In our Democracy (technically a Constitutional Republic), the government has essentially two roles: One is to provide public goods, and the other is to transfer income.
There has always been at least some debate about what should be included in public goods. There is also debate about how much income should be transferred.
Since 1935 when the Social Security Act was passed, the income transfer function has expanded rapidly.
In 1965 the Medicare Act was passed, which represented an even larger expansion of government income transfer.
The debate now extends to public goods. The new Biden administration has the view that health care and higher education, among other things, should be public goods. That will mean people can receive healthcare without incurring any direct cost. It will also mean that students can go to college without having to pay tuition. That’s how public goods work.
The cost for these services will be divided among those Americans who earn income and pay income taxes. There is no doubt government spending will have to grow to pay for these public goods.
Income-earning Americans are starting to question the total size of the income transfer function, especially at a time when budget deficits are frightfully large, and the public debt is approaching one and a half times the annual GDP.
Excluding COVID-19 pandemic spending, the federal government would have spent about $4.5 trillion in fiscal year 2020. Of that amount, 60% or $2.7 trillion was spent on income transfer programs like Social Security, Medicare and Medicaid.
Interest on the public debt accounts for 10% of the budget. Of the remaining spending, 16% is for defense and the other 14% for domestic programs, some of which is other income transfer programs.
The majority of Americans value the principles of individual freedom and individual responsibility very highly. From a cost standpoint, they also know that government is extremely inefficient when managing services.
One of President Biden’s stated goals is to reduce income inequality. However, with a litany of socially-engineered programs on his agenda Biden seems to be taking the government’s income transfer role way too far.
His technique to reach his Robin Hood’esque, income transfer goal is to over-tax the highest income earners then give that income to people who for whatever reason, did not earn it. This is the wrong approach and worse, it is likely to be counterproductive.
The best way to reduce income inequality is to provide a better opportunity to the lowest income earners so that they can increase their income. This pushes the bottom up, rather than trying to pull the top down. During the Obama/Biden administration this technique was tried. The result was that income inequality actually worsened, and the poverty rate increased to one of the highest in 50 years.
By contrast, the Trump administration was able to grow the economy and provide higher real wages. The poverty rate fell to 10.5% a historic low by 2019.
In general, since the 1970s average annual economic growth has slowed and the income gap has widened, according to the Center on Budget and Policy Priorities (CBPP). That means the CBPP analysis and the experiences of the Trump Administration indicate that higher economic growth rates actually reduce income inequality and the poverty rate.
Biden’s continued insistence on income transfer programs will tend to slow economic growth. That’s because raising taxes on the highest income earners and on corporations will reduce capital formation. In a capital-intensive economy, especially when there are huge capital-grabbing government budget deficits, reducing capital formation will slow economic growth, thereby worsening income inequality.
Biden’s economic policy would be wise to encourage growth, rather than redistributing income. The result would be a rising tide that would lift all boats, which would be better for ALL Americans.
