Vermont Senator and presidential hopeful Bernie Sanders has pushed the American left to make income inequality a focal point of the 2016 elections. Echoing Thomas Piketty, the recently debunked economic pop star, Sanders has stated: “In America we now have more income and wealth inequality than any other major country on earth.” While not technically accurate, this rhetoric has inspired calls for redistributive tax policies.
Advocates for reducing income inequality may have the best of intentions or merely be indulging in political grandstanding. But if they wish to be taken seriously, they should first determine whether or not redistributive policies are truly effective at fixing the purported problem.
It’s commonly believed that taxation can combat inequality through progressive redistribution. Numerous studies, however, have shown that the economic and societal outcomes of income redistribution policies are inefficient. In other words, they destroy wealth in the process of transferring it.
Two of the most comprehensive empirical studies in this area are Public Spending in the 20th Century, by Vito Tanzi and Ludger Schuknecht, and Filip Palda’s paper “Fiscal Churning and Political Efficiency” (Kyklos 50:2, May 1997). Both studies use a metric called ‘churning’ that measures the degree to which taxes levied on citizens to support new social programs actually transfer capital right back to the original taxpayer.
Tanzi and Schuknect looked at large-scale growth in government spending since the middle of the twentieth century and found that the growth in government spending, specifically in transfer and welfare programs, coupled with the increases in taxes to finance the increased spending, has resulted in no measurable or real benefits for citizens. Citizens would be better off, their study suggests, if either: (1) government spending on social programs were made more efficient by reducing spending on transfers and welfare by the degree of fiscal churning or (2) transfer and welfare programs involved a decrease in the tax burden for those whom the programs are suppose to help. (The second alternative would allow the intended beneficiaries to have more capital and freedom to decide what services they view as most beneficial, compared to the current state, in which government officials decide what the poor and middle classes need without the knowledge or accountability to make an accurate assessment.)
In other words, Leviathan taxes with one hand and then with the other hand passes out transfers back to the taxpayer. Worse, taxed capital goes through multiple levels of bureaucracy before it’s returned, resulting in overall losses for taxpayers.
Bernie Sanders seems oblivious to all of this. He proposes turning the United States (which churns about 9 percent of its transfer payments) into a welfare state like Sweden (which Tanzi and Schuknecht found churns 34 percent of its transfers) or Canada (which lies at the average of the O.E.C.D. countries, which Tanzi and Schucknecht conservatively found to churn 11.7 percent and which Palda estimates the degree of churning to be between 15.2 percent and 49.2 percent). (Tanzi and Schuknecht reach the same general conclusion as Palda, but whereas their study made cross-country comparisons, Palda’s paper looked in greater detail just at Canada.)
Wasting resources and incurring large costs for no welfare gain is a zero-sum game that has had little to no effect on the equalization of incomes. Moreover, these transfer programs are wasted on social services which, even apart from the problem of churning, are inefficient and ineffective.
Robert Higgs, among others, has noted that these publicly provided services have crowded out voluntary institutions that make a vibrant free market. Social services could be provided through market-based private charity. This would give citizens the freedom to help the poor in ways that they think are the most beneficial.
