Nineteen Neglected Consequences of Income Redistribution

Virtually every government action changes the personal distribution of income, but some government programs, which give money, goods, or services to individuals who give nothing in exchange, represent income redistribution in its starkest form.

Until the twentieth century, American governments steered pretty clear of such “transfer payments.” The national government gave pensions and land grants to veterans, and local governments provided food and shelter to the destitute. But the transfers to veterans can be viewed as deferred payments for military services, and local relief never amounted to much.

Since the creation of the Social Security system in 1935, especially during the past 30 years, the amount of income overtly transferred by governments has risen dramatically. In 1960 government transfer payments to persons amounted to $29 billion, or 7 percent of personal income. In 1993 the total came to $912 billion, or nearly 17 percent of personal income.[1] In other words, one dollar out of every six received as personal income now takes the form of old-age, survivors, disability, and health insurance benefits ($438 billion), unemployment insurance benefits ($34 billion), veterans’ benefits ($20 billion), government employees’ retirement benefits ($115 billion), aid to families with dependent children ($24 billion), and miscellaneous other government transfer payments ($280 billion) such as federal subsidies to farmers and state and local public assistance to poor people.

Myth versus Reality

It is tempting to think about government transfers in a simple way: one person, taxpayer T, loses a certain amount of money; another person, recipient R, gains the same amount; and everything else remains the same. When people look at income redistribution in this way, they tend to make a judgment about the desirability of the transfer simply by considering whether T or R is the more deserving. Commonly, especially when the issue is discussed in the news media or by left-liberal politicians, R is portrayed as a representative of the poor and downtrodden and T as a wealthy person or a big corporation. Opponents of the transfers then appear callous and lacking in compassion for the less fortunate.

In fact, the overwhelming portion—more than 85 percent—of all government transfer payments is not “means-tested,” that is, not reserved for low-income recipients.[2] The biggest share goes to the elderly as pensions and Medicare benefits, and anyone over 65 years old, rich and poor alike, can receive these benefits. Today people over 65 have the highest income per person and the highest wealth per person of any age group in the United States. Federal transfer payments to farmers present an even more extreme case of giving to those who are already relatively well off. In 1989, for example, the federal government paid about $15 billion to farmers in direct crop subsidies, and 67 percent of the money went to the owners of the largest 17 percent of the farms—in many cases payments to farmers are literally welfare for millionaires.[3] It is simply a hoax that, as a rule, government is taking from the rich for the benefit of the poor. Even people who believe in the rectitude of redistribution à la Robin Hood ought to be troubled by the true character of the redistribution being effected by governments in America today.

But apart from the troubling moral questions raised by redistribution, the issue is far more complicated than ordinarily considered. Beyond the naked fact that T pays taxes to the government and the government gives goods, services, or money to R, at least 19 other consequences occur when the government redistributes income.

Neglected Consequences

1. Taxes for the purpose of income redistribution discourage the taxpayers from earning taxable income or raising the value of taxable property through investment. People who stand to lose part of their earnings respond to the altered personal payoff. As a result, they produce fewer goods and services and accumulate less wealth than they otherwise would. Hence the society is poorer, both now and later.

2. Transfer payments discourage the recipients from earning income now and from investing in their potential to earn future income. People respond to a reduced cost of idleness by choosing to be idle more often. When they can get current income without earning it, they exert less effort to earn income. When they expect to get future income without earning it, they invest less in education, training, job experience, personal health, migration, and other forms of human capital that enhance their potential to earn income in the future. Hence the society is even poorer, both now and later, than it would have been merely because taxes discourage current production and investment by the taxpayers who fund the transfers.

3. Recipients of transfers tend to become less self-reliant and more dependent on government payments. When people can get support without exercising their own abilities to discover and respond to opportunities for earning income, those abilities atrophy. People forget—or never learn in the first place—how to help themselves, and eventually some of them simply accept their helplessness. It is no accident that both material privation and lassitude distinguish individuals accustomed to living on payments such as Aid to Families with Dependent Children (AFDC).

4. Recipients of transfers set a bad example for others, including their children, other relatives, and friends, who see that one can receive goods, services, or money from the government without earning them. The onlookers easily adopt an attitude that they, too, are entitled to such transfers. They have fewer examples of hardworking, self-reliant people in their families or neighborhoods. Hence a culture of dependency on government transfers can become pervasive when many people in a neighborhood rely on such transfers for life’s essentials or—where the recipients are better off—its comforts.

5. Because some transfers are more generous than others, some classes of recipients come to resent the “injustice” of the distribution of the largess. Hence arise political conflicts. Representatives of discontented groups politicize the determination of the amounts to be transferred and engage in continual jockeying to increase certain kinds of transfers, at the expense of others if necessary. Note, for example, the ceaseless activities of the American Association of Retired Persons, perhaps the most powerful lobby in Washington, striving to increase old-age pensions and Medicare benefits, or the National Association for the Advancement of Colored People, seeking to increase transfers that benefit blacks in particular. Such political maneuvering creates or exacerbates conflicts among groups defined by their eligibility to receive particular kinds of transfers: old against young, black against white, rural against urban, female against male, Northern against Southern, homeowner against renter, and so forth without visible limit. Society becomes more contentious.

6. Just as recipients engage in internecine warfare, so do taxpayers, who resent disproportionate burdens in funding the transfers. For instance, young people now learn that their Social Security taxes are going straight into the pockets of retired people who as a group are better off. Young taxpayers also learn that they probably will never recoup their own contributions, unlike the present-day elderly, who have realized an extraordinarily high effective rate of return on their contributions. (Currently the average married couple gets back everything ever paid in, with interest, in just over four years. )[4] Black Social Security taxpayers learn that, because of their lower life expectancy, they cannot expect to receive as much retirement income as the average white person can expect. Taxpayers who consider themselves disproportionately burdened grow to resent their exploitation by the tax-and-transfer system. Therefore they give more support to politicians who promise to defend their pocketbooks against legislative marauders, and they strive harder to avoid or evade taxes.

7. As a result of the preceding two consequences, the entire society grows more divided and pugnacious. Less and less does the society constitute a genuine community. Rather, it becomes balkanized into bellicose subgroups regarding one another as oppressors and oppressed. People lose their sense of belonging to a common political community with collective interests and joint responsibilities. Instead, fellow citizens regard each other as either patsies or moochers and feel personal hostility toward those who appear to be net gainers from the system. Some actually come to hate the perceived moochers. Witness the palpable hostility when shoppers paying cash wait in the check-out line at the grocery store while someone uses food stamps to make purchases.

8. Among the recipients of transfers, self-help institutions languish. In olden days the burden of caring for the less fortunate outside the family was borne mainly by friends and neighbors acting jointly through churches, lodges, unions, clubs, and other voluntary associations. When individuals can receive assistance directly from the government, competing private associations tend to wither and eventually die—at least their functions as helping institutions disappear. When they are gone, people who need help have nowhere to turn except to the government, which is unfortunate in many ways, because what the government does is not really the same. Nor is it as effective, especially in the long run, when private associations have much greater success in making sure that people who recover their capacities then resume taking care of themselves.

An observer noted that in the aftermath of the big Los Angeles earthquake, “Thousands of forlorn, atomized individuals did nothing but wait for a centralized savior, the federal government. America has been diminished by a system of compulsory compassion that simply wants true communities out of the way so that altruism can be left to the experts.”[5]

9. Just as self-help institutions wither among the needy, so do charitable institutions among those who are better off. When government agencies stand ready to attend to every conceivable problem in society, people whose sensibilities incline them toward helping the less fortunate have less incentive to organize themselves for doing so. It is easy to say, “I pay my taxes, and plenty of them. Let the government take care of the problem.” If one contributes charitably, it is as if one were paying twice to accomplish the same objective. Hence, government transfers crowd out private transfers. Coercion, in the form of the tax system, displaces the voluntary provision of assistance, and private charitable institutions wane.

10. As citizens drop out of their involvement in charitable and helping institutions, letting the government take over, they become less self-directing and more accepting of all kinds of government activity. So when someone proposes that the government undertake a function previously carried out exclusively within the private sphere, people are not shocked; they are not even very suspicious of the government’s ability to carry out the task. After all, governments now do all sorts of things, from socializing preschoolers to feeding the poor to insuring the medical expenses of the elderly. So what if the government takes on still another responsibility? What was once a prevailing suspicion of the enlargement of government becomes a resignation to or an acceptance of its continuing expansion into new areas.

In the nineteenth century, opponents of proposed new government programs would commonly protest: “The government has no business doing that.” Nowadays we rarely hear anyone oppose a government initiative on these grounds. That there is a private sphere into which government ought never to intrude has become a nearly extinct species of thought as governments have spread their programs and activities, not to mention their regulations of “private” life, into almost every cranny of society.

11. Hence people do not mobilize political opposition so readily when new government programs are proposed. Facing less opposition, those who support the new programs are more likely to triumph politically. New government programs proliferate quicker, restrained somewhat by budgetary limitations but not much by fundamental ideological objections. According to a recent Wall Street Journal/NBC poll, “when Americans were asked whether ‘entitlements’ should be cut to reduce the deficit, 61% said yes. But when they were asked whether ‘programs such as Social Security, Medicare, Medicaid and farm subsidies’ should be cut, 66% said no.”[6] Evidently most people resent paying for the programs, but they have no objection to the programs themselves.

12. Redistribution involves more than T who pays and R who receives. In between stands B, the bureaucracy that determines eligibility, writes the checks, keeps the records, and often does much more, sometimes intruding into the personal lives of the clients. The mediating bureaucracies consume vast resources of labor and capital, accounting for much of the gross expense of the transfer system. For the government to transfer a dollar to R, it is never sufficient to take just a dollar from T. In addition a hefty “commission” must be paid to support B. From a societal perspective, one must recognize that labor and capital employed by the bureaucracies cannot be used to produce goods and services valued by consumers. Again, society is poorer.

13. Once a bureau is created, its personnel become a tenacious political interest group, well placed to defend its budget and make a case for expanding its activities. After all, who knows more about the urgent necessity of increasing a bureau’s budget and staff than those who carry out its activities? The bureaucrats have a close hold on the relevant data and the ostensible expertise with respect to whatever problem they treat. Therefore they have potent advantages in the political process when they seek to augment the resources placed at their command. Agency experts will testify that outsiders “just don’t know how serious the problem is.”

A bureau often constitutes one side of a political “iron triangle,“ joined with the organized client groups that form the second side and the congressional committees with legislative jurisdiction or oversight responsibility that form the third side. When the bureau becomes politically embedded in this way, as most do, its impoverishment of society can continue indefinitely without serious political challenge.

14. Taxpayers do not simply cough up money to fund the transfers without resistance. Many of them devote time, effort, and money to minimizing their legal tax liability or evading taxes. They buy books and computer software. They employ financial advisers, lawyers, and accountants. From time to time they organize political movements to campaign for tax relief à la California’s Proposition 13. All the labor and capital employed in connection with tax resistance are unavailable to produce goods and services valued by consumers. Society is poorer, and will remain poorer as long as people continue to devote resources to tax resistance. (However, to the extent that tax resistance succeeds in making tax rates lower than they otherwise would have been, it promotes greater wealth creation in the longer run.)

15. In the end many citizens will pay taxes to finance the transfers. Even if no one tries to resist the taxes or alters his behavior in supplying labor and capital, the cost to taxpayers will be more than one dollar for each dollar taken by the government, because it is costly just to comply with the tax laws. Taxpayers must keep records, research the tax rules, fill out forms, and all the rest. These activities require time and effort withdrawn from valuable alternative uses. Many people, even though they intend nothing more than full compliance with the law, hire the expert assistance of accountants and tax preparers—the tax rules are so complicated that mere mortals cannot cope. Use of resources to comply with tax laws makes the society poorer.

According to a study by James L. Payne, just the private compliance expense of taxpayers plus the budgetary and enforcement expense of the IRS add $270,000,000 to the tab for each billion dollars of spending by the federal government.[7]

16. Just as taxpayers do not passively submit to being taxed, recipients and potential recipients of transfers do not just sit quietly waiting for their ship to come in. They also act politically. They form organizations, attend meetings, employ publicists and lobbyists, and campaign for political candidates who support their objectives. All the labor and capital employed in transfer-seeking activities are unavailable to produce goods and services valued by consumers. Society is poorer and will remain poorer as long as people continue to devote resources to seeking transfers.

17. Just as taxpayers must employ resources to comply with the tax laws, so recipients of transfers must employ resources to establish and maintain their eligibility to receive the transfers. For example, recipients of unemployment insurance benefits must visit the department of employment security and wait in long lines to certify that they are indeed unemployed. Sometimes they must go from place to place applying for jobs, which they may have no intention of accepting, in order to demonstrate that they are “seeking employment.” Recipients of disability insurance benefits must visit doctors and other health professionals to acquire certification that they are indeed disabled. In each case, more resources are squandered, and society is that much poorer.

18. By adopting programs to redistribute substantial amounts of income, a nation guarantees that its government will become more powerful and invasive in other ways. Because government itself is the most menacing interest group in society, nothing good can come of this development, and much evil may come of it. As James Madison remarked more than two centuries ago, “one legislative interference is but the first link of a long chain of repetitions, every subsequent interference being naturally produced by the effects of the preceding.”[8] When the government created Medicare and Medicaid in 1965, for example, it set in motion a train of events that led inexorably to the subsequent “crisis” of escalating health-care costs and thence to the bigger government now being wrought by congressional efforts to deal with this artificial crisis.

19. Creating a more powerful and invasive government means that the liberties of citizens will be diminished. Rights previously enjoyed will be set aside. For a long time American citizens enjoyed extensive rights in the negative sense—rights to be left alone by governments or other people as they went about their lives. All individuals could enjoy such rights simultaneously. With the growth of the transfer society, American citizens have gravitated away from negative rights and toward positive rights, also known as welfare rights, which are in effect claims on the resources of other people. One person’s welfare right entails a corresponding duty of other people to provide the resources necessary to satisfy the claim. As such entitlements have grown, therefore, liberties in the sense of negative rights have necessarily diminished.

Culmination

Ironically, in the full-fledged transfer society, where governments busy themselves redistributing income by means of hundreds of distinct programs, hardly anyone is better off as a result. Those who get something of value from the system frequently give up even more in taxes. Further, because many of the consequences of government income redistribution share the common aspect of impoverishing the society, even those who get a bigger slice than they surrender are cutting into a smaller pie. Only the ruling class—those who constitute the government—can confidently expect to gain, as each new program enlarges the number of official jobs and the bureaucracy’s budget.

In the transfer society the general public is not only poorer but less contented, less autonomous, more rancorous, and more politicized. Individuals take part less often in voluntary community activities and more often in belligerent political contests. Genuine communities cannot breathe in the poisonous atmosphere of redistributional politics. Most importantly, the society that allows its government to redistribute income on a wide scale necessarily sacrifices much of its liberty.

Finally, one must recognize that, notwithstanding what some regard as the institutionalization of compassion, the transfer society quashes genuine virtue. Redistribution of income by government coercion is a form of theft. Its supporters attempt to disguise its essential character by claiming that democratic procedures give it legitimacy, but this justification is specious. Theft is theft whether it be carried out by one thief or by 100 million thieves acting in concert. And it is impossible to found a good society on the institutionalization of theft.

Notes:

[1] U.S. Council of Economic Advisers, Annual Report 1994, p. 299.

[2] James D. Gwartncy and Richard L. Stroup, Microeconomics: Private and Public Choice, 6th ed. (Fort Worth: Dryden Press, 1992), pp. 409–410.

[3] Ibid., pp. 488–489.

[4] Paulette Thomas, “BiPartisan Panel Outlines Evils of Entitlements, But Hint of Benefit Cuts Spurs Stiff Opposition,” Wall Street Journal, August 8, 1994.

[5] Arianna Huffington as quoted by John H. Fund, “A Spiritual Manifesto for a New Political Age,“ Wall Street Journal, July 13, 1994.

[6] Thomas, “Bipartisan Panel.”

[7] James L. Payne, “Inside the Federal Hurting Machine,“ The Freeman, March 1994, p. 127.

[8] “The Federalist No. 44,“ in The Federalist (New York: Modem Library, n.d.), p. 291.