Who Benefits from the Federal Government?

by on December 20, 2007 at 7:43 am in Economics | Permalink

A common response to my post showing that The Rich Pay for the Federal Government was that the rich also get more benefits from the federal government.  Let’s go to the numbers.  Here’s a chart showing federal spending categories for 2007.  (Click to expand.)
Spending_3

Social Security, the biggest category, doesn’t benefit the rich at all because net Social Security payments are heavily biased against the rich.   According to Eugene Steuerle and Adam Carasso of the liberal Urban Institute a two earner couple earning $230,000 a year (thus putting them at the mean household income for the top 20%) and scheduled to retire in 2030 will pay $227,886 more in social security taxes than they receive in benefits (in present value).

Defense is the next biggest category.  To me a lot of "defense" spending doesn’t benefit anyone but let’s be generous and say that the rich benefit from military spending in proportion to their income share which for the top 20% means 55%.  Thus $301b.

Medicare benefits the rich less than the poor since they are healthier (plus they must pay higher premiums) but let’s say that Medicare benefits the rich in proportion to their population.  If we say the top 20% are rich and assume that this is the same in the 65 and older category then 20% of Medicare goes to the rich.  $78.8b.

Medicaid doesn’t benefit the rich.  The rich do use unemployment insurance but at far lower rates than the poor.  Does welfare benefit the rich?  Not directly but maybe from the warm glow.  I don’t think the benefits of charity are what most people mean when they say that the rich benefit from the federal government but who knows.  Let’s again be generous and say that the warm glow goes just to the rich and that it is worth 20% of the benefit to the poor.  $73.4b

Everything else includes the example that people always seem to mention first, roads!  Alas, the entire transportation budget is just $77 billion, not much there even if a lot of it goes to the rich.  By my judgment a lot of "everything else" has low value but again let’s be generous and say that the rich benefit from everything else in proportion to their income share (.55).  $233b.

Excluding the national debt gives us a total of $687 billion out of $2597 billion going to the rich or 26%.  If we assume that the division of the national debt is the same as for the government as a whole (since this is just past expenditures) the percentage is still 26%.

Thus in a generous accounting the rich get 26% of the benefits of federal spending and pay 68.7% of the costs.  In percentage terms the rich get about 37 cents on the dollar.

Alternatively stated about 63 cents of every dollar in taxes paid by the rich is transferred down.  Given that the median voter is a taxeater not a taxpayer we should not be too surprised, although this is a smaller number than I would have guessed before I did the calculation.  From an efficiency point of view we should be happy that the rich don’t get too much – transferring resources creates a lot of waste but transferring resources from the rich to the rich is especially wasteful. 

The basic point is clear; In the United States, one can argue for taxing the rich on the ability to pay principle but not on the benefit principle.

Addendum: Thanks to Ted Frank for catching a math slip-up on my part which I fixed raising the total to 26%.

1 sammler December 20, 2007 at 7:58 am

You could skew the numbers a little further, by assuming that the federal government provides to each citizen the potential to increase his income above some baseline, which could be achieved by each individual under anarchic conditions; and then by pretending that this baseline is the same for all people, and is significantly different from zero (neither of which is true in practice). This would let you perceive the poor as benefiting not at all, which is about what is required to believe that the rich benefit more than they pay.

2 Aaron Fix December 20, 2007 at 8:08 am

“In the United States, one can argue for taxing the rich on the ability to pay principle but not on the benefit principle.”

I have never been able to see why taxes should be levied any other way. It seems to me that if a government wants to make money, the best way to do so would be to tax people who have money.

3 John Phillips December 20, 2007 at 8:17 am

I can’t quite imagine why one would separate the benefits of spending from the benefits of regulation. One typical argument is that the rich benefit a lot more from property rights protection and enforcement, since they have more to lose. I’ve never been very convinced of the “government benefits the rich because it prevents the poor from stealing from them” argument, but I still wouldn’t say that it’s primarily spending the rich benefit from.

4 Aaron Fix December 20, 2007 at 8:18 am

I should mention that who pays more relative to income in actual dollars is a very poor indicator of who sacrifices the most.

1) It should be who pays more relative to income earned above some benchmark level (whatever level we decide is a reasonable standard of living). This would mean that some people are paying positive taxes on negative income above that level (i.e. their income is below the benchmark).

2) If you believe in concave utility, then the very rich could conceivably be on a much more flat portion of their utility function, and thus their actual decrease in utility from taxes is the same as that for a poorer person.

I am not suggesting to levy taxes this way, only that these are better ways to think about sacrifice. I don’t know anything about public finance economic literature.

5 Paul from Florida December 20, 2007 at 8:36 am

It’s not the taxing; it is the state that the rich benefit from.

A large state is a barrier to entry for small business (read individuals). A large state requires legions of administrators that would otherwise be at the lower paid mercy of overtaxed small business. Higher paid Lawyers and Academics all depend upon the large state.

The wealthy are able to quickly profit from large state changes such as port building and globalization. When a mill town closes, the savings of generations is wiped out.

It’s the state and it’s forms, not the taxes.

6 MostlyAPragmatist December 20, 2007 at 8:42 am

Alex–

Many of the posts on this web site argue that our democratic political system is not efficient at allocating revenue and that this process is skewed toward special interests. The special interests are usually wealthy–health insurance industry companies, defense contractors, AMA members, pharmaceutical companies.

Also, you are comparing net government spending with total effective tax rate. I don’t think that’s valid in the case of Social Security. Social Security tax is capped at around 90k, so it is quite small for high income individuals, but the indirect benefits of a minimum guaranteed pension to high net-worth individuals is significant–they don’t need to provide it to their own employees.

But what really bothers me about this, your previous post, and many of your posts is this: I don’t trust the rich, and I don’t pity them, and I’m suspicious of those who argue their part and try to make me trust and pity them. Especially when they argue that the poor (i.e. the bottom 80%) are also somehow benefiting from the current state of affairs. You just sound mean, Alex.

7 A student of economics December 20, 2007 at 8:44 am

Here’s a more complete version of the Hobbes quotation:

[W]herein men live without other security than what their own strength and their own invention shall furnish them withal. In such condition there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.

8 Rich Berger December 20, 2007 at 8:49 am

Alex-

Nice post. I especially enjoy the contortions that various commenters go through to cling to their belief that the rich benefit disproportionately from the state.

9 Geoffrey December 20, 2007 at 9:00 am

You’re quite generous on a few points, but a little too tight on others.

– First, I am sure you are right that Social Security has negative *net* benefits, but this post was about *gross* benefits. You had previously calculated gross costs based on taxes, so for Social Security it would seem appropriate to calculate gross benefits. Or to put it another way, I think about 50-60% of SS costs are borne by the rich, and at least 20% of the benefits go to the rich. That doesn’t make it a good deal, but it makes it better, by at least $120 billion, then you present here.

– Second, for Medicare, I would assume the denominator should not be total US population, but total US population paying taxes, so 2.8% would seem low for total group benefits. I also understand that the over-65 ranks skew rich. It doesn’t bump things up much, but perhaps to 10% or even 20% of the benefits going to the rich.

Combining these, you might augment the benefits to the rich by $200 billion, or about 7%.

10 pnj December 20, 2007 at 9:10 am

This graph is such a red herring! This data tells almost nothing about whether the Government benefits the rich or the poor, because it represents a tiny share of what Government does. Only a fool would argue that the rich receive more direct transfers from Government spending – part of being rich is not needing to rely on these pathetic Government transfers.

The rich derive their benefit from Government policies, not from Government transfers. So we need to look at policies.

Tariffs that protect manufacturing workers probably benefit the poorer, at everyone’s expense. Business-friendly environmental regulations benefit business-owners at everyone’s expense. Foreign wars overwhelmingly benefit the rich (including through asset prices, as Prakash mentioned), and their costs are paid by soldiers who are often poor, and almost never rich. Post war recessions are much more harmful to the poor than to the rich, because they aren’t able to hedge their risks.

It would be much more interesting to see on balance whether Government’s policies help the rich more than they help the poor. But that is not as easy to write as a simplistic blog post.

11 Tyler Cowen December 20, 2007 at 9:20 am

There’s nothing like a post about distribution (and perhaps implicitly about fairness) to drive lots of comments. Throughout the discussion there are many, many confusions about what is the appropriate margin. One question is: if government increased spending by one percent, along the lines of its current mix, who would benefit? The rich don’t do so great there. Another question is: if we take the entirely of government spending — without which we would have Hobbesian anarchy — who benefits from that? The answer to the second question is pretty much identical to people’s expected lifetime wealth. You can criticize Alex by invoking this second consideration, but the real question is whether you can show him wrong on the first. Maybe he wasn’t clear enough, but lots of you are jumping on him by invoking the second consideration rather than rationally trying to respond to the first. Sort out your margins, people!

12 anonymous December 20, 2007 at 9:59 am

A folk tale from Nigeria:
Once there were two boys who were great friends, and they were determined to remain that way forever. When they grew up and got married, they built their houses facing one another. There was a small path that formed a border between their farms.

One day, a trickster from the village decided to play a trick on them. He dressed himself in a two-color coat that was divided down the middle. So, one side of the coat was red, and the other side was blue.

The trickster wore this coat and walked along the narrow path between the houses of the two friends. They were each working opposite each other in their fields. The trickster made enough noise as he passed them to make sure that each of them would look up and see him passing.

At the end of the day, one friend said to the other, “Wasn’t that a beautiful red coat that man was wearing today?”

“No”, the other replied. “It was a blue coat.”

“I saw the man clearly as he walked between us!” said the first, “His coat was red.”

“You are wrong!” said the other man, “I saw it too, and it was blue.”

“I know what I saw!” insisted the first man. “The coat was red!”

“You don’t know anything,” the second man replied angrily. “It was blue!”

They kept arguing about this over and over, insulted each other, and eventually, they began to beat each other and roll around on the ground.

Just then, the trickster returned and faced the two men, who were punching and kicking each other and shouting, “Our friendship is OVER!”

The trickster walked directly in front of them, and showed them his coat. He laughed at their silly fight. The two friends saw this his coat was red on one side and blue on the other.

The two friends stopped fighting and screamed at the trickster saying, “We have lived side by side like brothers all our lives, and it is all your fault that we are fighting. You have started a war between us.”

“Don’t blame me for the battle,” replied the trickster. “I did not make you fight. Both of you are wrong, and both of you are right. Yes, what each one saw was true. You are fighting because you only looked at my coat from your own point of view.”

13 Jarick December 20, 2007 at 10:04 am

For those criticizing Alex on this point, exactly what are the costs of protecting private property and “allowing” the rich to get rich?

“Defense” could only be seen so in the loosest of terms, since there has been no serious attempts to invade and conquer the country from without in anything resembling recent history. Copyrights and trademarks would fall under the “other spending” category. None of the physical protection of private property or “enforcement” comes from the federal level.

So that skews far away from the rich benefiting, since it’s obvious that the federal government can protect private property without levying a large income tax. In fact, there was no income tax for the majority of the country’s history, yet people seemed to thrive.

14 A student of economics December 20, 2007 at 10:07 am

Tyler: Good point.

Which margin would you like to cut first? If you first cut $45 billion from property rights protection, it’s pretty clear that the rich would suffer the most, having the most property to protect with the use of government force.

Some people seem to assume that this margin would not be cut until and unless those margins that benefit the poor and middle class were cut or eliminated first. Why should that be so? After all, that’s not the way it happened in Russia in 1919 or China in 1945.

In the long run, one can wonder whether the median voter (for that matter, the bottom 90% of the wealth distribution) would long tolerate a property-rights only government that fostered an increasingly unequal distribution of the benefits of civilization. (Actually, it appears that many in the top 0.1% wouldn’t be a fan of such a society either.)

In that sense, even the services and transfer payments, and the protection of state and local governments, are part of the grand bargain that preserves the wealth of those who do well in our current arrangement.

15 Jody December 20, 2007 at 10:16 am

In the long run, one can wonder whether the median voter (for that matter, the bottom 90% of the wealth distribution) would long tolerate a property-rights only government that fostered an increasingly unequal distribution of the benefits of civilization. (Actually, it appears that many in the top 0.1% wouldn’t be a fan of such a society either.)

In that sense, even the services and transfer payments, and the protection of state and local governments, are part of the grand bargain that preserves the wealth of those who do well in our current arrangement.

To make the bargain more transparent: give us some of your stuff or risk us stealing all of your stuff.

My wife likes to call the government the only legal mafia (that’s a real nice house you have there. Be a shame if something should happen to it.) Based on student’s perspective, I’m afraid she’s right.

16 Floccina December 20, 2007 at 10:20 am

Do old people vote becuase they get money from Gov. or do old people get money from Gov. becuase they vote?

17 Colin M December 20, 2007 at 10:37 am

One benefit not mentioned is the lower rate of taxes the rich face in the US in comparison to other well developed nations.

Another benefit the rich receive (however impossible to measure), is favorable policy. Large campaign contributions and political donations often skew public policy to favor the rich financially.

18 Antibob December 20, 2007 at 10:41 am

I’m confused by the second paragraph in which social security outlays are not counted as a “benefit” for the wealthy. Just because they pay more into social security than they get out does not mean that they get zero return from it, any more than a $100 stock which falls to $50 is the same as one that falls to $0.

I don’t know very much about the details of social security distributions, but assuming that it is uniform in its distributions, shouldn’t the top 20% be counted as receiving 20% of the social security benefits? Under that assumption, the top 20% of income earners should be credited as getting an extra 0.2 * $586b = $117b, rather than the flat $0 attributed to them now.

Admittedly this doesn’t change the core point that the wealthy pay more into the government than they get out, but it does raise their rate of return from 687/2597=26% to 804/2597 = 31%

19 Randy December 20, 2007 at 10:48 am

lw,

Following the money is the best way to know who the owners are, that is, the people who are collecting the rent. What they do with it is irrelevant to separating the rent collectors from the rent payers. Take another look at the chart. Some of the recipients are wealthy and some less so, but they are all benefitting from the collection of rent. And that’s the real division in this country. not rich and poor, but political and non-political, rent collectors and rent payers.

20 Spike December 20, 2007 at 11:12 am

The falicy in this is that it compares the cost of federal spending, and not the value that spending provides. In some cases the value to society of a federal service is far in excess of its cost (e.g., maintaining the rule of law), and in some cases the value is less than the costs (e.g., ethanol subsidies) or even negative (e.g., the War in Iraq). I think that while the costs may arguably in line with Alex’s numbers, if you ran the numbers based on value provided, the rich would come out far ahead.

21 Randy December 20, 2007 at 11:23 am

Spike,

I’ve considered the “value of government” argument, but I reject it on the grounds that the funds are collected under threat of violence. If I pay for a service willingly, then the service provider has the right and justification to claim that the service he provides has value. But if I am forced to pay for some supposed service, then the “provider” has no right and no justification to claim that his service has value.

22 kharris December 20, 2007 at 11:29 am

“Maybe he wasn’t clear enough, but lots of you are jumping on him by invoking the second consideration rather than rationally trying to respond to the first. Sort out your margins, people!”

Wanting the discussion to be about “the first” does not make it so. Insisting that we stick to the margins doesn’t change the fact that some of us find value in looking at the whole picture. I am rather suspicious of arguments which rely heavily on “no, no, don’t look at that” regardless of whether “marginal” is included in that argument.

“Who benefits most?” is not the same question as “Who benefits most at the margin?” and it does seem that the initial question was “Who benefits most?” no matter how much that displeases Tyler. In fact, the calculations offered have to do with shares, rather than with changes, so the question iniitally presented is pretty obviously not “who benefits at the margin?”

There are ever so many risks in thinking about things from one’s own perspective and denying the perspective of others.

23 Patinator December 20, 2007 at 11:33 am

One big reason the rich do not benefit from social security is that if you earn a certain amount before counting your social security check, that social security check is taxed to the point of making it meaningless.

For anyone who is young and making decent money, just assume that the government will, at some point, confiscate your contributions for redistribution or that, due to inflation, it will be worthless by the time you would claim it. Either way, just be happy for that time in the year when you go past the 90K mark and you are no longer paying into a system worth zero for you.

24 Joe December 20, 2007 at 11:38 am

Can someone explain how we are accounting for the distribution of cash value from government spending? When the govt pays $30 million in unemployment compensation, the cash goes to the unemployed person. When the government pays $30 million in Medicare bills, the patient receives services but the cash goes to the doctor’s office. When the government buys a $30 million airplane for the Air Force, the cash goes to Boeing. When the government pays $30 million in interest on the Federal debt, the cash goes to the bond holders.

How do you apportion the cash benefits to Boeing, doctors offices, and bondholders across the income distribution?

25 Randy December 20, 2007 at 11:59 am

Exactly, Joe. And my point above is that it makes no sense to apportion it across the income distribution. What matters is that some collect the rent and some pay it, and to generalize, the political class collects, and the non-political class pays. Talk about your incentives…

26 J. December 20, 2007 at 12:04 pm

Archit Shah says, “Welfare and redistribution benefit the rich; they prevent more radical changes (Soviet Revolution) or anarchy (Russia today?).”

Any quick glance over Soviet history will indicate that anything preventing a Soviet-style revolution is at least as good for the poor as the rich. It isn’t as though communist revolutions end up putting in governments that help the poor.

27 Jarick December 20, 2007 at 12:22 pm

Another interesting observation: a group of economists hung up over wealth redistribution as if it actually matters to the well-being of classes. What happened to productivity?

Devil’s advocate: Disproportionate wealth transfer to the poor benefits the rich by providing a disincentive to education and achievement. Satiating the basic needs of the lower class undermines the drive to improve one’s condition. One must only change the perception, not the reality.

Orwell would be proud of that one.

28 Allan December 20, 2007 at 12:34 pm

There are two distinct issues here:

1) Who benefits most from government?
2) How should government be funded?

These are separate and distinct issues.

As to the former, I firmly believe that the rich benefit more from the federal government than do the poor. As Tyler points out, this is not borne out by what the government spends. On the other hand, government spending only accounts for a small portion of benefits flowing from the U.S. government.

As to the latter, the rich should certainly shoulder a larger share (proportionally) of the cost of government than the poor, as they are financially able to do so. And the failure to fund government would destroy government altogether. That would be a detriment to everyone and is, arguably, immoral.

We are then left with the question of how much of the government’s cost should the wealthy bear. Or, what is equitable? I truly do not know. But I find arguments that the wealthy are paying too much very unpersuasive if there is no explanation of what they should pay (and morally bankrupt if the argument is that they should pay only their proportionate share). I also find arguments that the wealthy are paying too little unpersuasive if the arguments are not at least supported by theory.

One note. Much of the nation’s wealth is, well, wealth. We don’t tax that on the federal level (there are local property taxes). Why don’t we? If, as some have argued, the primary reason for any government, to include the federal government, is to protect property rights, why do we not tax property, i.e., wealth, on the federal level.

29 jp December 20, 2007 at 1:00 pm

We are then left with the question of how much of the government’s cost should the wealthy bear.

Before we answer that question, we should answer the question, How much should government cost?

30 jp December 20, 2007 at 1:04 pm

BTW — About a week ago, I posted the same data that Alex has posted here on a discussion board for members of Mensa. FWIW, the comments here have been much better informed and better argued than those of the Mensa people.

31 Lawrence December 20, 2007 at 1:09 pm

A benefit not listed in the post, nor the comments (well not completely) as far as I can tell is:

A robust safety net increases the access one of the more affluent members of our societies can enjoy within the society.

I have met an individual who spends time in both Rio and Chicago. In Chicago he has relatively safe open access to the entire city. While in Rio, the same cannot be said.

A robust “safety net” to insure a games stlye “postive fairness” rating in the lower classes reduces all maner of harms that an affluent member of said society might experience in a society in which the lower echelons do not rate as “fair”.

Yes, fairness awareness has been identified as an “irrational” response by many economists, but recent research indicating that lower base primates than humans play “games” “rationally”, indicates the possibility that “fairness” is actually one of many evolutionary stepping stones like communication to our present location on the ascent we find ourselves in.

Fairness may increase safety and decrease disease, just to give two examples, as well as increasing the variety of experiences safe to purchase. Indicating that the “rich” may indeed be drawing a direct benefit from social security, Medicare, welfare and other “fairness” formats.

32 Mcwop December 20, 2007 at 1:30 pm

Who benefits the most from military spending below?

A) Taxpayer (estate lawyer) with a $2,000,000 salary, they are opposed to war, and would like to cut military spending
B) Taxpayer with a $65,000 salary that builds military aircraft and is all for the Iraq war.

33 Allan December 20, 2007 at 1:40 pm

Mcwop,

It depends. If all of the estate lawyer’s clients are the founder of Lockheed-Martin, he is the clear winner…

34 Allan December 20, 2007 at 1:46 pm

Millian,

Your posting presents an interesting point.

Assuming we can quantify the exact benefit a person gets from the government. I guess, under the benefits theory, the person should pay for that and the ability (or inability) to pay more is irrelevant. On the other hand, for the ability to pay crowd, the benefits received are irrelevant.

I am for an ability to pay model. However, I do believe that there should be some quantification of the benefit in order to show benefit.

It is hard to explain, but it is not a zero sum game. The amount of benefit from government does not equal 100%. I would argue that the benefit from government to society greatly exceeds the amount of taxes put in. So, if we have everyone pay the exact amount for the benefits that they receive, we would have a huge surplus in government coffers.

We don’t want that. So, we then have to figure out how much of a discount everyone should get. I will assume, for the purposes of this argument, that everyone agrees that if you receive $1 in government benefits you should pay $1 in taxes.

I cannot, for the life of me, figure out a formula for this. But I think that this is one of the bases for arguing that the wealthy do not pay too much in taxes and may be paying too little.

35 Curmudgeon December 20, 2007 at 1:52 pm

Can anyone point me to similar information based on high net worth individuals (as opposed to high income individuals)? To me, they are the real “rich.”

36 A student of economics December 20, 2007 at 1:59 pm

Hey Alex, do you now agree with your co-host Tyler Cowen when he writes that the total benefits of government are roughly equal to “people’s expected lifetime wealth”? In other words, the rich benefit much, much more from government.’

If so, you should correct the math in your blog posting. Here’s a start, based on the CBO data you provided earlier: the richest 20% pay about $60K in taxes annually for a benefit of about $231K each year. You can do some NPV stuff to convert to lifetime expectations if you want, or use Ed Wolff’s wealth data (which are much more unequal than incomes), but it won’t change the basic point.

This means the richest 20% get about $231K-$60K or about $170K per year from the existence of government. Not a bad amount of benefit from government, and certainly a lot more than what the bottom 20% get. (And no, it does not make sense to take ratios instead of differences, since benefit is relative to what they would have with no government.)

If, despite the title of your post and the data you provide, you now prefer to assess everything “on the margin”, you need to explain why you would cut margins of government that benefit poor and middle class people rather than those that benefit wealthy people.

Of course, if marginal benefits are proportional to total benefits, as you apparently assume in your original post, then you can just go with the above calculation.

So, do you disagree with Tyler, or do you want to correct your calculations? 🙂

37 Rich Berger December 20, 2007 at 2:18 pm

ASOE-

I’m in the top 20%, pay roughly the annual taxes you cite, so I should be getting $231K of annual benefit. Please tell me where I can get my hands on that generous gift from the poor.

As you may imagine, I’m pretty excited by my new-found windfall. It’s a Christmas miracle.

PS – I am sure I am not alone in my awe of your ability to come up with such impressive nonsense. My hat (my mink hat) is off to you!

38 Michael Blowhard December 20, 2007 at 2:25 pm

Do any women ever comment on postings like this one? And even if there are a few, why so few?

Just curious. And certainly with no politically-correct motives …

39 Doug December 20, 2007 at 2:35 pm

“Whatever the numbers say, the rich alone are the ones who benefit from civilization.”

You can’t possibly mean that.

40 Alex Tabarrok December 20, 2007 at 2:35 pm

Student I agree with Tyler that “the real question” is whether you can show that I am wrong about the distribution of government spending on any reasonable margin. It’s idle chatter to speculate and what would happen if there were no government – some say anarchy others say Galt’s Gulch. Who knows?

I showed in the first post that the rich pay for most government spending. In the second, I showed that most government spending does not go to the rich. Do you deny?

Be specific. Suppose the government were 50% smaller with all programs and taxes being reduced equally. Who would benefit most?

41 TGGP December 20, 2007 at 2:39 pm

Once again, I’d like to point out Better Off Stateless as one of the few analysis of what actually happens when the government goes away.

42 Bob Dobalina December 20, 2007 at 2:46 pm

Plainly, they’re willing to pay as much as they’re
paying now, else they’d emmigrate.

No, Huben, they’d renounce their citizenship, as mere emigration does not free an American from the tentacles of the IRS.

Your argument is pretty stupid, otherwise, but this part especially warranted a callout.

43 Allan December 20, 2007 at 2:54 pm

Alex,

Don’t take this the wrong way, but you are being obtuse. Yes, if you look ONLY at what the government actually pays out and individuals receive monetarilly, the rich do not get more. You need to look at the intangible and indirect benefits to truly see the value of government.

To put it in a way you might understand: IBM might have $1 billion net worth when you consider only tangible assetts. But, if I wanted to buy IBM, I might have to spend $2 billion. Why? Because the good will IBM has is worth something. The intangible benefits from government are also worth something and that must go in the calculation.

44 A student of economics December 20, 2007 at 3:13 pm

Alex: thanks for responding. This is a good and interesting discussion.

You say: “It’s idle chatter to speculate and what would happen if there were no government”

Well, YOU asked who benefits from government. Thomas Hobbes, Tyler Cowen, Warren Buffett and lots of others all come to pretty much the same conclusion. If you want to know who benefits from government, you need to compare it to the alternative, which is anarchy. Obviously, rich people benefit more (not so say there wouldn’t be some “winners” in the war of all against all, but I doubt Bill Gates and Warren Buffett specifically would retain their billions, or perhaps even their lives.)

You request: “Be specific. Suppose the government were 50% smaller with all programs and taxes being reduced equally. Who would benefit most?”

In my judgment, most of the total benefits of government do NOT come from direct monetary spending. I think most libertarians would agree. So it biases the question to focus only on cutting the financial components of government. We could make lots of changes on the margin in lots of government programs, e.g. cap mortgage rates as Bush has proposed, to reallocate some property rights from bankers to home purchasers, etc. If we made marginal changes in government in proportion to the total benefits, both financial and non-financial, then by definition, people would benefit or be hurt in proportion to the total value of government to them. In other words, the rich would be hurt more.

You seem to assume that property rights allocation and enforcement role is inviolable, but, say, health care or education spending can “reasonably” be cut on the margin. There’s no theoretical or empirical basis for such an assumption (unless you want to appeal to some divine endower of certain rights, but you’ll then find others have different interpretation of divine rights). Your assumption of what could and should be cut “at the margin” simply reflects your personal values and/or preferences. Look around the world, including the U.S., but especially certain other countries, and you see this. What’s more, I suspect that the cost of protecting property rights would go up astronomically if the wealth distribution were dramatically more unequal. It’s an equilibrium that would probably leave even wealthy people materially worse off.

Last but not least, in addition to the enormous financial and non-financial benefits wealthy people like me get from government (for which I’m grateful, even if some are not), like most other humans, I am a fundamentally social animal. Hence, the utility of other humans directly enters into my own utility function. I don’t like to see suffering, so living in a highly inequitable society, like say Panama, or Medieval Europe, would give me great disutility, regardless of how many servants or flat screen TVs I could afford.

45 Randy December 20, 2007 at 3:21 pm

Re; “Suppose the government were 50% smaller with all programs and taxes being reduced equally. Who would benefit most?”

The non-political class would benefit most. First, because these are the people that are most likely to be net rent payers. Second, because if they still want some of the types of services that government offers they will continue to pay for them via voluntary programs which would be far more efficient than the current bureaucratic programs. They would lose nothing, while gaining from the ending of programs which they do not use but are forced to pay for, and the greater efficiency of voluntary programs for what they do use.

46 dizmal December 20, 2007 at 3:30 pm

This is the least credible analysis I’ve seen in a long time.

However, that said, I’m willing to enthusiastically accept it.

Let’s cut all government spending and taxes in half tomorrow and let the rich suffer.

47 A student of economics December 20, 2007 at 3:34 pm

“If you want to add regulation then please go ahead and do the calculation but do so fairly by adding up the costs of regulation to the rich as well as the benefits.”

This sounds hard, but it’s really not. As Tyler explained, a good approximation of the total value of government , (including all tangible and intangible costs and benefits of regulation), is the present value of lifetime wealth.

For someone with $100,000,000 of lifetime wealth, that works out to… ah…let’s see….got it!: roughly $100,000,000. Interestingly, I guess that means a wealthy person benefits more, at least monetarily.

Alex: Did I make an error in the math?

P.S. Exercise for serious math wonks: assume an average of $1 of consumer surplus for each dollar of lifetime spending and compare a rich person with a poor person in terms of consumer surplus. Who comes out ahead? Show your work.

48 Randy December 20, 2007 at 3:45 pm

Allen,

Again, I don’t think the government has the right to claim or assume that the services they offer have any value. The fact that they use force to fund the services invalidates the right and the justification for the claim that the services have value. Make the programs voluntary and then we can calculate their value by the amount that people are willing to pay for them, but as long as they are involuntary, the only fair assumption is that the programs have zero value.

49 jp December 20, 2007 at 4:15 pm

a good approximation of the total value of government , (including all tangible and intangible costs and benefits of regulation), is the present value of lifetime wealth

I don’t understand the reasoning behind this statement.

50 John Dewey December 20, 2007 at 4:16 pm

Allan: “Is there no value to “allow[ing] free men to achieve their potential?”

Perhaps there is. If we allowed the individual states to compete in offerring protection of that right, then we could determine an equitable market price, couldn’t we? But let’s be clear: the right is not something we are granted by the state. It is one of those inalienable rights which formed the basis for our nation. The value provided by our government is protection of that right – not the right itself.

It is very clear to me that the right to achieve one’s full potential can be protected for just a fraction of the $2.9 trillion the government spends each year.

Because the government is protecting the right to achieve potential for all 300 million of us equally, it seems only just that we pay an equal amount for that right. That some can achieve more than others – that they have greater potential – should not alter the price we each pay for protecting that right.

51 Allan December 20, 2007 at 4:20 pm

John,

We agree that the protection of the right has value. It is like a ticket to a Bruce Springsteen concert. Everyone who attends the concert gets to hear the music. But the seats at the front are worth more than the seats at the back. So you pay more.

Similarly, the protection of the right to achieve one’s full potential is worth more to some that others. That is, if you have more potential, you have more to gain from the protection. Ergo, you should pay more for that right. Anything else would be communistic.

52 Allan December 20, 2007 at 4:29 pm

Rich,

While I accept the premise that the wealth of some will increase without government, I reject the premise that the wealth of the nation will always increase as the size of government declines. Were that true, Somalia would be the wealthiest nation on earth.

The US disproves your point. At the end of the 19th century, the US government was tiny compairing to today’s standard and the US was a relatively minor country. By the end of the 20th century, the government was huge and the US was the only superpower, economically and militarily. Maybe it would have been even moreso, had there been less government, but maybe not.

53 A student of economics December 20, 2007 at 4:36 pm

JP (and Rich Berger implicitly) ask:

a good approximation of the total value of government , (including all tangible and intangible costs and benefits of regulation), is the present value of lifetime wealth

I don’t understand the reasoning behind this statement.”

a) Without government, we would, by definition have anarchy. Hobbes called this the “war of all against all”. See the posts at 8:41:59 AM, 8:44:06 AM and 9:20:13 AM for some more detail. The bottom line, is that everyone has subsistence income and wealth, at best. In fact, a lot of people would not even have that.

b) With government (at least the one we have now), we have the wealth and income we have now (by definition).

Hence, subtract a) from b) and you get Tyler Cowen’s conclusion: namely the net value of government is the present value of lifetime wealth.

QED

Obviously, this means that wealthy people benefit much more from government, as it now exists, than poor people.

Of course, one could pick and choose certain functions of government to change ‘on the margin’. This might help or hurt various groups of citizens, depending on which functions one changed. I don’t doubt that we could make changes that make the wealthy (even) wealthier, at least in the short run, if those were your preferences and you didn’t give any political power to average citizens.

But if the question is simply “Who benefits from [our] government?”, then the answer is very straightforward: those who currently have the most wealth, at least if one measure benefit financially.

54 A student of economics December 20, 2007 at 4:49 pm

Alex reminds me: “Student, please consult the title of this blog.”

I assume this is in reference to my looking at total lifetime benefits from government as opposed to some type of “marginal” benefit. Is that right?

Well, there are virtually infinite margins one could change when it comes to regulations, rights, etc. In fact, it’s not even clear that many of them can be reduced to a scalar or vector space.

Furthermore, it’s not clear that Alex himself was doing a marginal analysis when he reported calculated the TOTAL government spending in various categories. He never once used the word “marginal”, in fact. However, let’s give him the benefit of the doubt, and assume he was merely using the total benefits that he reports as proxies for the marginal benefits that he really meant to discuss. Apparently, he is therefore assuming that marginal benefits are proportional to total benefits. Economists do this all the time (although not necessarily with good justification).

Would it be fair for me to do exactly the same thing as Alex?

Okay, then, assume the “marginal benefits” of government (on some hypothetical margin of rights, regulations, transfers, taxes, etc) are proportional to the total benefits.

The total benefits are great for wealthy people than poor people.

Hence, the marginal benefits are greater for wealthy people, too.

QED

55 jp December 20, 2007 at 5:05 pm

a) Without government, we would, by definition have anarchy. Hobbes called this the “war of all against all”. See the posts at 8:41:59 AM, 8:44:06 AM and 9:20:13 AM for some more detail. The bottom line, is that everyone has subsistence income and wealth, at best. In fact, a lot of people would not even have that.

b) With government (at least the one we have now), we have the wealth and income we have now (by definition).

Hence, subtract a) from b) and you get Tyler Cowen’s conclusion: namely the net value of government is the present value of lifetime wealth.

This seems to assume that the current government is the cause of the current levels of wealth. All we can say with complete confidence, however, is that the current government is consistent with the current levels of wealth.

If we were all forced to carry around 50-pound weights wherever we went, young, strong adults would fare better than children, the old, and the infirm. Young, strong adults would be able to accomplish more than other people. But that would not mean that the 50-pound weights are responsible for the greater accomplishments of young, strong adults.

56 GunnerUnit December 20, 2007 at 5:10 pm

jp, slave morality is correct. It is frightening how jealous and resentful these people are, even presumably educated people. Many seem to assume that say, doctors and lawyers, are this elite society who feast on the poor and middle class. They don’t seem to realize that most doctors and lawyers come from middle class backgrounds, that most will never make more than six figures in a year (and that a large chunk of their salary goes towards their crazy student loans), and that the vast majority work 60-70 hour workweeks, and sometimes more, to make their comfortable but not extravagant salary. The fact that these people want to bury “the doctors and lawyers” for the misdeeds of the “rich” is proof that they have no idea about which they speak.

Slave morality indeed.

57 Allan December 20, 2007 at 5:21 pm

Randy,

I do not agree that it could be done.

I submit to you that you benefit from the public subsidizing the education of your physician, your accountant, your attorney, etc. Were public schools effective (something for another post), you would benefit from the public subsidizing the education of children of those who could not otherwise pay for an education. How do we figure out what the individual benefit was from Reagan standing in Berlin and telling Gorbechav to take down that wall?

These benefits are indirect. Other benefits are so indirect that it is impossible to quantify their costs.

Were you able to quantify ALL the benefits a person receives from ALL public spending, sure, we could figure our the benefit side of taxes accordingly. But we can’t do it.

JP,

I think we can say, with the utmost confidence, that the laws of the US, that is the government, is the cause for the country’s great wealth. One of the greatest things our government (mostly at the state level) has done is allow for the “corporate shield.” Without it, shareholders would have unlimited liability. Take away corporations and this country would be nothing.

58 Millian December 20, 2007 at 5:43 pm

I still don’t see why the extremely large benefit/cost ratio from property protection laws – i.e. for what we spend, individuals receive a lot of consumer surplus – means the rich must pay so much above the odds on other social spending that has nothing to do with property protection. (Again, this is from a benefits point of view, before we account for equity.) One way of interpreting Tyler’s comment is an attempt to move the debate on from seeing “government” as an institution which can be scaled up or down, but is homogenous in its nature. We should be seeking to unbundle the different products we get in our analysis, like any good economist would.

59 dubaiwalla December 20, 2007 at 5:46 pm

Do rich people have a higher life expectancy? If so, wouldn’t they actually benefit disproportionately from Medicare?

60 mt57 December 20, 2007 at 6:14 pm

“Hence, subtract a) from b) and you get Tyler Cowen’s conclusion: namely the net value of government is the present value of lifetime wealth.” This is terrible logic, which excludes among other things all technological and medical change. It is like saying, “what is the value of penicillin? A rich person is worth more so should pay more for a penicillin shot.” Now, compare an 80 year old millionaire living alone to a 10 year old middle class child and tell me again, who will derive greater economic benefit from the shot? It is not a function of wealth.

“One of the greatest things our government (mostly at the state level) has done is allow for the “corporate shield.” Without it, shareholders would have unlimited liability. Take away corporations and this country would be nothing.”

Sorry but this is false. There have been many sole proprietorships and general partnerships that have generated above average wealth. Every member of a professional partnership, even if the liability is limited for their colleagues’ acts and omissions, incurs the risk of unlimited liability for their own acts and omissions. Yet they are often quite wealthy. Every citizen incurs the risk of unlimited liability when they drive a car. yet wealthy people drive a car. The value of the statutory limitation on liability can be easily replaced with a liability insurance policy and, for the risk averse, an excess policy. The long tail risk of a greater liability is sufficiently low that most people ignore it. You also overlook the fact that the unlimited “liability” is itself a creature of government. You speak as if it were a natural condition. So you cannot speak of the limitation on liability as if it were a naked benefit. It merely limits the cost of the imposition of liability.

“Do rich people have a higher life expectancy? If so, wouldn’t they actually benefit disproportionately from Medicare?”

No, because they can replace it. As Alex wrote, read the title of the blog. The marginal utility of Medicare is much greater the less you have.

Just on the anarchy argument, with due respect, much of the government’s spending and taxx collection is for the elderly and sick. It’s not plausible to contend that if that were to stop, the wealthy would be at danger of attack by anarchic mobs of elderly and sick such that the wealthy need to buy them off out of fear. As for defense, come on. Our wealth lies between two oceans. Mexico and Canada are not attacking us. We do not need a major defense budget to protect wealth here. There is no plausible case that the stationing of troops overseas, e.g., in Iraq or N. Korea, benefits the rich or that the rich as a group support the war. Support for militarism tends to come from segments of the population not defined by wealth for reasons that are noneconomical in nature. The military budget is not an economic benefit to the society at large or its wealthy members, it is an economic waste in large part because it vastly exceeds what is needed for our own security interests. Certain peole who are the recipients of military spending benefit but they tend not to be rich.

61 anomdebus December 20, 2007 at 6:18 pm

ASOE,
Also, I do not believe that humans will long live without some form of governance, so I am not sure how we can posit that the situation would stay the same. I would guess that if you removed all government institutions, you would some time after get something that resembled a feudal society. I am not going to guess how long it would take. That would be very dependent on the culture of the people in question. There would be different winners and losers, but I suspect many of today’s winners would manage to stay winners. I believe, for a time, overall wealth would decline, as you have said, but not be virtually eliminated.

62 Anon December 20, 2007 at 7:19 pm

But if you lower taxes teh angry poors will mob the streets and slaughter teh rich!!!!111

You owe the government YOUR LIFE; it is the reason that you are alive today, RICH MAN!!!!11

63 Steve Sailer December 20, 2007 at 7:39 pm

So, Alex, I look forward to your next post following the logic of your last two to the obvious policy implication: letting in so many low-skilled illegal immigrants who, and their children after them, will tend to be net drains on the taxpayers doesn’t make economic sense for America as a whole.

64 Cliff December 20, 2007 at 8:16 pm

“he is therefore assuming that marginal benefits are proportional to total benefits. Economists do this all the time (although not necessarily with good justification).

Would it be fair for me to do exactly the same thing as Alex?”

ASOE, the answer is no.

Alex is talking about taxing and spending. You are talking about total benefits, including intangible, from the totality of government.

Spending and monetary benefits received have a proportional relationship. You will not increase the amount spent on anybody by decreasing spending. Therefore it is a reasonable assumption that proportionately cutting all taxing and spending will proportionately reduce monetary benefits received. A wealthy person who receives 37 cents in benefit spending for every 1 dollar of taxes will save 63 cents for every dollar of spending cut.

On the other hand, the relationship between government spending and overall benefit is unknown, and need not be proportional. It may very well be that marginally reducing taxing/spending will increase overall benefit to the wealthy. Certainly they benefit monetarily, so your assumption is that intangible detriments outweigh these. That is an untestable assumption and you have given no basis for it.

65 Randy December 20, 2007 at 9:26 pm

One more reason why “follow the money” will work and why determining the subjective value of government is unnecessary; the correlation between those who are net collectors of rent payment from the government (see the graphic) and those who believe that government has considerable value is very strong. And not surprisingly, the correlation between those who are net payers of rent to the government and those who believe that the government is a necessary evil at best and a psuedo-criminal organization at worst is also very strong. Are there exceptions? Sure. But people can be counted on to rationalize their interests. We can proceed from that point. And following the money will take us to the respective interests.

66 A student of economics December 20, 2007 at 9:57 pm

Alex, I like your story.

Here’s one for you:

The Land of Fairtax has a simple production function: one grock combined with one maston creates one grock-maston unit, or GMU, which is very tasty. Sadly a grock or maston alone is inedible. Fortunately, there are 100 grocks and 101 mastons scattered about the land. Sadly, the people of the land don’t bother to search for them and risk starvation – there’s no incentive since whenever one is found, anyone else can just come and take it away anyway. Wisely, the people institute a government with a single function: enforce property rights. Finders are keepers, under penalty of death to any stealers.

Highly incentivized, the people of Fairtax joyously rush out and collect all the grocks and mastons. Each person is strong enough to bring one to the grand market, where trades are made. Interestingly, the price for mastons drops to just barely above zero – apparently there’s an excess supply. Meanwhile, owners of grocks do very well indeed, capturing nearly all the gains from trade. Some citizens complain, but Al-Taba, the wizard of the land pointed out that that the grand market is always just and fair – how can it not be? Those people with a higher “instinct-for-grocks† quotient, or IQ, are obviously more worthy and justly deserve to get most of the wealth of society.

Meanwhile, on the island of Cantabridge, the people studied the situation in Fairfax with interest and concern. They also want to produce and consume yummy GMUs and liked the property rights idea – it clearly helped provide strong incentives. However, with the grocks and mastons all hidden behind a veil, each person worried that he or she might end up on the “excess supply† side of the market and be very poor. So, they decided that their government should have not One, but Two functions: protect property rights and transfer a 20% of the wealth from the richest people to the poorest. They all agreed and indeed, after hunting for grocks and mastons, one side did end up in slight surplus (which side has been lost to the sands of time). After the market clearing trades, the “rich† gave 20% of their wealth to the “poor†. Most people were satisfied, although some on each side of the exchange grumbled.

Then the wizard, Al-Taba, sent a carrier pigeon with a query. It said “I wonder who benefits from government?† The Cantabridgians responded (by carrier pigeon): “We all do. Without it, we’d probably starve†. But Al-Taba, replied in the margin of the first note: “No, no, no, fools. By ‘government’, I only mean the transfer function, not the property rights function†. Then he did some arcane calculations.

After 2 days and 2 nights, he emerged and proclaimed “Behold, I have the answer! The poor benefit from government, not the rich!†

At which point, a humble student listened, learned and turned to his girlfriend saying “I don’t think you contribute exactly as much money to our relationship as I do, here’s a new accounting and you owe me $43.17†.

67 Allan December 20, 2007 at 10:21 pm

Randy,

If economics were the key to figuring out how people voted, i.e., they vote with their pocketbook, there would be no way that Republicans could have won so many elections since 1952. There has to be something else at play.

68 R. Richard Schweitzer December 20, 2007 at 11:44 pm

What a bunch of Hokum!

None of this has anything to do with reality.

“Benefit” has to do with appropriations of revenues only to the extent that it impacts the appropriators’ motivations.

The true reason for the viability of “progressive” (scaled) taxation is summed up in the old English maxim: ” The art of taxation is to pluck the most feathers from the geese with the least squawks.”

The least economically “feathered” of our geese would not only squawk, but peck, viciuosly, at our political class at the conscious loss of much of their less adequate covering. Those birds more densely endowed can “take it” in losing some of their more adequate covering, and so tend not to be moved to much more than cackle a bit – it does not mean the same thing to them as it might to the less feathered.

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70 Randy December 21, 2007 at 7:26 am

Reimannian and Allan,

There is also extensive literature on people’s willingness to rationalize their interests. Its a foundation of the psychiatric profession. Also, both Republicans and Democrats fall into the category of those who are net rent collectors and believe that government has value. That’s why they vote and seek office. They don’t argue over whether or not the government has value, as long as the revenue keeps flowing there is no doubt that the government has value to the political class, they only argue over how the rent collections will be distributed among them.

71 Cliff December 21, 2007 at 8:00 am

ASOE, in addition to my previous post, note that in your example as in life, without property rights there could be no transfer. If the size of “government” were cut 50%, it would be insane to cut property rights 50% as the “government” might well collapse entirely. However, note also that we are talking only about the federal government, which could go away entirely and not deprive us of property rights.

Also, are you familiar with behind-the-veil experiments? They do not come out the way you might expect.

72 jp December 21, 2007 at 8:34 am

TGGP — Thanks for all the information you have provided. By way of returning the favor, I think you would enjoy reading A Constitutional View of the Late War between the States, by Alexander Stephens (the one-time Vice President of the Confederacy). Used copies (especially of vol. 1) are pretty easy to find. It contains a lot of interesting evidence regarding how the federal government was viewed in the early years of the USA. An overview of it is provided in Edmund Wilson’s Patriotic Gore, which is available in paperback.

73 Eric H December 21, 2007 at 9:34 am

@ Huben

Nice example of reasoning from a faulty premise (survivorship bias – only the wealthy who remain citizens are included in the data set). What’s your deal about emigration, anyhow? Seems like your answer to everything lately is to introduce a false choice of either accepting the status quo or emigrating. Can you think of no other alternative? Or perhaps you think the status quo cannot be improved in any way?

74 Randy December 21, 2007 at 10:54 am

Allen,

Re; “…there is no question that everyone benefits one way or another…”

Of course there is a question. You rely on the assumption is that only government can provide certain services and that assumption is in error. Mandatory monopolistic provision of a service is only of certain benefit to those who run the monopoly. Those who use services, even the ones they do use, would very often be better off if allowed access to competitive sources. One more time, the government has no right or justification to claim that the services that it mandates constitute a benefit. The claim is nothing but propaganda. If they want to prove that their services have value, they will have to eliminate the mandate and the monopoly.

75 Allan December 21, 2007 at 12:20 pm

Randy,

I really on no assumption. Your premise is not that government programs provide no benefit, but that the private sector could provide those benefits more efficiently. And your conclusion is that we should have a smaller government. While your premis is debatable point, it does not undermine my argument a whit.

76 Allan December 21, 2007 at 12:22 pm

oops. “Really” should be “rely”.

77 meter December 21, 2007 at 12:57 pm

The point has been made but has apparently sailed over the heads who are insistent that we “just give the oppressed poor a break” that at high enough tax rates, the poor will simply leave. Seems pretty market-friendly to me.

Apparently tax rates are not too high as this isn’t happening.

I have a suggestion for the rich who think they pay too much in taxes: go buy your own island a la Richard Branson. You won’t owe anyone a dime. Build your own infrastructure, security, etc. See how that suits you.

78 Randy December 21, 2007 at 1:24 pm

Meter,

Suppose, just suppose, that the rich don’t actually pay the taxes they turn in to the government. Suppose that they simply adjust prices in order to collect what they turn in and that all taxes, regardless of surface form, are actually paid as hidden sales taxes. Suppose that you’ve been the victim of a first rate confidence job. How would that effect your thinking on the value of so called “progressive” taxation? I mean, if there really was no such thing as progressive taxation?

79 Porita December 21, 2007 at 2:45 pm

Underlying most of the arguments I see here is this assumption: the rich actually deserve their money. People accumulate wealth and leverage high incomes by means of educational opportunities, capital, social class and luck, for which they can claim negligible personal responsibility. Since the distribution of wealth is effectively arbitrary, protesting “unfairness” to the rich of progressive taxation seems beside the point.

80 John Dewey December 21, 2007 at 3:11 pm

Porita: “People accumulate wealth and leverage high incomes by means of educational opportunities, capital, social class and luck, for which they can claim negligible personal responsibility. ”

That’s not at all the way it happens in the U.S. A small few may inherit their wealth. But most earn their riches through hard work, good decision-making, and assumption of risk.

Social class was an important determinant of wealth accumulation decades ago, but no more. Read The Millionaire Next Door by Stanley and Danko if you need proof.

You may count inherited intelligence as luck, whatever that means. You may also count being born into families that teach solid work ethics as luck. Or perhaps you mean that being born into the U.S. as opposed to sub-Saharan Africa is luck. However you wish to define luck, there are many millions in the U.S. who had the same opportunities, but who were unable to work hard enough, to make the right decisions, and to accept the risk of entrepreneurship. The U.S. economy rightfully rewards those who seized the opportunities provided them. Most of the rich most definitely deseve their money.

81 Cliff December 21, 2007 at 3:51 pm

John,

“But most earn their riches through hard work, good decision-making, and assumption of risk.

Social class was an important determinant of wealth accumulation decades ago, but no more. Read The Millionaire Next Door by Stanley and Danko if you need proof.”

A book of anecdotes is not proof. If you want to read a better book that explains why you are wrong, try Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb. Luck is the predominant factor in wealth accumulation, particularly high levels of wealth. Taleb specifically addresses and deconstructs the Millionaire Next Door. Just because some people succeeded doing a certain thing does not mean a) there are not others who failed doing the same thing or b) what they did caused their success.

82 jp December 21, 2007 at 4:05 pm

I think it is safe to assume, based on the real world actions of the politicos, that talk of “income distribution”, helping the “underprivileged”, etc., etc., is nothing but the method of a confidence game used to get stuff.

Randy — If “stuff” includes the pleasure of wielding the power to take from A and give to B, while telling yourself a fable about serving the public, then I wholeheartedly agree.

83 EG December 21, 2007 at 4:40 pm

The article does understate the positive externalities of some of these programs here.

For example, Medicaid is ruled to produce no personal benefits for rich. But everyone is better off when children are vaccinated against a disease or when we treat infectious diseases and prevent them from spreading.

Or take unemployment insurace. It could be argued that the federal guarantee of an income allows people to prolong their search for a job until they find one they are suited to, rather than taking the first offer. The result is a more efficient allocation of labor and, in turn, a Pareto improvement that benefits the rich and the poor.

This is not necessarily a “generous accounting” of the benefits.

84 meter December 21, 2007 at 5:30 pm

“Suppose, just suppose, that the rich don’t actually pay the taxes they turn in to the government. Suppose that they simply adjust prices in order to collect what they turn in and that all taxes, regardless of surface form, are actually paid as hidden sales taxes. Suppose that you’ve been the victim of a first rate confidence job.”

I assume all of the above and more: that tax shelters and such allow the rich to vastly underreport.

85 jp December 21, 2007 at 5:51 pm

I assume all of the above and more: that tax shelters and such allow the rich to vastly underreport.

Tax shelters are used only by the super-rich. The “average” rich (like me and a lot of the people I work with) basically just suck it up and pay. The only deductions I can take are for charitable donations and my mortgage (which is quite modest).

86 J. December 22, 2007 at 12:09 am

Greg says,

“Even in during the Cold War with the Soviet Union, who was really going to be affected by a communist take over. The poor and lower middle class lives would not change that much. It is the wealthly and large property owners who fear being replaced.”

If we judged how well the poor and middle class would do in a communist take over in the U.S. by how well these classes have done under communist takeovers in other countries, this statement is not only false, but obviously false. Accordingly, since to be charitable, I have to assume you wrote this post in haste or while on drugs.

87 Sam Koritz December 22, 2007 at 5:33 pm

Why focus on just federal taxes? According to this chart — http://graphics7.nytimes.com/images/2003/01/20/business/21DOUBLE.chart.jpg — “Taking all types of government taxes into consideration, the tax burden, as a percentage of pretax income, is roughly the same for all income groups.” That’s probably an exaggeration, but not by much.

Also, government-created barriers to entry limit competition, thereby benefiting the already-haves. 13 of the top 15 best-paying jobs on Forbes’ latest list are in the very-regulated medical field (the other two are airline pilot & CEO): http://articles.moneycentral.msn.com/CollegeAndFamily/MoneyInYour20s/BestandWorstPayingJobs.aspx

88 John Dewey December 26, 2007 at 12:18 pm

cliff: “A book of anecdotes is not proof. If you want to read a better book that explains why you are wrong, try Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb. Luck is the predominant factor in wealth accumulation, particularly high levels of wealth. Taleb specifically addresses and deconstructs the Millionaire Next Door.”

I’ve been out of town, and I apologize for not responding sooner.

Why do you feel that The Millionaire Next Door is just a book of anecdotes? Stanley and Danko included quite a number of statistics. By 1996, they had been interviewing and studying wealthy Americans for a couple of decades. Their statistics and observations were based on more than just anecdotes.

Can you explain how Taleb deconstructs the Stanley and Danko book? I haven’t read his book, but I did read one excerpt. His argument was that if wealth could be acquired by hard work, frugal living, and assumption of risk, then we would have many more millionaires, for hundreds of thousands have read The Millionaire Next Door. Taleb’s argument trivializes working hard, living frugally, and assuming risk. Those requirements for wealth are simple to write down but not so easy to execute.

I agree that luck may play a role in amassing huge levels of wealth. But who can know whether it was luck or simply good decision-making that enabled Sam Walton, Fred Smith, and Ray Kroc to build their fortunes?

89 Greg December 26, 2007 at 1:42 pm

I do not understand why so many people commenting on this blog feel that the rich are not paying their fair share. Below what level of income should one not be required to pay taxes? No matter how you break it down, 58% of all tax revenues are wealth transfer: Social Security, Medicare, Medicaid and Unemployment and Welfare. Given that the top 10% pay 57.4% of all income tax (average income $339k) and the top 20% (averaging $231k) pay 68.7% vs. the 4.9% payed by the lowest 40% of taxpayers by income, it seems to me that the rich really are paying their fair share. I have no problem with that (I’m in the 4th quintile, together the 4th and 5th quintiles pay 85.6% of all income tax.)

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I think that huge tax breaks, “Death Tax,” corporate welfare and bailouts of large failed corporations benefit the rich.

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100 Orrin Wells December 7, 2010 at 8:05 pm

Recently I have learned about the problems our nation has, regarding our deficit.
I believe this was caused by borrowing money that we know we don’t have. The recession has been a big part of this. I know there are other parts to this too. Looking back the economic growth under George Bush did not generate nearly enough tax revenue to pay for his agenda, which included tax cuts, the Iraq, and Medicare prescription drug coverage. Hear is wear the problem is; our government is spending money on all these programs such as Medicare, social security, the universal healthcare along with stimulas packages. We don’t have money for this! It this keeps up the deficit is going to get bigger and our nation won’t be a nation any more!
Action must be taken to control the deficit and keep it from growing. I have multiple ideas for this. The government can form two different taxes. Taxes for the middle and upper classes. The reason I don’t mention the lower class is because for them it’s already hard to stay finically stable in this economy as it is. It needs to be a fair amount and instead of spending it on these programs it needs to go toward the deficit. The national deficit is about 13.8 trillion right know. if could get the deficit low enough and not spend money that is not ours, the deficit will stay low and the economy will strengthen.

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