor's office. When the government buys a $30 million airplane for the Air Force, the cash goes to Boeing. When the government pays $30 million in interest on the Federal debt, the cash goes to the bond holders.
How do you apportion the cash benefits to Boeing, doctors offices, and bondholders across the income distribution?
Posted by: Joe at Dec 20, 2007 11:38:42 AM
Mafiosa,
Great handle. As for the idea that I agree to pay because I live here, its more accurate to say I pay because I think its in my best interest to live and do business here. In other words, its a rent payment. But its still a use of force. They don't kick me out if I don't pay. They throw me in jail.
Posted by: Randy at Dec 20, 2007 11:53:53 AM
Exactly, Joe. And my point above is that it makes no sense to apportion it across the income distribution. What matters is that some collect the rent and some pay it, and to generalize, the political class collects, and the non-political class pays. Talk about your incentives...
Posted by: Randy at Dec 20, 2007 11:59:22 AM
Kharris (and Tyler and Alex): It seems that Tyler has already conceded that the total benefits of government (Alex's original question, as literally interpreted) accrue to people roughly according to "people's expected lifetime wealth". In other words, the rich benefit much, much more from government.
But even the reformulated question about margins in no way supports Alex's claim that the rich don't benefit as much as the poor. A perfectly feasible margin to adjust is property rights regulation and enforcement. It is, despite Alex's misleading COST-based arithmetic, arguably the most important and valuable BENEFIT of our government. (The question was about BENEFITS, right?) Cut or change that, even a little, and the wealthy suffer greatly.
It's not hypothetical or "zero probability" as some might wish. You needn't go to Venezuela or Iran or China to see that. Recently, George Bush and the Federal Reserve, hardly traditional socialists, proposed revising the property rights of bankers to prevent them from demanding their contractually-required interest payments on adjustable mortgages. On the margin, property rights are hardly inviolable. Rather, they are constantly being changed on the margin, sometimes for the benefit of wealthy people, sometimes not.
Bottom line: 1) Government unmistakably benefits the rich far more than the poor overall. 2) Its effect on the margin, depends on which margin you change. It would be silly to consider only margins that hurt the poor or middle class, given that the biggest benefit of government is enabling and enforcing (via threat of violence!) the current income and wealth distribution.
Posted by: A student of economics at Dec 20, 2007 11:59:34 AM
Archit Shah says, "Welfare and redistribution benefit the rich; they prevent more radical changes (Soviet Revolution) or anarchy (Russia today?)."
Any quick glance over Soviet history will indicate that anything preventing a Soviet-style revolution is at least as good for the poor as the rich. It isn't as though communist revolutions end up putting in governments that help the poor.
Posted by: J. at Dec 20, 2007 12:04:45 PM
Stephen Downes waaay overstates it, but Alex does overlook the representation of the "rich" in the chunk of society that are tax consumers. As many economists, Milton Friedman most notably, have pointed out, for most of the welfare programs, only a modest portion goes to the intended (poor) beneficiaries. The rest goes to (1) the vast army of bureaucrats running the programs, many of whom are in the top 20% of income earners, and (2) various professionals, some of whom are ultra high-priced (doctalawya's, consultants, engineers, etc.). I think it's fair to say that much of Ross Perot's rise to billionairehood was owing to the Great Society programs of LBJ.
Many years ago, about 1970, in a much more progressive tax situation in the US, economists Eugene Smolensky and Morgan Reynolds did a study on the "Post-Fisc Distribution of Income". I don't recall the exact methodology, but the conclusion was that there was very little change. If this study was re-done today, my guess is that it would show more of a tilt to the broadly-defined rich--say, the top 20%. So I agree w Stephen Downes that Alex is basically wrong. Even libertarians like Friedman and Reynolds would say that the rich are net beneficiaries, "post-fisc."
Posted by: Bill Kruse at Dec 20, 2007 12:11:45 PM
Another interesting observation: a group of economists hung up over wealth redistribution as if it actually matters to the well-being of classes. What happened to productivity?
Devil's advocate: Disproportionate wealth transfer to the poor benefits the rich by providing a disincentive to education and achievement. Satiating the basic needs of the lower class undermines the drive to improve one's condition. One must only change the perception, not the reality.
Orwell would be proud of that one.
Posted by: Jarick at Dec 20, 2007 12:22:08 PM
Nice post. I especially enjoy the contortions that various commenters go through to cling to their belief that the rich benefit disproportionately from the state.
Psychologically, some of it strikes me as an example of what Nietzsche called "slave morality." The rich -- by their possessions, culture, celebrity, freedom of action -- make the non-rich feel bad. The non-rich fight back by recharacterizing their own disadvantages as virtues. "The rich are only rich because of the work WE do." "The rich are only rich because (unlike us) they manipulate the system." "The rich are only rich because they are greedy; we're not." "The rich are only rich because we permit it in exchange for the taxes they pay." Etc.
Posted by: jp at Dec 20, 2007 12:27:36 PM
There are two distinct issues here:
1) Who benefits most from government?
2) How should government be funded?
These are separate and distinct issues.
As to the former, I firmly believe that the rich benefit more from the federal government than do the poor. As Tyler points out, this is not borne out by what the government spends. On the other hand, government spending only accounts for a small portion of benefits flowing from the U.S. government.
As to the latter, the rich should certainly shoulder a larger share (proportionally) of the cost of government than the poor, as they are financially able to do so. And the failure to fund government would destroy government altogether. That would be a detriment to everyone and is, arguably, immoral.
We are then left with the question of how much of the government's cost should the wealthy bear. Or, what is equitable? I truly do not know. But I find arguments that the wealthy are paying too much very unpersuasive if there is no explanation of what they should pay (and morally bankrupt if the argument is that they should pay only their proportionate share). I also find arguments that the wealthy are paying too little unpersuasive if the arguments are not at least supported by theory.
One note. Much of the nation's wealth is, well, wealth. We don't tax that on the federal level (there are local property taxes). Why don't we? If, as some have argued, the primary reason for any government, to include the federal government, is to protect property rights, why do we not tax property, i.e., wealth, on the federal level.
Posted by: Allan at Dec 20, 2007 12:34:03 PM
Jp-
Being rich can be an attitude, but some are just born rich. Others are born to complain and envy.
Posted by: Rich Berger at Dec 20, 2007 12:40:41 PM
We are then left with the question of how much of the government's cost should the wealthy bear.
Before we answer that question, we should answer the question, How much should government cost?
Posted by: jp at Dec 20, 2007 1:00:57 PM
Rousseau first articulated the principle which has driven the "tax the rich" approach ever since. In the "Discourse on the origin of inequality" he says civil society is essentially a conspiracy by the rich to impose the private property regime on the non-rich. This regime secures the property of the rich and harms the poor -- the early version of the 'progressive immiseration' thesis.
Whatever the numbers say, the rich alone are the ones who benefit from civilization.
Hence any penalties imposed on the property owners by the rest of us are more than justified. The idea of mitigating the inequality created by civilization is now deeply taken for granted.
Posted by: Kent Guida at Dec 20, 2007 1:01:00 PM
BTW -- About a week ago, I posted the same data that Alex has posted here on a discussion board for members of Mensa. FWIW, the comments here have been much better informed and better argued than those of the Mensa people.
Posted by: jp at Dec 20, 2007 1:04:18 PM
Jp,
IMHO how much government should cost is a question for another thread. It is a good question that is debated daily.
We know (in theory) how much government does cost. The question for this thread is how to pay for it.
Posted by: Allan at Dec 20, 2007 1:08:28 PM
A benefit not listed in the post, nor the comments (well not completely) as far as I can tell is:
A robust safety net increases the access one of the more affluent members of our societies can enjoy within the society.
I have met an individual who spends time in both Rio and Chicago. In Chicago he has relatively safe open access to the entire city. While in Rio, the same cannot be said.
A robust "safety net" to insure a games stlye "postive fairness" rating in the lower classes reduces all maner of harms that an affluent member of said society might experience in a society in which the lower echelons do not rate as "fair".
Yes, fairness awareness has been identified as an "irrational" response by many economists, but recent research indicating that lower base primates than humans play "games" "rationally", indicates the possibility that "fairness" is actually one of many evolutionary stepping stones like communication to our present location on the ascent we find ourselves in.
Fairness may increase safety and decrease disease, just to give two examples, as well as increasing the variety of experiences safe to purchase. Indicating that the "rich" may indeed be drawing a direct benefit from social security, Medicare, welfare and other "fairness" formats.
Posted by: Lawrence at Dec 20, 2007 1:09:23 PM
Some writers here seem to be falling into the fallacy of "bundling" everything government does. If property rights enforcement in the United States costs (say) $50bn, and the rich benefit overwhelmingly from that, make them pay overwhelmingly for that. There is no reason from a benefits point-of-view why their large net benefit in this area means they ought to contribute more to different benefits in other areas; and though there is a clear argument from a fiscal and equity point-of-view for progressive taxation, a benefits point-of-view is what Alex's argument was about.
Posted by: Millian at Dec 20, 2007 1:16:33 PM
Who benefits the most from military spending below?
A) Taxpayer (estate lawyer) with a $2,000,000 salary, they are opposed to war, and would like to cut military spending
B) Taxpayer with a $65,000 salary that builds military aircraft and is all for the Iraq war.
Posted by: Mcwop at Dec 20, 2007 1:30:08 PM
I think it's both right and wrong to say that the rich don't benefit from the current establishment.
I propose that the benefits doled out to the lower class are probably seen as the cost of doing business to placate the masses to avoid either political or economic revolution.
The rich have by definition benefitted from the system, and they want to keep it that way. This is not to say that I don't want a freer and freer market, including blowing up, figuratively of course, the anti-competitive measures big business and big government collaborate on. It's just to say that I would hypothesize that the rich are some of the biggest enemies of small, limited government.
Posted by: Andrew at Dec 20, 2007 1:38:27 PM
Mcwop,
It depends. If all of the estate lawyer's clients are the founder of Lockheed-Martin, he is the clear winner...
Posted by: Allan at Dec 20, 2007 1:40:59 PM
Everyone here is making a huge error by entirely neglecting income mobility, and treating each quintile as if it is an unchanging group of people.
In the last 10 years, my annual income has ranged between $10,000 and $175,000. Should I be counted among the rich or the poor?
Posted by: Russ R at Dec 20, 2007 1:45:11 PM
Millian,
Your posting presents an interesting point.
Assuming we can quantify the exact benefit a person gets from the government. I guess, under the benefits theory, the person should pay for that and the ability (or inability) to pay more is irrelevant. On the other hand, for the ability to pay crowd, the benefits received are irrelevant.
I am for an ability to pay model. However, I do believe that there should be some quantification of the benefit in order to show benefit.
It is hard to explain, but it is not a zero sum game. The amount of benefit from government does not equal 100%. I would argue that the benefit from government to society greatly exceeds the amount of taxes put in. So, if we have everyone pay the exact amount for the benefits that they receive, we would have a huge surplus in government coffers.
We don't want that. So, we then have to figure out how much of a discount everyone should get. I will assume, for the purposes of this argument, that everyone agrees that if you receive $1 in government benefits you should pay $1 in taxes.
I cannot, for the life of me, figure out a formula for this. But I think that this is one of the bases for arguing that the wealthy do not pay too much in taxes and may be paying too little.
Posted by: Allan at Dec 20, 2007 1:46:56 PM
People misunderstand who gets punished by the destruction of government. First, there is no Hobbsian anarchic existence because control will eventually ascend. Second, the rich can afford security, to prop up a strong man, to take for themselves by force the nation's raw materials and labor, and to destroy avenues to competing wealth like innovation, education, productivity, and risk taking. Which avenues to wealth they don't destroy, they restrict traffic to simony and nepotism. If any poor person manages to get past that and acquire a little wealth, the truly wealthy can take it from him by force.
As a group, the rich, particularly those without remorse, will manage without the Federal government and secure their relative wealth. The poor will be much worse off and without hope of bettering themselves. Lifetime expected wealth is reduced for everyone, but it is much, much worse for the poor. Its been a while since the non-wealthy of this country truly feared for security, shelter, food and a promise for their children. The Wealthy as a group never have feared losing those things.
This is true in Russia today, medieval Europe and Asia, and classical Mediterranean. This is true notwithstanding various exceptions that can be pointed out.
Posted by: guy in the veal calf office at Dec 20, 2007 1:50:53 PM
Can anyone point me to similar information based on high net worth individuals (as opposed to high income individuals)? To me, they are the real "rich."
Posted by: Curmudgeon at Dec 20, 2007 1:52:27 PM
I also agree with the "bundling" statement.
To me, it's simply economic laziness to avoid "internalizing" the costs. As in privatization where it is feasible, and user fees elsewhere. The tragedy of the commons is well known. The rich should pay for those things that they benefit from. How can we accomplish this in a Democracy? We can't. We can hardly discuss it. A Republic, maybe.
I echo Paul from Florida on barriers to entry. The rich benefit from the status quo, but the answer is not to give the government more money, because it's the government that locks in the status quo. The answer is to lower government-imposed barriers to entry. Some speedbumps for big business are mountains for small business. To quote Justice Antonin Scalia "Sometimes evenhandedness is not fairness."
Posted by: Andrew at Dec 20, 2007 1:55:04 PM
Hey Alex, do you now agree with your co-host Tyler Cowen when he writes that the total benefits of government are roughly equal to "people's expected lifetime wealth"? In other words, the rich benefit much, much more from government.'
If so, you should correct the math in your blog posting. Here's a start, based on the CBO data you provided earlier: the richest 20% pay about $60K in taxes annually for a benefit of about $231K each year. You can do some NPV stuff to convert to lifetime expectations if you want, or use Ed Wolff's wealth data (which are much more unequal than incomes), but it won't change the basic point.
This means the richest 20% get about $231K-$60K or about $170K per year from the existence of government. Not a bad amount of benefit from government, and certainly a lot more than what the bottom 20% get. (And no, it does not make sense to take ratios instead of differences, since benefit is relative to what they would have with no government.)
If, despite the title of your post and the data you provide, you now prefer to assess everything "on the margin", you need to explain why you would cut margins of government that benefit poor and middle class people rather than those that benefit wealthy people.
Of course, if marginal benefits are proportional to total benefits, as you apparently assume in your original post, then you can just go with the above calculation.
So, do you disagree with Tyler, or do you want to correct your calculations? :)
Posted by: A student of economics at Dec 20, 2007 1:59:42 PM
But what happens when you consider transfers that are caused by government regulation that do not go through the Federal government? E.g., if the government protects a private monopoly, surely someone gains a lot, but it won't necessarily show up in government expenditures.
-Kevin
Posted by: Kevin Postlewaite at Dec 20, 2007 2:03:01 PM
ASOE-
I'm in the top 20%, pay roughly the annual taxes you cite, so I should be getting $231K of annual benefit. Please tell me where I can get my hands on that generous gift from the poor.
As you may imagine, I'm pretty excited by my new-found windfall. It's a Christmas miracle.
PS - I am sure I am not alone in my awe of your ability to come up with such impressive nonsense. My hat (my mink hat) is off to you!
Posted by: Rich Berger at Dec 20, 2007 2:18:30 PM
I see a moral case for collecting taxes mostly from the rich (because the poor spend all or most of their money on necessities, while taxes on the rich only cut into their discretionary spending). But I see a stronger moral case for drastically cutting the size of government.
When you come down to it, all taxes are protection rackets. Therefore it is morally unacceptable to collect them for ANY purpose beyond those absolutely necessary (police, courts, and defense).
Once you accept this moral principle, the idea of taxing the rich because they can pay reduces to Willie Sutton's reason for robbing banks: "Because that's where the money is."
Posted by: John David Galt at Dec 20, 2007 2:20:31 PM
Do any women ever comment on postings like this one? And even if there are a few, why so few?
Just curious. And certainly with no politically-correct motives ...
Posted by: Michael Blowhard at Dec 20, 2007 2:25:42 PM
Rich,
You experience it every day. It's just that the benefits are not in dollars. It is in the fact that you can go to a federally subsidized hospital; that your accountant, lawyer, and doctor can be educated; and that you can freely travel from state to state. It is that you can have untainted meat and fresh fruits and vegetables year round. And there are a myriad of other ways.
I would posit that every taxpayer in this country, except those at the very top of the earnings list, get more from their government than they pay in taxes. In that, I am confident. Even those at the very top may be coming out ahead.
How can that be, you ask. Well, it can happen where the government benefits accrue to the citizens exceeds the taxes that come in. That is, if $X in taxes produces $X + $Y in benefits, and the rich get $X + $Z in benefits and Z < Y, and the remainder of the benefits ($Y - $Z) go to the not rich, everyone is still getting a good deal, even if the rich pay all of the taxes (the rich get $Z return on their investment and the not rich are taken care of).
I believe that our government produces a positive return on our investment (taxes). Sure, the rich pay more taxes, but their benefits exceed the amount of taxes they pay.
Caveat: all of this is theorectical. I wish there were some research on this theory or that I had the wherewithal to do the study myself.
Posted by: Allan at Dec 20, 2007 2:32:37 PM
"Whatever the numbers say, the rich alone are the ones who benefit from civilization."
You can't possibly mean that.
Posted by: Doug at Dec 20, 2007 2:35:10 PM
Andrew: "It's just to say that I would hypothesize that the rich are some of the biggest enemies of small, limited government."
What is the basis for your hypothesis? How many truly wealthy people - with net worths greater than $25 million - do you know? The several I have known tell me this: we will be winners regardless of what the system gives us. But we're going to take advantage of whatever is available to us. To ignore the spoils of big government would give our competitors - or adversaries - an advantage.
The enemy of the middle and lower class is not the capitalists but rather the big government. It is the 535 members of Congress who use the authority to tax and the authority to determine recipients of the $2.9 trillion budget in harnessing pure power.
True capitalists are burdened by big government much more than they are helped. Their enterprises would thrive like never before if Leviathan were slayed.
Posted by: John Dewey at Dec 20, 2007 2:35:26 PM
Student I agree with Tyler that "the real question" is whether you can show that I am wrong about the distribution of government spending on any reasonable margin. It's idle chatter to speculate and what would happen if there were no government - some say anarchy others say Galt's Gulch. Who knows?
I showed in the first post that the rich pay for most government spending. In the second, I showed that most government spending does not go to the rich. Do you deny?
Be specific. Suppose the government were 50% smaller with all programs and taxes being reduced equally. Who would benefit most?
Posted by: Alex Tabarrok at Dec 20, 2007 2:35:40 PM
john david galt: "all taxes are protection rackets. Therefore it is morally unacceptable to collect them for ANY purpose beyond those absolutely necessary (police, courts, and defense)."
I completely agree!
Mr. Galt, I always enjoy reading your comments.
Posted by: John Dewey at Dec 20, 2007 2:39:02 PM
Once again, I'd like to point out Better Off Stateless as one of the few analysis of what actually happens when the government goes away.
Posted by: TGGP at Dec 20, 2007 2:39:28 PM
On the subject of policy, Dean Baker's The Conservative Nanny State is a good read but disappointing in that it is not actually advocating eliminating a great many of the policies it points out (as Milton Friedman did with licensing) but just trying to justify other policies favored by progressives.
Posted by: TGGP at Dec 20, 2007 2:44:50 PM
Plainly, they're willing to pay as much as they're
paying now, else they'd emmigrate.
No, Huben, they'd renounce their citizenship, as mere emigration does not free an American from the tentacles of the IRS.
Your argument is pretty stupid, otherwise, but this part especially warranted a callout.
Posted by: Bob Dobalina at Dec 20, 2007 2:46:03 PM
Allan: "I believe that our government produces a positive return on our investment (taxes)."
That's just an amazing statement.
It is probably true that the requirements for an orderly free market economy - police, courts, and defense, as Mr. Galt listed - provide citizens the opportunity to achieve, through their individual efforts, a positive return greater than the taxes to support those requirements. But there is just no way all the garbage expenditures and transfers by our federal government are producing a positive return. Further, the continued interference in markets - such as ethanol mandates - have impeded increases in our standard of living.
Please note carefully - the taxes to support police, courts, and defense do not provide the positive return. Those expenditures only allow free men to achieve their potential.
Posted by: John Dewey at Dec 20, 2007 2:53:09 PM
Alex,
Don't take this the wrong way, but you are being obtuse. Yes, if you look ONLY at what the government actually pays out and individuals receive monetarilly, the rich do not get more. You need to look at the intangible and indirect benefits to truly see the value of government.
To put it in a way you might understand: IBM might have $1 billion net worth when you consider only tangible assetts. But, if I wanted to buy IBM, I might have to spend $2 billion. Why? Because the good will IBM has is worth something. The intangible benefits from government are also worth something and that must go in the calculation.
Posted by: Allan at Dec 20, 2007 2:54:29 PM
Mr. Dewey,
I am intrigued. Is there no value to "allow[ing] free men to achieve their potential?"
Put another way, if your government did not allow you to achieve your potential, how much would you pay for that right?
Personally, I think there is value, I just don't know how to quantify it.
Posted by: Allan at Dec 20, 2007 3:04:48 PM
Alex: thanks for responding. This is a good and interesting discussion.
You say: "It's idle chatter to speculate and what would happen if there were no government"
Well, YOU asked who benefits from government. Thomas Hobbes, Tyler Cowen, Warren Buffett and lots of others all come to pretty much the same conclusion. If you want to know who benefits from government, you need to compare it to the alternative, which is anarchy. Obviously, rich people benefit more (not so say there wouldn't be some "winners" in the war of all against all, but I doubt Bill Gates and Warren Buffett specifically would retain their billions, or perhaps even their lives.)
You request: "Be specific. Suppose the government were 50% smaller with all programs and taxes being reduced equally. Who would benefit most?"
In my judgment, most of the total benefits of government do NOT come from direct monetary spending. I think most libertarians would agree. So it biases the question to focus only on cutting the financial components of government. We could make lots of changes on the margin in lots of government programs, e.g. cap mortgage rates as Bush has proposed, to reallocate some property rights from bankers to home purchasers, etc. If we made marginal changes in government in proportion to the total benefits, both financial and non-financial, then by definition, people would benefit or be hurt in proportion to the total value of government to them. In other words, the rich would be hurt more.
You seem to assume that property rights allocation and enforcement role is inviolable, but, say, health care or education spending can "reasonably" be cut on the margin. There's no theoretical or empirical basis for such an assumption (unless you want to appeal to some divine endower of certain rights, but you'll then find others have different interpretation of divine rights). Your assumption of what could and should be cut "at the margin" simply reflects your personal values and/or preferences. Look around the world, including the U.S., but especially certain other countries, and you see this. What's more, I suspect that the cost of protecting property rights would go up astronomically if the wealth distribution were dramatically more unequal. It's an equilibrium that would probably leave even wealthy people materially worse off.
Last but not least, in addition to the enormous financial and non-financial benefits wealthy people like me get from government (for which I'm grateful, even if some are not), like most other humans, I am a fundamentally social animal. Hence, the utility of other humans directly enters into my own utility function. I don't like to see suffering, so living in a highly inequitable society, like say Panama, or Medieval Europe, would give me great disutility, regardless of how many servants or flat screen TVs I could afford.
Posted by: A student of economics at Dec 20, 2007 3:13:12 PM
Allan, what you are missing is that I compared taxes with spending - two things which are measured on an equal basis. If you want to look at the intangible benefits of government then to be count correctly you should also look at the intangible benefits of the money the rich would have had if they didn't have to pay so much taxes. Counting the "consumer surplus" of the spending but not of the taxes is just cheating.
Posted by: Alex Tabarrok at Dec 20, 2007 3:16:58 PM
Re; "Suppose the government were 50% smaller with all programs and taxes being reduced equally. Who would benefit most?"
The non-political class would benefit most. First, because these are the people that are most likely to be net rent payers. Second, because if they still want some of the types of services that government offers they will continue to pay for them via voluntary programs which would be far more efficient than the current bureaucratic programs. They would lose nothing, while gaining from the ending of programs which they do not use but are forced to pay for, and the greater efficiency of voluntary programs for what they do use.
Posted by: Randy at Dec 20, 2007 3:21:29 PM
Student like Allan you forget that I compared taxes with spending. If you want to add regulation then please go ahead and do the calculation but do so fairly by adding up the costs of regulation to the rich as well as the benefits.
Posted by: Alex Tabarrok at Dec 20, 2007 3:24:12 PM
This is the least credible analysis I've seen in a long time.
However, that said, I'm willing to enthusiastically accept it.
Let's cut all government spending and taxes in half tomorrow and let the rich suffer.
Posted by: dizmal at Dec 20, 2007 3:30:30 PM
It would also help if the people adding up the benefits would avoid nonsensical approaches to the question of factor productivity. No one would suggest that the company which sells cotter pins to Toyota is entitled to all Toyota's profits on the grounds that it couldn't make any money if the wheels were always coming off its cars. Yet the parallel assumption WRT government is all over this thread.
Posted by: Paul Zrimsek at Dec 20, 2007 3:33:59 PM
"If you want to add regulation then please go ahead and do the calculation but do so fairly by adding up the costs of regulation to the rich as well as the benefits."
This sounds hard, but it's really not. As Tyler explained, a good approximation of the total value of government , (including all tangible and intangible costs and benefits of regulation), is the present value of lifetime wealth.
For someone with $100,000,000 of lifetime wealth, that works out to... ah...let's see....got it!: roughly $100,000,000. Interestingly, I guess that means a wealthy person benefits more, at least monetarily.
Alex: Did I make an error in the math?
P.S. Exercise for serious math wonks: assume an average of $1 of consumer surplus for each dollar of lifetime spending and compare a rich person with a poor person in terms of consumer surplus. Who comes out ahead? Show your work.
Posted by: A student of economics at Dec 20, 2007 3:34:53 PM
Alex,
I understand that you compare taxes with spending. But there is no rational basis for doing so, except to figure out how much money a given person or group of people receives from the government. That sum, whatever it is, does not indicate how much benefit is received from government as a whole.
IMHO, taxes should be paid on the benefits received. Sure, subtract out regulatory costs, they do reduce the benefit.
But if you are going to complain about taxes, be honest about it.
Posted by: Allan at Dec 20, 2007 3:38:41 PM
Allen,
Again, I don't think the government has the right to claim or assume that the services they offer have any value. The fact that they use force to fund the services invalidates the right and the justification for the claim that the services have value. Make the programs voluntary and then we can calculate their value by the amount that people are willing to pay for them, but as long as they are involuntary, the only fair assumption is that the programs have zero value.
Posted by: Randy at Dec 20, 2007 3:45:49 PM
ASOE-
I think you misinterpreted Tyler. He wrote "Another question is: if we take the entirely of government spending -- without which we would have Hobbesian anarchy -- who benefits from that? The answer to the second question is pretty much identical to people's expected lifetime wealth." I read that as the value of government is the difference between wealth with government (less the present value of taxes) and wealth without government. I think it's pretty clear from Alex's two posts that wealth (at least for the wealthy) increases as the size of government declines.
Now if we could have a President and a Congress who would conduct a real world test..
Posted by: Rich Berger at Dec 20, 2007 4:07:51 PM
a good approximation of the total value of government , (including all tangible and intangible costs and benefits of regulation), is the present value of lifetime wealth
I don't understand the reasoning behind this statement.
Posted by: jp at Dec 20, 2007 4:15:12 PM
Quoting Allan,
"IMHO, taxes should be paid on the benefits received."
But that is not the calculation that critics of Alex, like you, are advocating. In any given period, "the benefits received" are simply the income realized during that period. In that sense, a flat tax is exactly consistent with your argument, not a progressive one. To argue for progressive rates, critics of Alex, like you, argue that merely preserving wealth created during prior periods - even if static in the current period - is a perpetual benefit that must be paid for in each period, in addition to the income earned during that period. But that wealth is simply past income that has been already taxed once. The argument that wealth preservation is a benefit equal to the benefit of new income is simply double counting - yes, adding everyone's balance sheet to the tax base will result in faster redistribution but it is not logical. It's like confusing an income statement with a balance sheet. If you argued that we should count the annual increase in wealth as income, ie. a new benefit that justice requires be taxed, that would be a more logical proposition, although the monitoring and calculation costs make it logistically challenging.
Great post Alex.
Posted by: mt57 at Dec 20, 2007 4:15:50 PM
Allan: "Is there no value to "allow[ing] free men to achieve their potential?"
Perhaps there is. If we allowed the individual states to compete in offerring protection of that right, then we could determine an equitable market price, couldn't we? But let's be clear: the right is not something we are granted by the state. It is one of those inalienable rights which formed the basis for our nation. The value provided by our government is protection of that right - not the right itself.
It is very clear to me that the right to achieve one's full potential can be protected for just a fraction of the $2.9 trillion the government spends each year.
Because the government is protecting the right to achieve potential for all 300 million of us equally, it seems only just that we pay an equal amount for that right. That some can achieve more than others - that they have greater potential - should not alter the price we each pay for protecting that right.
Posted by: John Dewey at Dec 20, 2007 4:16:03 PM
Randy,
You make a valid point. Let's assume that you never buy anything manufactured abroad and never travel. Why then must you pay for custom control? Let's say that you are a substinence farmer and never go off the farm. Why should you pay for roads? Let's say that you have a house that is fireproof. Why should you pay for a fire department? What if you never borrow books. Why should you pay for a library?
We could have a system that forces everyone to pay for what they use. You tell me how to quantify that. I don't think that you can.
As for the government assuming the government services have value, it is readily apparent. Without our system of government, our country would not be so wealthy. If that is not the case, why do we argue that Communism is bad in part because it does not allow the nation to accrue wealth?
Posted by: Allan at Dec 20, 2007 4:16:20 PM
John,
We agree that the protection of the right has value. It is like a ticket to a Bruce Springsteen concert. Everyone who attends the concert gets to hear the music. But the seats at the front are worth more than the seats at the back. So you pay more.
Similarly, the protection of the right to achieve one's full potential is worth more to some that others. That is, if you have more potential, you have more to gain from the protection. Ergo, you should pay more for that right. Anything else would be communistic.
Posted by: Allan at Dec 20, 2007 4:20:27 PM
Student, please consult the title of this blog.
Posted by: Alex Tabarrok at Dec 20, 2007 4:27:01 PM
Rich,
While I accept the premise that the wealth of some will increase without government, I reject the premise that the wealth of the nation will always increase as the size of government declines. Were that true, Somalia would be the wealthiest nation on earth.
The US disproves your point. At the end of the 19th century, the US government was tiny compairing to today's standard and the US was a relatively minor country. By the end of the 20th century, the government was huge and the US was the only superpower, economically and militarily. Maybe it would have been even moreso, had there been less government, but maybe not.
Posted by: Allan at Dec 20, 2007 4:29:03 PM
Let's assume that you never buy anything manufactured abroad and never travel. Why then must you pay for custom control? Let's say that you are a substinence farmer and never go off the farm. Why should you pay for roads? Let's say that you have a house that is fireproof. Why should you pay for a fire department? What if you never borrow books. Why should you pay for a library?
Libertarians have been asking those very questions for decades. :-)
Posted by: jp at Dec 20, 2007 4:30:37 PM
JP (and Rich Berger implicitly) ask:
"a good approximation of the total value of government , (including all tangible and intangible costs and benefits of regulation), is the present value of lifetime wealth
I don't understand the reasoning behind this statement."
a) Without government, we would, by definition have anarchy. Hobbes called this the "war of all against all". See the posts at 8:41:59 AM, 8:44:06 AM and 9:20:13 AM for some more detail. The bottom line, is that everyone has subsistence income and wealth, at best. In fact, a lot of people would not even have that.
b) With government (at least the one we have now), we have the wealth and income we have now (by definition).
Hence, subtract a) from b) and you get Tyler Cowen's conclusion: namely the net value of government is the present value of lifetime wealth.
QED
Obviously, this means that wealthy people benefit much more from government, as it now exists, than poor people.
Of course, one could pick and choose certain functions of government to change 'on the margin'. This might help or hurt various groups of citizens, depending on which functions one changed. I don't doubt that we could make changes that make the wealthy (even) wealthier, at least in the short run, if those were your preferences and you didn't give any political power to average citizens.
But if the question is simply "Who benefits from [our] government?", then the answer is very straightforward: those who currently have the most wealth, at least if one measure benefit financially.
Posted by: A student of economics at Dec 20, 2007 4:36:15 PM
Allan: "That is, if you have more potential, you have more to gain from the protection. Ergo, you should pay more for that right. Anything else would be communistic."
Why should a high potential person pay more for that protection? I pay approximately the same amount for a quart of oil that protects my Ford engine as the Lamborghini owner pays for his quart of oil.
I do not understand your logic. You seem to be confusing the value of one's potential with the value of protecting one's inalienable right.
Again, the right provided by the state is neither the value of one's full potential or the portion of that potential one elects to realize. It is very simply the protection of the right.
It's not communism at all, sir. What you are proposing, though, sounds very much like Marxism:
"From each according to ability, to each according to need."
We all need protection to pursue happiness. We should all pay for it. There should be no free riders.
Posted by: John Dewey at Dec 20, 2007 4:47:28 PM
Alex reminds me: "Student, please consult the title of this blog."
I assume this is in reference to my looking at total lifetime benefits from government as opposed to some type of "marginal" benefit. Is that right?
Well, there are virtually infinite margins one could change when it comes to regulations, rights, etc. In fact, it's not even clear that many of them can be reduced to a scalar or vector space.
Furthermore, it's not clear that Alex himself was doing a marginal analysis when he reported calculated the TOTAL government spending in various categories. He never once used the word "marginal", in fact. However, let's give him the benefit of the doubt, and assume he was merely using the total benefits that he reports as proxies for the marginal benefits that he really meant to discuss. Apparently, he is therefore assuming that marginal benefits are proportional to total benefits. Economists do this all the time (although not necessarily with good justification).
Would it be fair for me to do exactly the same thing as Alex?
Okay, then, assume the "marginal benefits" of government (on some hypothetical margin of rights, regulations, transfers, taxes, etc) are proportional to the total benefits.
The total benefits are great for wealthy people than poor people.
Hence, the marginal benefits are greater for wealthy people, too.
QED
Posted by: A student of economics at Dec 20, 2007 4:49:13 PM
ASOE-
If you could dial down the arrogance a bit and dial up the reading comprehension, you might realize that you misread Tyler and you certainly misunderstood me. I think Alex has nailed you but you keep slipping away into absurdity.
You remind me of the adage "If you can't dazzle them with your brilliance, baffle 'em with bullshit."
But in fairness, I could be totally misreading you. You may just be a top-notch parodist, taking the rubes for a ride.
Posted by: Rich Berger at Dec 20, 2007 5:05:22 PM
a) Without government, we would, by definition have anarchy. Hobbes called this the "war of all against all". See the posts at 8:41:59 AM, 8:44:06 AM and 9:20:13 AM for some more detail. The bottom line, is that everyone has subsistence income and wealth, at best. In fact, a lot of people would not even have that.
b) With government (at least the one we have now), we have the wealth and income we have now (by definition).
Hence, subtract a) from b) and you get Tyler Cowen's conclusion: namely the net value of government is the present value of lifetime wealth.
This seems to assume that the current government is the cause of the current levels of wealth. All we can say with complete confidence, however, is that the current government is consistent with the current levels of wealth.
If we were all forced to carry around 50-pound weights wherever we went, young, strong adults would fare better than children, the old, and the infirm. Young, strong adults would be able to accomplish more than other people. But that would not mean that the 50-pound weights are responsible for the greater accomplishments of young, strong adults.
Posted by: jp at Dec 20, 2007 5:05:33 PM
Allan,
Re; "We could have a system that forces everyone to pay for what they use. You tell me how to quantify that."
I'm not sure what you mean here, but if one pays for something willingly then the value to that person is easily quantifiable by the price he or she is willing to pay. But if one is forced to pay for something there is no real way to quantify the value. The value could be infinite, but it could also be zero. The government certainly has no justification for assigning an infinite value, and not even a justification for assigning the price it charges. Only in a voluntary transaction does price relate to value. The point of all this is that if we eliminate the idea that the services government provides have value, then we can restrict the discussion to simply following the money. Who pays and who gets paid. End of story.
Posted by: Randy at Dec 20, 2007 5:09:54 PM
jp, slave morality is correct. It is frightening how jealous and resentful these people are, even presumably educated people. Many seem to assume that say, doctors and lawyers, are this elite society who feast on the poor and middle class. They don't seem to realize that most doctors and lawyers come from middle class backgrounds, that most will never make more than six figures in a year (and that a large chunk of their salary goes towards their crazy student loans), and that the vast majority work 60-70 hour workweeks, and sometimes more, to make their comfortable but not extravagant salary. The fact that these people want to bury "the doctors and lawyers" for the misdeeds of the "rich" is proof that they have no idea about which they speak.
Slave morality indeed.
Posted by: GunnerUnit at Dec 20, 2007 5:10:29 PM
John,
We do all need protection. But value of protection to you is different of the value of protection for me.
Take your car example. You own a Lamborghini, I own a Ford Escort. We both have a right to reach our potential to go as fast as we want. But, for you to reach your potential, you need a better road than I do to reach my potential. Assuming a road is built that allows for unlimited speed. Who gets the most benefit? I submit it is you and your Lamborghini. All I needed was a much inferior road to reach my potential.
Our government is the road that enables us to achieve our potential. Those who need a better government to reach that potential do get more benefits.
I submit to you that there is a value to allowing us to reach our potential. And to build that road for you, where I get no benefit (albeit because I have no potential), but charging the same to each user is a communist ideal.
Your quart of oil example does not work. The oil merely determines whether the car has the potential and can run. A car with oil has the same potential as a car without oil (assuming that your potential is not measured while the car is standing still, e.g. by sound). Instead, we are the cars and we need someone else to provide us the road.
Posted by: Allan at Dec 20, 2007 5:10:58 PM
Randy,
I do not agree that it could be done.
I submit to you that you benefit from the public subsidizing the education of your physician, your accountant, your attorney, etc. Were public schools effective (something for another post), you would benefit from the public subsidizing the education of children of those who could not otherwise pay for an education. How do we figure out what the individual benefit was from Reagan standing in Berlin and telling Gorbechav to take down that wall?
These benefits are indirect. Other benefits are so indirect that it is impossible to quantify their costs.
Were you able to quantify ALL the benefits a person receives from ALL public spending, sure, we could figure our the benefit side of taxes accordingly. But we can't do it.
JP,
I think we can say, with the utmost confidence, that the laws of the US, that is the government, is the cause for the country's great wealth. One of the greatest things our government (mostly at the state level) has done is allow for the "corporate shield." Without it, shareholders would have unlimited liability. Take away corporations and this country would be nothing.
Posted by: Allan at Dec 20, 2007 5:21:06 PM
Allan,
"Were you able to quantify ALL the benefits a person receives from ALL public spending, sure, we could figure our the benefit side of taxes accordingly. But we can't do it."
Exactly. We can't do it. Which is why the unquantifiable needs to be dropped from the discussion. It is no more fair for me to claim that nothing the government does for me has value than it is for the government to claim that I would be undone without it. So we stick to what can be quantified. Follow the money.
Posted by: Randy at Dec 20, 2007 5:33:23 PM
I still don't see why the extremely large benefit/cost ratio from property protection laws - i.e. for what we spend, individuals receive a lot of consumer surplus - means the rich must pay so much above the odds on other social spending that has nothing to do with property protection. (Again, this is from a benefits point of view, before we account for equity.) One way of interpreting Tyler's comment is an attempt to move the debate on from seeing "government" as an institution which can be scaled up or down, but is homogenous in its nature. We should be seeking to unbundle the different products we get in our analysis, like any good economist would.
Posted by: Millian at Dec 20, 2007 5:43:09 PM
Rich: Sorry about if I seem arrogant to you. The QEDs, references to Hobbes and Cowen, simple math, etc are just my way of having a bit of fun and teasing you all a bit. That said, I thought I was being pretty precise and relatively complete in my reasoning (at least by blog comment standards :). Which part of my logic don't you agree with? Where, specifically, did I misread you or Alex?
JP: I wouldn't say gov't is the "cause" of wealth, but simply that it is indispensable. No gov't means no property rights, and hence no significant wealth. I don't think many people would seriously disagree. To assess the value of something, it is standard to consider the value one would have without it vs. the value with it. Yes, there are many other things that are necessary for value on this Earth, so its not a zero sum game. Certainly, I would not advocate turning over all wealth to government or treating it as the sole source of wealth.
However, the question posed was "who benefits from the federal government?", and the answer, which seems obvious at least to me, is that we all benefit in proportion to what we have with it vs. what we would have without it. I.e. a rich person gets more financial benefit.
We can change the question, i