Promoting freedom, innovation, and growth

Connect with IPI

Receive news, research, and updates

October 22, 2014

All Quiet, Too Quiet, In Allocation Nation

The argument for election that Republicans ought to be making but arenít.
IPI expert referenced: Merrill Matthews | In The News | Media Hit
  Minneapolis Star Tribune

By GREGG J. CAVANAGH

With the midterm elections less than two weeks away, and with Republicans in a position to take control of the U.S. Senate and pick up seats in the House, it is notable how muted Republican campaigns have been. While party members have hammered away at the incompetence of the Obama administration, the mainstay conservative themes of limited government, out-of-control spending and burgeoning debt have been downplayed, if not ignored altogether. Unlike the midterms of 2010, it is as if the Tea Party has been placed on probation by the Republican Party.

In December 2013, the Congressional Budget Office reported that the top 20 percent of households paid 92.9 percent of the federal income taxes collected in 2010. The bottom 40 percent paid minus 9.1 percent of federal income taxes, the negative number reflecting the fact that these households received an average of $18,950 in government transfers. Democrats counter these statistics by observing that low-income households pay many other taxes, such as payroll, sales and property taxes.

In point of fact, the federal, state and local governments now spend $7.2 trillion a year. Eliminating intergovernment transfers of $600 billion yields net government expenditures of $6.6 trillion. This amounts to $54,000 for each of the 122 million households in this country.

This means that every household that pays less than $54,000 in total taxes is being subsidized by other taxpayers. The amount of the subsidy is the difference between the $54,000 and the amount of taxes the household pays.

Of course, this assumes that the household does not receive any direct payments from government. If a household receives housing assistance of $12,000 a year, for example, the amount of the subsidy is $12,000 higher.

Leads to inefficiencies

Merrill Matthews of the Institute for Policy Innovation analyzed 2013 Census Bureau data and Affordable Care Act figures and concluded that about 52 percent of American households receive benefits from one or more government programs. Meanwhile, Democrats are constantly looking for ways to enroll more people in existing or new benefits programs.

These figures cut through Democratic spin and make clear that a majority of American households do not pay anywhere near their pro rata share of government spending. This has important implications for both public policy and politics.

First, because most households do not come close to paying for the government services they receive, they have a strong incentive to favor, and vote for, the provision of those services by the government rather than by the private sector. What individual, for example, would want to pay a $5 fare to a private bus company for a ride when he or she could receive the same ride from the government for a subsidized fare of $1? Low-income individuals will tend to favor the government provision of services whether there is any valid reason for the government to provide such services.

This can lead to tremendous inefficiencies. Suppose, for example, that a private bus company could provide a ride for $5, but the government’s cost of providing that ride is $10. If a majority of the voters pay no taxes to support the government transit system, and the ride is priced at $1, they will favor the government’s provision of the ride, even though it is economically inefficient. The inefficiency will be borne directly by the minority of taxpayers who actually pay for the transit system, and indirectly by the entire society through the inefficient use of limited resources.

Second, the present system creates a strong incentive for government services to be provided by the federal government, rather than state or local governments. The federal taxation system is much more progressive than the state and local systems. Thus, lower-income individuals will pay less for services that are provided by the federal government than they will for services provided by state or local government. Accordingly, they will tend to support the federal government’s provision of those services, independent of whether it makes any sense for the services to be provided at that level.

This bias is especially strong in the current environment of high federal deficit spending. State and local governments must balance their budgets, thus there is at least some pressure for them to tax households at all income levels. The federal government can provide services by borrowing or printing money; thus, it has a greater ability to provide services to targeted households for free.

Third, the present system has completely obliterated the notion that government’s redistributive spending must somehow be based on need. As long as most households do not pay for an expenditure, they have every incentive to favor it. This explains why we now have many government programs that provide benefits to the non-needy, such as light-rail transit and Obamacare subsidies for the middle class. People love benefits they don’t have to pay for, and stand ready to vote for the politicians who provide them.

Leads to votes

In the final analysis, a politician’s claim that “the people” want a program or a benefit is nothing more than a statement that people like free stuff. Unfortunately, this is now the principle that underlies politics in this country.

The Democratic Party is firmly ensconced as the party of the “freebie.” At this juncture, it is unclear whether there is anything Democrats won’t give away to garner votes. For example, Democrats are now talking about relieving students of their student loans — that is, simply wiping away contractual obligations that the students knowingly and voluntarily undertook. Meanwhile, President Obama has promised to hand out our most cherished benefit — citizenship — to millions of persons who knowingly entered and remain in this country illegally.

It is perhaps not surprising that Republicans have found themselves without a strategy in this new environment. It is as if the Democrats are running an all-you-can-eat buffet with Republican money, and the best Republicans can do is stand at the end of the line handing out pamphlets on the dangers of obesity. It’s not hard to figure out who wins that popularity contest.

The so-called “establishment” Republicans seem to have realized that they are playing a rigged game, and have opted for promising Democrat-style benefits, but at lower cost. What they fail to recognize is that people who don’t pay taxes don’t really care about government waste. As long as government continues to dispense the goodies, they come out ahead, and Democrats have proved to be the most reliable providers of a free lunch.

Meanwhile, any conservative who argues for any kind of fiscal discipline is immediately branded by Democrats (and too many Republicans) as “mean-spirited” and “radical,” and is literally accused of trying to kill seniors, women, children and the disabled. Conservatives have been wholly ineffective in fashioning a message that the long-term benefits of freedom, self-reliance and respect for property rights trump the short-term benefits of Democratic freebies. That’s why their campaigns in the current election cycle focus more on the failings of the Democrats than on any changes the conservatives would make if elected to office. With a majority of Americans now on the government gravy train, any message of limited government and fiscal responsibility is considered a loser.

What Republicans must do

Unfortunately, Republicans don’t have many more election cycles to get things right. While Democrats may be incensed over corporations using their own money to try to influence voters, they see nothing hypocritical about Democratic politicians using trillions of taxpayer dollars to buy voters for themselves. The progressive juggernaut will not be stopped unless Republicans unite and take bold steps to stop it.

First, Republicans must resist at all cost — including the defunding of government — any further efforts by the Democrats to either remove voters from the tax rolls or add them to the benefit rolls. Instead, Republicans must find ways to reverse this trend.

Second, Republicans must find a way to convince voters of the folly of the Democratic free lunch, and to remind them of the traditional values — freedom, personal responsibility and respect for property — that made this country great.

Based on numbers alone, it should already be impossible for Republicans to win a national election. The fact that they garner as many votes as they do suggests that some voters are able to look beyond their short-term financial incentives and see the bigger picture. Republicans must find a way to tap into that spirit in all voters before it’s too late.


 

  • TaxBytes-New

Copyright Institute for Policy Innovation 2017. All Rights Reserved Privacy Policy Contact IPI.

e-resources e-resources