1/16/2024
WSJ Today Tuesday 1/16/2024
The American welfare state is built on the idea of taxing those who are better off to give to those who are in need. Yet in today’s massive welfare state, many who receive benefits from the government also pay substantial taxes.
New research by the Manhattan Institute analyzes the amount of government benefits that are offset by taxes on the same households in the same year. The report estimates that about 20% of government benefits are returned to the government through taxes. That means that in 2022 almost $800 billion—or roughly what the government spent on defense—went out one door and in another.
These taxes cancel or net out equivalent benefits, so some could argue that they aren’t a problem. But taking money only to give it back again is costly and inefficient. Families ultimately bear the cost of applying for and maintaining benefits. The government takes hard-earned cash through taxation but often provides benefits in a less useful form, such as housing vouchers or food stamps.
Both taxes and benefit programs distort decisions. Taxes deter people from working. Means-tested programs such as food stamps pay less benefits as recipients’ incomes go up. This amounts to an implicit tax on earnings. Abundant evidence shows that certain kinds of taxes and welfare can also deter marriage. Giving benefits and then taxing recipients doesn’t only recirculate money; it destroys wealth and limits options.
Many claim that the so-called “middle-class welfare state,” including health insurance subsidies and means-tested programs for workers far up the income ladder, is a boon to working families. But taxes that cancel out benefits are the highest for households that aren’t poor and don’t receive Social Security. For them, about 45% of all benefits are returned as taxes. For those in poverty, only about 3% of benefits are returned in taxes.
Understanding this should make lawmakers think twice about creating a universal European-style welfare state in the U.S. Europe’s programs come with payroll and sales taxes that are in some cases double the American rates. These high taxes are paid by the same families that receive the supposed benefits. It would be better for the U.S. to give targeted help to those in need instead of increasing taxes only to return some of the money in less useful forms.
By any reasonable measure, taxing people and then giving them benefits is a waste of time and money. Government can shrink itself significantly without costing any household a dime by cutting both taxes on and benefits to households receiving government support. This would reduce waste and increase options for everyone. That would be better than forcing Americans to chase after money they already earned.
Mr. Glock is director of research at the Manhattan Institute and author of “The Dead Pledge: The Origins of the Mortgage Market and Federal Bailouts, 1913-1939.”
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