December 03, 2002

Howard Gleckman Fears the Destabilization of U.S. Government Finances

Business Week's Howard Gleckman fears the consequences of Bush administration tax policy: more tax cuts for the rich, lower investment in the United States, slower economic growth, and a government unable to perform vital missions:

BW Online | December 3, 2002 | The Tax-Cut Recipe for Ruin: ...The White House argues that locking those tax cuts in beyond 2010 -- when they're now due to expire -- will provide an immediate boost to growth. That claim is just silly. No credible evidence shows that cutting taxes in 10 years has any impact on economic decisions today. Even Federal Reserve Chairman Alan Greenspan, who has rarely met a tax cut he didn't like, says the growth argument is bogus. "I know there is a presumption that if you make those tax cuts permanent it will add stimulus to the economy," Greenspan told Congress on Nov. 13. "I doubt it."

DECEMBER 3, 2002

WASHINGTON WATCH
By Howard Gleckman

The Tax-Cut Recipe for Ruin

By making 2001's rate reductions permanent and putting Washington on a starvation diet, Bush will burden his successors with a gigantic mess

President Bush's top economic policy priority next year will be to make the 2001 tax cuts permanent. And with congressional Democrats both demoralized and outvoted, there's a good chance it will happen -- with potentially stunning consequences.

Such a step would fundamentally change the federal government. With the tax cuts permanent, Washington's red ink will only grow, and so will pressure to reduce basic Social Security and Medicare benefits. Then the tax system itself would have to be revamped. In many ways, making those tax cuts permanent will result in some of the most dramatic changes in government since the Great Society.

What the move won't do is help the current economy very much. The White House argues that locking those tax cuts in beyond 2010 -- when they're now due to expire -- will provide an immediate boost to growth. That claim is just silly. No credible evidence shows that cutting taxes in 10 years has any impact on economic decisions today. Even Federal Reserve Chairman Alan Greenspan, who has rarely met a tax cut he didn't like, says the growth argument is bogus. "I know there is a presumption that if you make those tax cuts permanent it will add stimulus to the economy," Greenspan told Congress on Nov. 13. "I doubt it."

SHRUNKEN SERVICES. Making the '01 bill permanent would lock in several key changes in the tax law. The biggest: lowering individual tax rates and repealing the estate tax. The latter alone would cost in excess of $50 billion a year in 2011.

If the tax cuts are made permanent, by 2020, the U.S. government will have to shrink. It may well be reduced to doing just four things: paying Social Security benefits, providing health care for the elderly and the poor though Medicare and Medicaid, supporting the national defense, and paying interest on the money borrowed to do the first three. That's it.

There would be literally no money left for education, law enforcement or homeland security, environmental and consumer protection, highways, air-traffic control, or any of the myriad of other things we've come to expect Washington to provide. Indeed, stripping the government to just that handful of functions would still leave the budget in the red.

FUTURE SHOCK. To understand why, here are a few numbers. Assume that defense costs remain at about 3% of gross domestic product -- which is well below the average for even the past decade. And figure no changes in Social Security, Medicare, and Medicaid -- not even passage of a Medicare drug benefit. In that case, doing just health, Social Security, defense, and paying interest on the debt is expected to cost roughly 19.5% of the nation's total economic output, according to the General Accounting Office. But tax revenues -- after the '01 cuts are locked in -- would bring in just 19% of GDP. Houston, we've got a problem.

Admittedly, this debate is somewhat theoretical. Nobody really knows how much revenue the tax system will generate in 10 years or 20 years. It may be a percent of GDP higher or lower. But you get the drift.

The debate is also a little fuzzy since never in the history of the income tax has the levy remained static for as long as a decade. The tax laws will be changed many times between now and 2010, and many times again before 2020. And, in the end, a permanent, growing structural deficit will be unacceptable. First, the bond market will revolt, pushing up interest rates. Then, the politicians will respond, probably by raising taxes. As the late economist Herb Stein once said, "If something cannot go on forever, it will stop."

Still, raising taxes is never easy in Washington. Once tax cuts are locked into place, hiking them in the absence of a crisis is a very tough sell. Since the crunch won't come until sometime in the next decade, it will be up to Bush's successors to deal with a tax system that increasingly will fail to bring in enough money to satisfy the demands of voters. Make no mistake: By making those tax cuts permanent, Bush will be leaving future Presidents with an especially nasty budget mess.

Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BusinessWeek Online
Edited by Douglas Harbrecht

Posted by DeLong at December 03, 2002 12:52 PM | Trackback

December 3, 2002

Hey, Lucky Duckies!
By PAUL KRUGMAN - New York Times

Carping critics of the conservative movement have been known to say that its economic program consists of little more than tax cuts, tax cuts and more tax cuts. I may even have said that myself. If so, I apologize. Emboldened by the midterm election, key conservative ideologues have now declared their support for tax increases — but only for people with low incomes.

The public debut of this idea came, as such things often do, on the editorial page of The Wall Street Journal. The page's editors, it seems, are upset that some low-income people pay little or nothing in income taxes. Not, mind you, because of the lost revenue, but because these "lucky duckies" — The Journal's term, not mine — might not be feeling a proper hatred for the government.

The Journal considers a hypothetical ducky who earns only $12,000 a year — some guys have all the luck! — and therefore, according to the editorial, "pays a little less than 4% of income in taxes." Not surprisingly, that statement is a deliberate misrepresentation; the calculation refers only to income taxes. If you include payroll and sales taxes, a worker earning $12,000 probably pays well over 20 percent of income in taxes. But who's counting?

What's interesting, however, is what The Journal finds wrong with this picture: The worker's taxes aren't "enough to get his or her blood boiling with rage."

Posted by: on December 3, 2002 01:02 PM

If the state lacks the funds to perform vital functions, it is then advisable that it stop performing non-vital functions, or is it the contention of the writer that all current government activities are "vital"? In reality, of course, what is "vital" is enirely dependent on what a majority, or 60%, lacking the Executive's agreement, of elected representatives say is "vital". The writer prefers a larger state, and is therefore is opposed to any reduction in revenues sent to the state, because his definition as to what is "vital" differs from those who favor less revenue being sent to the state.

Posted by: Will Allen on December 3, 2002 01:22 PM

Ask yourself: When doing personal finances, do you extrapolate ten years into the future and then take those results into account when making spending decisions today? That's to say, would you take into account the "permanency" of tax cuts ten years hence (presumeably a period of time that will see two more potential changes at the White House) if you were to buy a refrigerator this Friday? Would that consideration even carry one tenth the weight of your 6-month, one-year and even five-year cash flow considerations? The degree of "good faith" behind the White House assertion can be found in the answer to this question.

Posted by: Jeff Sanford on December 3, 2002 02:49 PM

Bush: Okay, here's a $1.35 trillion tax cut for the richest Americans. Oh, and while we're in the middle of a long-term war with ruthless terrorists, lets make the tax cuts permenant.

Democrats: *shrugs* Well, maybe we support that, though it doesn't look so affordable. Say, have you seen our $900 billion prescription drug policy?

It reminds me of Dave Barry's description of Reaganomics (paraphrasing) "Reagan believed that it was possible to REDUCE taxes while INCREASING spending while REDUCING the deficit by sacrificing a LIVE chicken to a FULL moon."

Then, of course, we find the idea that deficits don't really affect interest rates anyway (a classical theorem of rational expectations theory, I think) coming back into fashion.

Julian Elson

Posted by: Julian Elson on December 3, 2002 04:55 PM

The forces whose raison d'etre is to shrink
government and cut the taxes of those who need
tax cuts the least have attained their present
political prosperity by very clever
tactical scheming. They have not forged anything
remotely approaching a national consensus for
their views. It is more likely that
we are at or near the extreme of a
pendulum swing than part way down a slippery
slope. Gleckman's argument is, one assumes deliberately,
a criticism of the intellectual bankruptcy of
present trends, not a plausible prediction of
the future.

Posted by: Ken Doran on December 3, 2002 08:19 PM

Anonymous quoted Paul Krugman as writing in the NY Times...

>> Emboldened by the midterm election, key conservative ideologues have now declared their support for tax increases — but only for people with low incomes.<<

Names, please. Surely it is more effective to expose such ideologues to the public by naming their names rather than by keeping them anonymous. And as they have been emboldened by the election into making declarations on the subject, it doesn't seem they'll be shy about being known.

Assuming they exist.

>> The public debut of this idea came, as such things often do, on the editorial page of The Wall Street Journal. <<

The particular editorial, for those who do not subscribe, being here:
http://www.freerepublic.com/focus/news/792339/posts

Now if anyone sees where it supports increasing taxes for anyone, and "only for people with low incomes" in particular, kindly point it out 'cause I missed it.

Otherwise, if that "declared support", in the Professor's words, is not actually there, soon I'm going to have to be skeptical whenever he claims to be quoting anything -- even the daily newspaper, for crying out loud.

Eh?? The very *next sentence* of the editorial goes on to the cost of payroll taxes -- and the refundable earned income credit that offsets them. To wit:

"Of course, lower-income workers are on the hook for the payroll tax -- but a sizable group slip free from even that net tax liability via the refundable earned income tax credit."

But the Professor doesn't mention this at all. In fact he deletes the earned income credit mentioned by the WSJ from his own tax calculation (even though the EIC can much more than offset payroll taxes) -- then specifically complains that the WSJ's editorial's "calculation refers only to income taxes"!

Egad! Was this all a deliberate misrepresentation of a WSJ editorial? [Gasp!]

Posted by: Jim Glass on December 3, 2002 08:54 PM

Jim--
The WSJ does say that "While we would opt for a perfect world in which everybody paid far less in taxes, our increasingly two-tiered tax system is undermining the political consensus for cutting taxes at all."

Now, this means that in a perfect world no one would get their taxes raised. But "in a perfect world" means that it's not going to happen, and there's no point in trying to make it happen.

Given that, do you think that the WSJ thinks that too many people pay little or no taxes? If they do think that, how could the problem be solved other than by raising taxes (or cutting exemptions) for them? If not, what do they think?

Posted by: Matt Weiner on December 3, 2002 09:08 PM

Jim Glass claims that the earned income tax credit offsets the payroll tax? Is this true? Does it have any effect on the way credits are counted for social security? And what are the numbers (at least approximately) around which this kicks in and then switches off?

I have never heard a claim like this before, but maybe I've misunderstood the details of the earned income tax credit.

Posted by: Maynard Handley on December 4, 2002 01:41 AM

Let me get this straight. A government that has too much debt (eg issues 10 Year bonds) is bad. On the other hand, when the Fed buys and therefore makes vanish this debt - as it now is thinking of doing, in order to ward off deflation - this is a proactive, dynamic central bank, which Japan and Europe would be fortunate to have. I don't know, could someone please explain this to me?

Posted by: Andrew Boucher on December 4, 2002 04:01 AM

>>The WSJ does say that "While we would opt for a perfect world in which everybody paid far less in taxes, our increasingly two-tiered tax system is undermining the political consensus for cutting taxes at all."

>> Now, this means that in a perfect world no one would get their taxes raised. <<

Huh? "Paid far less", is not, "remain the same". Which is what you need to make your argument work.

Posted by: Patrick R. Sullivan on December 4, 2002 07:57 AM

Jim Glass catches the Columnist of the Year in a "deliberate misrepresentation":

<<--------------quote------
>> ... the calculation refers only to income taxes. If you include payroll...<<

Eh?? The very *next sentence* of the editorial goes on to the cost of payroll taxes ...To wit:

"Of course, lower-income workers are on the hook for the payroll ...."
--------endquote------->>

And this is the guy we're supposed to accept as confirming his own story, in re Thomas White!

Posted by: Patrick R. Sullivan on December 4, 2002 08:02 AM

Andrew,
The inconsistency there isn't obvious to me. Could you explain more?

(I wish there were an emoticon for "This is a sincere question"; I really have no opinion.)

Posted by: Matt Weiner on December 4, 2002 11:45 AM

'And this is the guy we're supposed to accept as confirming his own story, in re Thomas White!'

Still haven't called Jeff Forbis (713) 838-0975, huh?

The other jumping-off point for this Krugman editorial, I assume, is that Fox has picked it up, and was worriedly discussing "people who don't pay taxes at all" the other night.

'Who are these lucky duckies? They are the beneficiaries of tax policies that have expanded the personal exemption and standard deduction and targeted certain voter groups by introducing a welter of tax credits for things like child care and education. When these escape hatches are figured against income, the result is either a zero liability or a liability that represents a tiny percentage of income. The 1986 tax reform, for example, with its giant increase in the personal exemption and standard deduction, took six to seven million people off the tax rolls.

This complicated system of progressivity and targeted rewards is creating a nation of two different tax-paying classes: those who pay a lot and those who pay very little. And as fewer and fewer people are responsible for paying more and more of all taxes, the constituency for tax cutting, much less for tax reform, is eroding. Workers who pay little or no taxes can hardly be expected to care about tax relief for everybody else. They are also that much more detached from recognizing the costs of government.

All of which suggests that the last thing the White House should do now is come up with more exemptions, deductions and credits that will shrink the tax-paying population even further.'

There's two things you can draw from these sentences:

1) The WSJ clearly thinks the non-taxpaying class is a problem.
2) At the very least, they don't want to see it expanded.

Paul's conservative critics are right: he clearly went too far by stating that conservatives want to raise the taxes of the poor. They're only *implying* they want to, and god knows getting distinctions like this right is important.

Posted by: Jason McCullough on December 4, 2002 12:27 PM

>> Jim Glass claims that the earned income tax credit offsets the payroll tax? Is this true? <<

The EIC was intellectually conceived by the policy mavens of the past as an offset to the payroll tax to eliminate the latter's regressivity for low-wage workers. It was inspired by M. Friedman's "use a negative income tax to replace welfare" idea.

Of course, nothing that passes through the sausage factory run by the Tax Code writers maintains its intellectual purity -- now the EIC can be much larger than the payroll tax and isn't tied to it in the Code in any way.

E.g. at $12,000 the EIC can be as large as $4,140, which is more than four times the payroll tax (or more than double both the employer's and employee's combined payroll tax liabilty.)

This gets us back to Professor K's claim about how willfully misleading the WSJ was, and what the *real* tax burden at $12,000 of income is:

>> ... according to the editorial [a person earning $12k] "pays a little less than 4% of income in taxes." Not surprisingly, that statement is a deliberate misrepresentation; the calculation refers only to income taxes. If you include payroll and sales taxes, a worker earning $12,000 probably pays well over
20 percent of income in taxes. But who's counting? <<<

At $12,000 the income tax bill is 3.6% for a single person and 0% for a couple, and the EIC can be as large as $4,140, providing a net payment to the individual from the government of as much as $3,200 *over* payroll taxes. (As the WSJ noted but Prof K omitted, for some reason.)

Now I'd like to see the local sales tax rate that applies so this person "probably pays well over 20% of income in taxes".

I thought economists were supposed to be empirical -- but, hey, who's counting? ;-)

Posted by: Jim Glass on December 4, 2002 12:38 PM

Matt- Well, it probably isn't out-and-out inconsistent, but it's amusing. The Fed is thinking of thwarting the demon of deflation by buying the government's long-term bonds. It couldn't do this, unless the government issued debt. So the government overspending apparently has a purpose...

Posted by: Andrew Boucher on December 4, 2002 01:13 PM

>> Jim--
The WSJ does say that "While we would opt for a perfect world in which everybody paid far less in taxes, our increasingly two-tiered tax system is undermining the political consensus for cutting taxes at all." <<

I think that's a pretty clear and straightforward statement, and anyone who's taken public choice economics 101 would understand it.

No, it means what it says: in a perfect world everybody would pay less in taxes. The WSJ is long-time on record with the opinion that the gov't today takes too much of GDP in taxes, including payroll taxes. About the same or more than during WWII, with no World War going on.

>> But "in a perfect world" means that it's not going to happen, and there's no point in trying to make it happen. <<

?? It doesn't mean that at all. In a perfect world, IMHO, everyone would enjoy peace, justice, happiness, and material prosperity. But it's not going to happen in any foreseeable future. So are you saying there's no point in trying to improve things by moving them incrementally in that direction?

The fact that it's "not a perfect world" means there is work to be done and obstacles to overcome in improving it.

>> Given that, do you think that the WSJ thinks that too many people pay little or no taxes? <<

Has the WSJ ever said that people pay too little in taxes? Has it ever said taxes should be raised -- but only on the poor? Has *anybody* ever said that??

>> If they do think that, how could the problem be solved other than by raising taxes <<

When they *repeatedly, unceasingly* say they think the problem is people pay too much in taxes, how can anyone imagine they think the solution is to increase taxes??? Geeze.

>> (or cutting exemptions) for them? If not, what do they think? <<

How about starting with what they said they think: that with the great majority of voters paying only a small portion of the total tax bill, there's not much of a political constituency for reducing taxes in general. And they would rather the Bush Administration not reduce this constituency further by enacting new special breaks that take more voters off the tax roles at the margin, but instead push for a broad-based general reduction, such as one of marginal tax rates across the board.

And here's what I think, FWIW: If someone is going to go around charging that others have "declared their support for tax increases — but only for people with low incomes", that someone had ought to be willing to name names and give quotes and citations. And if the citation is to a WSJ editorial, that editorial had better actually declare its support raising taxes -- but only for people with low incomes.

Otherwise the charge is what Prof K. sometimes calls a "deliberate misrepresentation" -- although he often also uses a shorter, three-letter word.

I also think that the claim that the WSJ's editors want people to feel "hatred for the government" ...

>> The Wall Street Journal ... editors, it seems, are upset that some low-income people pay little or nothing in income taxes. Not, mind you, because of the lost revenue, but because these "lucky duckies" — The Journal's term, not mine — might not be feeling a proper hatred for the government.<<

... is a "deliberate misrepresentation" of a particularly noxious, scurrilous kind.

Posted by: Jim Glass on December 4, 2002 01:39 PM

'I also think that the claim that the WSJ's editors want people to feel "hatred for the government is a "deliberate misrepresentation" of a particularly noxious, scurrilous kind.'

From the editorial:

'This skewed reality is the result of a growing number of absolutely legal escape hatches. Consider what happens to those in the lowest bracket. Say a person earns $12,000. After subtracting the personal exemption, the standard deduction and assuming no tax credits, then applying the 10% rate of the lowest bracket, the person ends up paying a little less than 4% of income in taxes.It ain't peanuts, but not enough to get his or her blood boiling with tax rage.'

"Proper hatred for the government" is too much of an extrapolation from "tax rage?"

You're right to some extent, Jim; on its face, the article does not call for tax increases on the poor. However, it's implied, and furthermore, there *are* mainstream conservatives that do an artful job of leaving it unsaid. Like here and here.

Here's the money quote from Heritage:

'The demand by voters for more federal benefits is overwhelming and growing. Despite our best efforts, conservative lawmakers are like children on the beach trying to hold back the tide with sand castles. Unless we reduce dependency quickly and develop a tax code that makes the cost of government more visible, Americans will demand more and more from government, to the point where freedom will be no stronger than a flickering flame on a shrinking wick.'

Posted by: Jason McCullough on December 4, 2002 02:16 PM

< On Topic >

The RatEx I was taught in grad school and believe in does suggest that expectations of future tax policies can have serious consequences for current period economic activity. The best way to look at the PRINCIPLE is to consider Social Security. I've seen polls showing that more young and middle-age Americans believe in UFOs than believe Social Security will provide for their welfare in retirement. So, are young and middle age people at least considering the solvency of Social Security in 20, 30 or 40 years in making consumption and savings decisions today? Well, the rational ones are, to be sure.

Go back to the Reagan era, and one element of the initial Reagan tax cuts was that they'd be made "permanent" so that rational consumers and business managers could make long-term decisions based on solid expectations of tax policy. And then in a year or two ANOTHER tax plan was passed with different elements and in four more years another major overhaul of taxes was implemented.

SO, it's not for nothing that one of the greatest lies of all time is, "I'm from the government, I'm here to help." Because participants in the economy know that the government rarely tells the truth and that "permanent" tax cuts or tax hikes do NOT EXIST, then it's completely irrelevant whether or not some bill passes that calls the Bush tax cuts permanent. Under any and all circumstances, they're only permanent until the next change, which will be coming soon.

Posted by: Anarchus on December 4, 2002 02:56 PM

"You're right to some extent, Jim; on its face, the article does not call for tax increases on the poor."

"right to some extent"!!!

How about: "Jim, you are correct, and Krugman is deliberately misrepresenting the WSJ article."?

Posted by: Patrick R. Sullivan on December 4, 2002 03:05 PM

Jim,
About the meaning of "in a perfect world," this statement of yours proves my point:
"In a perfect world, IMHO, everyone would enjoy peace, justice, happiness, and material prosperity. But it's not going to happen in any foreseeable future. So are you saying there's no point in trying to improve things by moving them incrementally in that direction?"

Yes, I'm saying that one's conception of a perfect world does not obligate one to support incremental movement to that perfect world.

Peace is a perfect example. Because I think that a perfect world would be peaceful, that does not obligate me to oppose every particular war. I don't remember whether you're for or against war on Iraq, but if you are, then you're in favor of moving incrementally away from your perfect world.

As for the rest, I'm with Jason:
"1) The WSJ clearly thinks the non-taxpaying class is a problem.
2) At the very least, they don't want to see it expanded. [MW--until we get to the perfect world]"
Thanks for putting it better than I did, Jason.

(I have another protest, actually:

Me: Now, this means that in a perfect world no one would get their taxes raised.

Jim: No, it means what it says: in a perfect world everybody would pay less in taxes.

If everybody pays less in taxes, then no one gets their taxes raised, right?)

Posted by: Matt Weiner on December 5, 2002 05:23 AM

Jason, Jason, you're deliberately changing the subject from what Krugman said about an article in the WSJ, to what a Republican congressman has said elsewhere.

So, this week alone you've managed the fallacies of circular reasoning (people can confirm their own stories) and the red herring.

Posted by: Patrick R. Sullivan on December 5, 2002 08:43 AM

>> You're right to some extent, Jim; on its face, the article does not call for tax increases on the poor. <<

Delete the "to some extent" and I graciously agree. So why did a commentator who is so righteously quick to charge others with "deliberate misrepresentation" and "lying" say that it did say that?

>>However, it's implied, and furthermore, there *are* mainstream conservatives that do an artful job of leaving it unsaid.<<

Ah, so it is "implied" and "unsaid". Does this mean Prof. K also wasn't entirely accurate when he said these commentators had been "emboldened" to "declare their support" for such taxes?

I'd like to see an example of a bold declaration of support that is "artfully left unsaid". ;-) Just one. For the Professor's sake.

I had a lot more to say in response to Jason and Matt but I don't want to suck up all of Professor DeLong's bandwidth. Maybe I'll start my own blog someday and we can all go at it. ;-)

In the meantime I'd recommend people look at the Besharov paper on welfare reform that Prof. DeLong points to right above (and which has drawn only 1 comment so far -- far too few for its merit and importance).

It is relevant to all this leastly in that it gives a typical example of a woman with $14k of income having about a *negative* 100% tax rate after considering the EIC and all -- in contrast to the "well over 20%" claimed by Prof K so righteously versus the WSJ.

Much more importantly, it explains how means-tested transfers and benefits are expanding rapidly *outside* the normal welfare system into the lower middle class, in amounts that are *larger* than normal welfare benefits -- creating new large disincentives to work and marriage by creating marginal tax rates of "from 55% to over 100%" for low-income people who are trying to raise their incomes.

" ... expansions have already gone far beyond what would be needed to help families leave welfare (or avoid it in the first place).... Between 1984 and 1999, total means-tested spending on families with children under 18 that are not part of AFDC/TANF rose fivefold, from about $20 billion to about $100 billion. (Compare that to the $60 billion or so spent on welfare families.)"

Besharov notes that "when Republicans wanted to scale back some of this ... Democrats successfully labeled the proposal a 'tax increase.' Never mind that the families affected did not pay any taxes."

Shades of accusing Republicans of wanting to increase taxes on the poor!

But what about the marginal tax rates of 55% to over 100% created by the means-testing transfers and benefits? Don't they count as taxes too? Are they actually locking people *into* poverty and dependence on transfers?

Of course the growth of these means-tested benefits and transfers is driven by voting numbers -- many collect, few pay -- and rationalized by "fairness" as we all want to help the relatively poor ... so long as we don't look at the disincentives and economic costs we are piling up.

But every extra new means-tested benefit that helps the relatively poor when looked at statically, also increases the tax rates imposed on those poor when looked at dynamically -- those 55% to over 100% disincentives are a real cost -- as it also increases the cumulative tax cost to the larger economy of paying for it.

This is the WSJ's concern writ large. Is the general voting public aware of, say, these particular costs of government?

Should it be? Is saying it should be "hatred of government"?

Posted by: Jim Glass on December 6, 2002 08:05 PM

Jim, look at that quote from Heritage again.

'But what about the marginal tax rates of 55% to over 100% created by the means-testing transfers and benefits? Don't they count as taxes too? Are they actually locking people *into* poverty and dependence on transfers?'

You either have to eliminate the programs or eliminate the restrictions to get rid of these problems. This brings me to my new view: that the lot of EITC, food stamps, child nutrition, etc., all of which are created with the explicit intention of improving the welfare of poor children, should be rolled into a universal per-child grant from the government, capped at 1.5 eligible kids per worker. Oh, and we need to make sure to roll enough money for child care in there, too. Possibly an immigration-related fix, too, not sure about it.

Would anyone actually oppose this? I don't think the cost would be all that great, and there's no incentive problems; you need to work to get it.

'But every extra new means-tested benefit that helps the relatively poor when looked at statically, also increases the tax rates imposed on those poor when looked at dynamically -- those 55% to over 100% disincentives are a real cost -- as it also increases the cumulative tax cost to the larger economy of paying for it.

This is the WSJ's concern writ large. Is the general voting public aware of, say, these particular costs of government?'

No, they're not. However, a) those marginal rates can be easily fixed, per above, and b) the people actually receiving those benefits have unbelievably low rates of voting, so the poor ganging up and soaking the rich doesn't seem to be in the cards. Which is why I don't get it.

'Should it be? Is saying it should be "hatred of government"?'

This *is* the WSJ editoral page we're talking about here. I also detect nothing of benelovent concern for the marginal tax rates of the EITC-receiving poor in that piece. :D

Posted by: Jason McCullough on December 9, 2002 03:18 PM