Robbing Peter to Pay Paul…

5

… and Ted Turner, and Warren Buffet, and Solyndra, etc.

Recently Matt Bergman posted a picture on PRL’s Facebook page with the caption, “Anything The Government Gives You Was Taken From Somebody Else.” I think most Libertarians would agree with this, but someone posted a comment that made me realize a lot of people don’t understand the economics of the taxing, spending, and transfer policies of the government.

The poster, who I’ll call Jane, said she usually agrees with Libertarian policies but was upset by the implication of the statement. She believes that if the government stopped forcing people to give up their income, wealth, and labor, then the poor and disabled would be the ones to suffer. I have no problem with the sentiment, Jane’s heart is in the right place, but the idea that we need the government to take care of these people is based on several naïve assumptions that are, at best, only partially true.

First, there’s the basic belief that $1 taken from you by the government is then given to someone in need. Right off the bat that is not true. Over half of every dollar taken from a taxpayer is spent on stuff and services. A lot of that stuff is useful, like the interstate highway system or protection from invasion by wild-eyed Canadians, but a lot of it is wasted, such as interest payments on the out of control national debt or remote control dune buggies on Mars, or even evil, like the drones used to massacre innocent wedding guests in Yemen. Regardless, of every $1 taken from you, $0.52 is spent on something other than a needy person. I’m sure Jane is aware of that, though she may not realize the magnitude.

That still leaves $0.48 going to help someone in need, right? Not really. In 2012 the feds took $1.689 trillion from taxpayers and transferred it to someone else. Not all of the recipients are poor or disabled. In fact the bulk of them aren’t. Nearly ¾ of the total is accounted for by Social Security and Medicare – the money is going to old people. Yes, there are a lot of poor old people; according to conflicting studies the percentage ranges from 9% – 17% of those over 65. But even at the higher number that means 83% of seniors are not poor. According to the Census Bureau, the net worth of people 65 and older is 25 times more than people who are 35 and younger. Old codgers are the richest people in the country, and yet they receive $3 out of every $4 transferred. Warren Buffet gets a Social Security check. He’s not eating cat food.

So that means 25% of transfer payments go to the needy, right? Nope. Programs aimed at the poor such as SNAP, Medicaid, WIC, housing subsidies, TANF, SSI, etc. only account for 16% of transfer payments. The other 9% pays for things such as flood insurance for John Stossel’s beach house, farm subsidies to Ted Turner and Bon Jovi, green energy subsidies to Solyndra, etc. Virtually none of this money is going to anyone who is needy.

That brings us to Jane’s second misconception, that the $0.16 earmarked for the needy all goes to the needy. If there’s a poor family in your neighborhood and you help them out by giving them $100, then they get $100. But when the government takes $1 from you and eventually gives it to the “less fortunate”, they do NOT get $1. As soon as you insert a middleman into a transaction, you reduce the efficiency of the transfer, because the middleman always takes a cut. In the case of the government, you don’t get just one middleman, you get several and they all take a cut.

When you pay $1 in taxes, there is a cost incurred for complying with the law. Income tax software, tax accounting, lawyers, accountants, any and all of these things create costs associated with determining what the tax is. 1% is a conservative estimate, though it can get much higher. Thus $1 only sends $0.99 to the IRS. There is a small cost associated with the IRS collecting taxes and then disbursing it to the various departments, about 1/3 of a cent, but once you get to the government agencies, the middleman’s cut balloons. The Department of Health and Human Services, the folks that oversee Medicaid, claim an overhead of 7%, but that’s not all. According to the Office of Budget and Management, 5% of the money spent by HHS was unrecoverable waste. Assuming these rates apply for all transfer payments, when the government gives $1 to you, it takes $1.15 from someone else. Overall, when Jane pays $1 in taxes only $0.14 is used to help the needy. Even if we limit ourselves to transfer payments, the poor only get $0.29. I don’t think this is what Jane has in mind.

There are 2 further misconceptions Jane has. First, that government is the only or best conduit for distributing charity. Nothing could be further from the truth. There are literally thousands of private charities that do what Jane wants, just as efficiently or better than the government does. In fact, by using private charity you can target the groups you want to help. Concerned about the poor in your town? Give to a local church or food bank. Concerned about abused animals? Give to the ASPCA. Concerned about starving children? Give to Feed the Children. None of these groups will throw you in prison if you don’t pay up, and none will use your donation to buy penis pumps. But the government will do and has done both of these things.

Lastly, how does Jane know that the person the government takes $1 from doesn’t need it more than the one it gives $1 to? A household with a median income, about $50,000, might first appear to be doing OK. But that household might have expenses, medical bills, college tuition for the kids, and mortgage payments that leave it tottering on the edge of financial disaster. Even if they don’t owe “income taxes”, they’re still paying taxes on their income via FICA (SS and Medicare) of at least $3,750/year ($7,500 if self employed). This money is being sent to a retiree to help with the mortgage on his 2nd home in Florida and pay country club fees. The cash transfers get even more absurd when you consider the working poor. These people also pay FICA, which in reality goes into the government’s general pot of money. A poor person with a job may still qualify for government assistance, but keep in mind, the government takes a cut for every $1 they receive. Thus, such a person pays $1.15 in taxes, the feds keep $0.15, then return $1 to the original payer. The government is enriched at the expense of the poor as it moves the money in a circle. This is insane.

According to the US Census Bureau, 15% of the US population lives in poverty, a little higher than it was in the mid 1960s when the “War on Poverty” was initiated. After half a century of taking from someone and giving to someone else, there is no evidence that the poor benefit from transfer payments.

Jane is a compassionate, charitable person. But in this case she’s wrong. When the government takes from you it doesn’t help the needy, it just makes the government stronger, richer, and omnipotent. This needs to stop.

 

Wayne Middlesteadt is the author of Five Ways To Beat The Market, proven methods to lower your risk while making above average gains in the stock market. For more information on the book visit http://www.slightlyangryoldman.com/Downhome/Five-Ways-To-Beat-The-Market 

Spending data came from the website http://www.usgovernmentspending.com

About Author

Wayne Middlesteadt

Wayne Middlesteadt is a 1986 graduate of Georgia Tech and has an MBA from Georgia State University. Currently working as a financial writer and track and field historian, his latest book is Five Ways To Beat The Market.

  • Allen Dahl

    The only issue I have contention with is that the social security payments argument does not take into consideration there are many seniors who have paid into the system for decades; certainly not all, but many have. Are they supposed to just forfeit all the money that they put in?

    • Wayne Middlesteadt

      I understand your concern, unfortunately SS doesn’t work the way the government tells you it does. The money you paid into SS was spent when you paid it. Most of it went to current retirees, but the excess was spent on whatever the government wanted. There isn’t a retirement account in Washington with your name on it. The money you paid in the past is long gone. If you receive SS when you retire you’ll get whatever Congress says you can have, and it’s only loosely tied to what you paid in. FICA is nothing more than an income tax disguised as a pension plan.

    • tim_lebsack

      “Are they supposed to just forfeit all the money that they put in?”
      No. Allen, you’ll have to search for the various ways that other countries (Chile, Mexico, Britain, Australia) have transitioned to better systems. Many different methods and combinations of methods have been suggested for the USA from raising retirement age, kicking the rich out of the systems benefits (aka means testing), opt-out for youngsters, purchasing annuities for retirees by selling govt. land (they own a LOT).
      It’s going to take wiser men than me and teams of actuaries but the solution is available. Some of will be happy and a few will be upset whatever solution is installed but the results will better for everyone. Imagine the average American’s retirement account returns percentage tripling or even better when the government can no longer Ponzi scheme us into retirement poverty.

    • orbithesun1 .

      My dad payed into Social Security his whole life. He passed away about year after his retirement, he did not get a fraction of what he put into SS. Talk about raising the retirement age tells us exactly what this is, a big ponzi scheme. The money that is payed into SS is supposed to be pooled, but that’s not what is happening. there is no pool, that money has been spent even before its been collected, hence a 17 trillion dollar Federal debt… What we have is very dumb downed, sucker populous, that is why we are in this mess. Enron is a pimple compared to the cancer of SS!

    • Brenda

      Some of the people who complain about this really need to do the math because it doesn’t add up. Even if you paid the MAX for 40 years, and included the portion paid by the employer, what is taken out of the system by many people is much more than what was paid in. And the other group of people die early, which is exactly what they govt intended for funding. How about making everyone responsible for their own retirement. If you can’t afford to retire, that’s not my problem. I am forgoing wants and sometimes needs now so that I WILL be able to retire. So many people just spend every dime (and then some).