Writing at Bloomberg View economist Tyler Cowen explains why taxing the rich won’t make the poor much better off:
When we make personal decisions, we usually compare a choice to the best possible alternative, not the worst. Imagine if you suggested to your spouse that you go out to the movies, and your spouse asked why that might be a good idea. It wouldn’t be much of an answer to say that the movie is better than the very worst show on television at home. Rather you should focus on comparing the movie to the next best thing you might do, like watching your favorite TV show or going to a new restaurant you want to try.
The upshot is that we should compare anti-poverty programs to other anti-poverty programs, and favor only the prioritized ones. But just how much of a priority does a program need to be?
One way to proceed is to ask: If we expand some programs, what is the most likely political response? It could be either lower spending in some other program or, in fact, raising taxes on the wealthy. But the evidence on the “fiscal gap†— the space between what the government owes and what it collects — suggests that the opportunity cost of expanding one transfer program is likely some government spending elsewhere, rather than expensive handbags for the wealthy.
My skepticism has slightly different grounds. Rather than comparing the status quo with imaginary programs we should be comparing likely outcomes with today’s reality.
The largest single transfer program, one that transfers money from taxpayers to beneficiaries, is SSRI, Social Security, and it’s slightly regressive, i.e. although the poor get money from it they get slightly less back from Social Security than they’ve put in. Practically all of the other federal programs transfer money from the rich to the merely merely well-to-do, the slightly less rich. Notionally, it’s on behalf of the poor but somehow the well-to-do receive their checks regardless of the actual benefits to the poor.
Consequently, with a confidence founded in experience we can say that any expansion of federal programs is likely at best to be slightly regressive and at worst to give the merely rich a leg up on the extremely rich. But, hey, it’s all good as long as it keep bureaucrats in office, amiright?
