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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
