Unintended Disincentives and Loss of Productivity

Argument for the elimination of ‘pork’, a flat tax, the problem with government handouts, and a plea for private charity.

The original idea of a federal government, which we’ve come a long, long way from, was mainly to defend the country and legislate laws written by representatives that offered their service for a term of a few years – not professional, career politicians who would receive all kinds of perks from corporate lobbyists. I’m sorry to say that career politicians usually have getting re-elected for another term as one of their main goals. To that end, they vote for all kinds of government handouts to be sent to their home district. We call that ‘pork’, which sounds like a joke, but it’s not funny.

More about welfare and why it diminishes private charity, but first, a few other thoughts…

disincentives

I remember when my brother was drawing unemployment insurance. He came home from a job interview, and I asked him how it went. He said he wasn’t interested in the job. Why? Because, he said, he could make just as much on unemployment, after considering the costs of commuting and withholding taxes if he took the job.

Apparently, unemployment insurance has been too generous. In my opinion (IMO), it should be scaled back to lower payments and shorter duration.

My aunt was in real estate. I remember when she told me she wasn’t going to work for the rest of the year. When I asked her Why?, she said it would put her in a higher income tax bracket.

Again, IMO, the ideal income tax would be a flat tax.

Why a flat tax would be better

The US federal income tax is divided into different ‘brackets’, instead of a flat tax where everyone would be treated the same. When my aunt came up against a bracket line which if exceeded would have put her in a higher tax bracket, you can hardly blame her for deciding it wouldn’t be worth it to keep working for the rest of the year. That creates unintended consequences – lowering both the economic output and the tax income revenue to run the government – so those who continue working, have to pay a higher income tax to make up for that loss. It’s a double whammy.

When Joseph’s dream interpretation predicted 7 years of plenty followed by 7 years of famine in Egypt, Pharoah put Joseph in charge of preparing. Genesis 41:15-49.

So Joseph taxed Egypt 20% during the good years. It was a flat tax, so everyone was treated the same. There were no deductions and no loopholes. No lines or brackets. No government meddling with the terms.

During those 7 years, Joseph stored up for Egypt a vast amount of grain for food.

When the 7 years of famine came, the Egyptians would have starved if Joseph hadn’t saved them. But he didn’t hand out the food for free. No welfare program. Again, everyone was treated the same. He made them buy it. Genesis 47:13-25.

When all the money in Egypt was gone, they paid with their livestock. When they no longer owned their livestock, they sold their land, and when they no longer owned any land, they sold themselves as slaves.

Interestingly, the people didn’t resent Joseph. They were thankful that he had saved them from starvation. “So they said, “You have saved our lives! Let us find favor in the sight of my lord, and we will be Pharoah’s slaves.” Gen. 47:25

Can you imagine how much more productive individuals and businesses would be if there was a simple flat tax with no loopholes, no deductions, no special instructions? No porky favors for special interests? Wouldn’t it be wonderful to fill out your income tax return in 5 minutes, and not need H&R Block or TurboTax? Everyone paying the same percentage?

Actually, a good argument can be made for a sales tax and NO income tax. Drug pushers, thieves, and prostitutes don’t report or pay income tax, but they couldn’t get away with not paying sales tax.

Unfair treatment on the edge

One of the problems with government interference in free market capitalism is that lines and special treatments are automatically unfair for those who fall just outside the line or didn’t get the special treatment.

On the east side of the river in Portland, I used to own a mixed use building with 3 apartments upstairs and my parts and service business downstairs. It was an old building, so I kept the rents very low, but enough to pay my property taxes. Meanwhile, across the river, a new apartment building was being built. The builder got a deal from the city – if a certain percentage of the apartments were rented at lower rents, he didn’t have to pay any property taxes for 10 years! Was that fair to me, who also provided low rent housing, but always paid full property taxes every year? Was it fair to all of us who paid higher city taxes to make up for the city’s lost income from that apartment complex?

About that same time, Portland came up with “Enterprise Zones”. Lines were drawn on both sides of Union Avenue (name later changed to Martin Luther King Blvd), a rather depressed area, and anyone inside those lines got really nice tax incentives to improve the property or start a business. But what about those who were located just on the ‘wrong’ side of the line? They got left out. Owners 40 feet apart from each other got treated differently, even though they hadn’t done a thing to deserve different treatment.

moral hazard

Our daughter had a student loan. She worked hard to pay it off. She had to make sacrifices to do that. Then, the federal government decided to “forgive” student loans just because we were in a recession. This was a form of “pork”. All the politicians that voted for it would bring it up in their next campaign, and anyone who voted against it would be vilified. But the point is, forgiving loans for some when others were required to pay is immoral. First, we should all be responsible to honor our contracts and pay what we agreed to pay. Secondly, true justice is impartial, and everyone should be treated the same under the law. (another argument for a flat tax)

more on handouts

Every government handout comes at the expense of everyone who didn’t receive it – some directly and obviously, because they’re on the wrong side of the line, and the rest indirectly, through higher taxes than otherwise would have been necessary. The money has to come from somewhere. If not from higher taxes, on the federal level, it comes as an invisible tax in the form of inflation, caused by printing more money, or in the form of higher government expense as interest on borrowed money. Without taxing, printing, or borrowing, the government has no money – one way or another, it’s we the people who are on the hook for every dollar spent.

There’s another reason why federal welfare is not the best way. It’s often been put this way: “One shoe doesn’t fit all”. No one knows real needs better than locals. Whether it’s fire or flood or tornado, it’s the local people that know local real estate values and conditions, local food harvests and prices, maybe even on a personal level know the persons who have been hit the hardest, and whatever they need most and how soon they need it (usually about 6 weeks before FEMA gets there).

another disincentive

Finally, there’s one more problem with federal assistance. It diminishes incentives for individuals to give. The tax deduction helps, although it’s quite limited. Most of what my wife and I give to charities and missions is beyond the deductible limits. But there are bound to be people who would give more generously if they weren’t tempted to think that the federal government will take care of it. It’s a subtle point.

I love the example of the old ‘barn-raising’ customs where everyone in the neighborhood would show up to help someone build a barn and raise the heavy timbers. The Amish and Mennonites still do this. They don’t ask for federal assistance.

So I’ll close with an appeal to all of us to give of our money, labor, and service to help others and to support good causes.

“And do not forget to do good and to share with others, for with such sacrifices God is pleased.” Hebrews 13:16