A Simple and Wrong Interpretation of Tax Payers and Government Spending

Crows in November

Crows in November

Minneapolis attorney Gregg J. Cavanagh weighed in on the politics of government spending, complaining that we live in an “allocation nation,” one in which most don’t pay their fair share.  It is a problem, he argues, because tax payers don’t understand the problem, especially the inefficiencies, and Democrats are eager to capitalize on that.  Republican wisdom and leadership, however, can set us on a more efficient and just course.

While Cavanagh has some stats correct, his overall analysis is wrong and his conclusions misleading and simple-minded.

Cavanagh suggests — based on total annual federal, state, and local tax expenditures exceeding $6.6 trillion — that anyone paying less than $54,000 in annual taxes is enjoying a subsidy from other tax payers.  These numbers represent the proportion of the total of annual government spending and I suppose Cavanagh is right in that regard when he says  “a majority of American households do not pay anywhere near their pro rata share of government spending.”

Right off the top we have problems with Cavanagh’s pro rata analysis.  When measuring who pays what in taxes against what they receive in government spending, the amounts vary greatly depending on where you live.  Just looking at Federal spending and measuring benefit based on what state a person lives, someone living in Texas receives a greater “subsidy” than a person living in New York.

But let’s stick with Cavanagh’s numbers — in the end they don’t matter much anyway — he is critical of this apparent subside because he seems to think that households receive at least $54,000 of direct government benefit they would not otherwise receive if it were not for the “tremendous inefficiencies” of government programs.

Cavanagh’s argument goes off track early and often, primarily by conflating all government spending into one pot and then correlating it directly to household support.  He tells us, for example, that “about 52 percent of American households receive benefits from one or more government programs” to expose these so-called spending inefficiencies.  That argument is misleading.

Let’s look at Federal spending.   In fiscal 2013 the Federal Government spent over $3.5 trillion.  About half of that spending went toward Medicare, Medicaid, and Social Security.    Keep in mind that a full third of federal tax revenues come from Social Security taxes, which are capped; it is supposed to be a fully-funded obligation.  However, over the years, political issues have muddled the funding of these programs.  These should be benefits paid to tax payers who have contributed via taxes to the budgets for these services.  There’s nothing wrong in that.

Another 18% of Federal spending pays for defense and about 30% goes toward other mandatory spending, everything from education, food assistance, environment, energy, infrastructure, transportation, and other necessary business of the government.

When Americans don’t equally pay a “pro rata” share of these expenses, Cavanagh wants to blame it on people expecting “freebies” from the government.  He explains how this works by creating a ridiculous analogy.  Cavanagh proposes a situation where the efficient private sector can deliver bus rides for $5 whereas that same bus ride will cost $10 if the public sector provides the service.  If the government undercuts the private business by subsidizing the cost so the rider pays only $1, the rider won’t care about the inefficiency.  They’ll gladly pay the $1 and let someone else worry about the wasted subsidy because someone else is paying for it.

There are problems all over this argument, not the least of which is the fact that public versus private inefficiencies of this sort are grossly overstated.  First, the majority of government spending is not spent on the “freebies” that worry Cavanagh.  Second, the pro rata argument fails for precisely the same reason.  Anyone paying less than $54,000 in taxes is not getting $54,000 in bus pass-type services.  It is certainly true that they are not paying a proportional share of total annual government spending, but Cavanagh’s inefficiency argument gets bogged down in this broken reasoning.  Government is not spending $54,000 per household for direct household benefits.  Even his numbers seem to make this case.  He says the bottom 40% of tax payer households get the equivalent of an $18,950 transfer on average.  We can presume these numbers are the worse.  Where’s the extra $35,000 in freebies?

One might argue, for example, that someone earning an income that is taxed above $54,000 annually gets proportionately more benefit from the government in proportion to his income.  Without strong government — laws, courts, treaties, etc — it would be difficult to operate a business or secure investments.  One also has to look at the benefit a business receives from a secure, healthy, and educated work force.  Consider education.  I might not send my kids to public schools and universities, for example, but if I am looking to hire a dozen or a hundred graduates, am I not benefiting from the public investment that helped educate those graduates?

What about the benefit of safe food and water, secure retirement, and healthcare for those in need?  The economic cost of not providing these services is high.  We live in a world where this is proven every day.

You cannot look at paying for government services as some sort of a la cart payment system.  I cannot agree to pay for only $500 of national defense, for example, and get only $500 worth of defense for my payment.

But there is even a more basic way in which Cavanagh is wrong.  It is obvious.  People with higher incomes pay more income taxes because they have higher incomes to tax.  If Cavanagh wants to get into a pro rata argument, perhaps we should start here.  Why is it the case that someone in the United States making $1 million is likely to pay less as a percentage of income in taxes than someone making $50,000?  Isn’t that an allocation problem?

Perhaps most troubling about Cavanagh’s misunderstanding of taxes, spending, and its benefits is his argument that “Democrats are constantly looking for ways to enroll more people in existing or new benefits programs.”  We’re back to his private versus public services argument.  He says “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.”  Presumably, therefore, Democrats foster this inefficiency to gain votes and shape policy.

This argument is naive, offensive, and wrong.  Republicans have proven themselves to be masters of self-deception and no strong steward of public finance.  Unfunded wars and tax highlight at least part of spending problems on the Republican side of the debate.  And don’t forget George W. Bush’s ballyhooed — and unfunded — Medicare prescription benefit plan.

Cavanagh wants us to accept that only Republicans care about government waste.  The suggestion is laughable and absurd.  It’s a borderline ad hominem argument that doesn’t belong is a supposedly serious discussion about taxes and spending.  In truth, Democratic leadership at both the state and federal level in many cases has done a better job in recent years balancing the books than the Republicans that preceded them.

I find Cavanagh’s argument that we have an allocation problem encouraged by needy citizens expecting a free lunch to be nothing more than a myopic rant, devoid of much thoughtfulness and largely wrong about the facts.  Cavanagh uses simple minded analysis to compensate for reason.  He is so wrong that you can hardly say he is self-serving.  Let’s presume he is among those fortunate enough to pay their “fair share” in taxes.  How would paying less — not just him, but everyone, so everyone can pay his fair share — help him in the end?  It wouldn’t.  We would have a small, feckless government unable to serve the people in any meaningful way.

People will disagree about government priorities.  It is unavoidable in a country of 350 million people.  What Cavanagh’s argument really boils down to is he unhappy about the allocations.  He doesn’t like the so-called “freebies” to lower income Americans.  His argument has nothing to do with pro rata fairness at all.

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One thought on “A Simple and Wrong Interpretation of Tax Payers and Government Spending

  1. Gary Farland

    A lot of good thinking in this blog, it shows the beneficial effect of Amore’s. What has become acceptable due to rightwing propaganda is that the well-to-do shouldn’t have to share with the needy. More than anything it shows the deterioration of the American political character, although the election of Obama showed there is a lot of latent decency left.

    Reply

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