What Government Aid?

By James Kwak

Earlier this year I wrote about a paper by Suzanne Mettler that included a survey showing that a large proportion of beneficiaries of government programs insist that they have never been beneficiaries of any “government social programs”—60 percent for the mortgage interest deduction and 44 percent for Social Security retirement benefits, for example. This provides ample evidence that “keep your government hands off my Medicare” is not a fringe opinion.

Recently, I read Mettler’s book, and there’s more to the story. One of her arguments is that hiding government programs in the tax code undermines the democratic system because it obscures the role that government plays in society. There were two quantitative examples I thought were particularly revealing.

Mettler distinguishes between visible federal programs, such as Pell Grants and Social Security, which are administered by government agencies and therefore are more recognizable as government programs, and submerged programs such as the mortgage interest deduction or 529 accounts. She found that the more visible programs a person uses, “the more likely he or she was to agree that government had helped in times of need.” Benefiting from submerged programs, however, had no impact on people’s perception that the government had helped them—even in the case of things like HOPE or Lifetime Learning tax credits, which help people pay for eduction. In fact, “the greater the number of tax breaks an individual had benefited from, the more likely he or she was to disagree that government had provided opportunities for an improved standard of living” (pp. 41–43, emphasis added). (This is after controlling for socio-economic characteristics.)

In short, the way our government currently distributes goodies makes it possible for people to think that they are paragons of individual self-reliance while still being enormous beneficiaries of other people’s tax dollars. That explains a lot about politics today.

Mettler and Matt Guardino also did an experiment that is described in chapter 4 of the book. For various tax expenditures, they asked people whether they supported them or not before and after giving them some information about the policies. For the mortgage interest deduction, one group was told only what it is; the other group was told what it is and that: “The people who benefit most from this policy are those who have the highest incomes. In 2005, a large majority of the benefits went to people who lived in households that made $100,000 or more that year.” (That’s absolutely true: you can look at last page of the JCT report on tax expenditures.) The first group favored the deduction by 81 percent to 5 percent; the second group was evenly split, 40 percent for and 41 percent against. (Support for the Earned Income Tax Credit, however, rose when people had more information.)

So there may be some reason for hope. Give people a little more information, and they are more likely to recognize their own self-interest. That would be a big improvement over the present state of affairs.

32 thoughts on “What Government Aid?

  1. If people understood all this, they’d think differently. But how will they learn? Schools don’t teach it. It’s seldom or never mentioned on the TV news. A very small percentage of of the population will read Mettler’s book. And how many people read this blog? Without it, I’d not have heard of Mettler’s book for probably a couple of months more, and I’m pretty savvy on economic matters. I’m not very optimistic.

  2. Right. Because if everybody would just vote their narrow self-interest — i.e., to use the coercive power of the state to transfer as much wealth as possible from other people to themselves — then we would be living in utopia. Obviously.

  3. Define “Government Social Program.”

    It may be perfectly legitimate for someone who has paid into Social Security their entire life (along with their employer) and who receives as retirement benefits less than they paid in to argue that they are not the beneficiary of a “Government Social Program.”

    Some economists make the reasonable argument that the mortgage interest deduction is a benefit to house sellers, not house buyers. By lowering the after tax cost of a house plus finance charge, the seller can charge a higher price. As such, a home buyer can legitimately say that they are not the beneficiary of a “Government Social Program.”

    If I can drive 100 miles on a well maintained high speed freeway without paying a toll, am I the beneficiary of a “Government Social Program?”

    If I can take government subsidized Amtrak to Chicago, am I the beneficiary of a “Government Social Program?”

    If I buy an electric car and receive a $4,000 tax credit, am I the beneficiary of a “Government Social Program?”

  4. @Speed – technically yes according to the author. Personally, I would think that a “Government Social Program” is one that pays out, not one that allows people to avoid paying (i.e., mortgage deduction or EIT).

  5. @Ian

    That strikes me as a distinction without difference. Why should an increase in disposable income of $X by paying less tax than would normally be owed be seen as any different from an increase of income by $X through cash transfer (adjusting for whatever tax rate would be assessed on the second quantity such that X1 = X2, obviously)?

  6. @speed – you would be hard pressed to drive 100 mph on an unpaved road, so yes, you benefit from a government expenditure that allows you to drive like a maniac, if you so choose. (Another government agency, ie, the cops, will no doubt take a different view).
    @Ian – most conservatives will agree that things like a tax exemption are not government largess, they are “doing the right thing by letting you keep more of your own money”. Personally, I would love to see the mortgage deduction go away, but the National Board of Realtors and the mortgage brokers’, not to mention the construction industry, pushed hardest for it; no doubt they’d push hardest to keep it.

  7. Wikipedia lists eight subcategories under Social programs …
    o Publicly funded healthcare
    o Health, education and welfare economics
    o Public housing
    o Social security
    o Universal healthcare
    o Welfare
    o Welfare reform
    o Welfare state

    Sandi, Clearly paved highways are a benefit to those who drive on them. But are paved highways built by the government a social program? If so, why? Are paved highways built by the government and paid for with user tolls a social program? If so, why? Are paved highways built with private money a social program? If so, why?

    I repeat my original post, Define Government Social Program.

  8. Speed–I think you just described “government social programs” yourself. In fact, of course, anything the government does can be defined as such a program, including building bridges or funding scientific research or fighting useless wars, but the list you gave pretty much covers what most well-informed people would call “social programs.” Language is like that. When most people define a word or phrase as describing something, that’s the definition.

  9. Are guys finished with the semantic masturbation yet? The whole point is that rich people like us (pity me, I’m just barely a 10%er) benefit a lot more from government programs than most people think. Many of us have this idea of a welfare queen in our head when we think of government spending when the truth is that I’ve been a massive beneficiary of government “spending” – the mortgage interest tax deduction, subsidized education loans, I worked in the defense industry for 4 years, I teach part-time at a for-profit university where many if not most of the students are getting huge education loans from the government, etc. etc. etc.

    Sure I’m paying way more in taxes than the welfare queen but my benefits are way bigger too.

  10. A couple of points, I agree with Sandi that many people don’t see a deduction or a credit as a social program because those we are trying to convince that Government isn’t all bad don’t want us to pay any taxes really – so those reductions in tax payments just get us closer to where they want the country to be.

    In reponse to Speed, who are these mythological people who pay more into Social Security than they get out? Okay, some people die at 67 years old, but most people given that the percentage of income to fund SS and the salaries people have earned haven’t been static but have risen over the years, you’d be hard pressed to find somebody that paid more than $75,000 into SS over their working lifetime. So if you averaged $100,000 of salary your last few years of work, you’re retirement benefit at full retirement age is $2,300 a month, so in less than 3 years you get back everything you paid in – if you want ot include your employer then it’s 5.5 years. Now this is a quick, back of the envelope calculation for most people the break even point is much less since they likely paid in so litte during those first twenty or thirty years of working, and the benefit caps out so those who make $20,000 a year get the same benefit as those who make $35,000.

    Now to comment on the post at large. Everything the government does is not a Social Program. The military isn’t a Social Program, nor are Highway funds. Now if you want to argue about what government does for you – now you’re talking. If you are a “job creator” the government educated your workforce up to age 18 most likely, the government paid for road to get your products and employees to the factory, the government plows and maintains those roads, the government negogiate treaties with foreign governments so you can sell your products overseas, the government maintains a judicial system that upholds your patents, deeds and copywrites – and we spends millions trying to prevent piracy. The government keeps the sea lanes clear so you can get oil and rare earth elements to manufacture with, the government pays unemployment insuance (with some help from you) to your employees that you have to lay off for a seasonal company, the government maintains a police force to keep your business and home secure against criminals, and a fire department to save your office if it goes up in flames, the government between basic research and development and the space program paid for the ground work that has led to Cell Phones, the Internet, Commercial Airlines, Television, Radio, The Microwave, GPS, the wealther forecast and
    Tang and Silly Puddy. I personally believe our government is too big, but my gripe is with the military and the huge police /security system that has built up since 9/11 – every agency doesn’t need it”s own armed police force. But to claim that government only does for those who get welfare and Medicaid is giant pile of horseshit.

  11. Let’s not forget Zombie Banks borrowing from the discount window (whatever that is) at the Fed at ZIRP and relending the “electronic play dough” back to the gubmint at 3% (or whatever) interest. That in plain English is called a government subsidy to a big bank.

  12. “Many of us have this idea of a welfare queen in our head when we think of government spending”

    Bingo. A government program is a social program when it it helps people who are, well um, you know, different.

  13. Before I make the following observation, I would like to make it clear I appreciate the service and protection provided by all American military men, and especially those who took part either voluntarily or through the draft in World War 2.

    Be that as it may, I find the post of Mr. Kwak’s and Mettler’s general message to be in dire need of people/society being made more aware of in the current environment. Often we are told that men and women of this generation are too eager to put their hand out for financial aid. But when I see some cranky old basturd on TV talking about the evils of government (Bob Dole, John McCain) I often wonder how much progress would many of their generation have made if not for the GI Bill??? There were tons of guys coming back from the war who would never have gotten a college education or ever been able to afford decent housing of not for the GI Bill. Just who in the hell do they think provided them with the free education and cheaply financed housing??? HInt: It was not General Motors, Ford, or IBM.

    I might also point out that a lot of what I call “Timothy McVeigh types” spend inordinate amounts of time listening to Glen Beck and Rush Limbaugh throw gasoline into their combustible mental mindset on how “big government” is coming to take their gun and liberty. But did McVeigh ever stop to ponder to himself for only a few minutes that his longest employer and probably the biggest paycheck McVeigh ever got in his lifetime came from the U.S. government??? If McVeigh had used the GI BIll and other “big government” programs (many for non-violent, constructive uses for re-entry into American society, such as the GI Bill) which he no doubt had the intelligence for, he might have found his way back to a healthy mindset.

  14. @tippy goldenpress

    I suggest you do some research to understand what yield to maturity really means, because the trades you are describing is far from risk-free arbitrage. Go ask the former corporate execs at Metallgeschaft A. G. for the definition of maturity mismatch.

  15. Your simple question is much too sophisticated for the “average” consumer or citizen. Most have no idea what a tax deductible. For most, it means “free”. Absurd. Economics, even this simple, is not taught it high school, and most majors don’t cover such stuff in college either. It is almost laughable to ask such questions of an American with a high school diploma (decreasing in percentage as we speak) when a terrifying number of such a citizens cannot even name the three branches of government.

  16. This may be a general phenomenon. I live in the interior Western US. None of us would even be here were it not for government subsidies. It all starts, of course, with water. Wallace Stegner pointed that out years ago. In Beyond t he 100th Meridian, Stegner expounded on John Wesley Powell’s ideas about the cooperation it would take to settle the dry interior. Failure after failure and bankruptcy after bankruptcy eventually led to the sort of monumental dam-building that only government could ever take on. Yet while there’s no part of the country more dependent on federal largesse than the Intermountain West, there are also few places where the dislike of government is stronger.

  17. I haven’t read the book, but it’s now on my reading list, James, thanks to you. This is one of my pet peeves, that so few in our society understand just how much public policy is set throught the tax code. However, it is easy to understand if one understands that about a third of all lobbying is done for the tax code. When, and if, Congress ever gets around to real tax “reform”, an unlikely circumstance, of course, my guess is that much of what is there now will continue to exist. Until election reform happens, tax reform and tax policy reform will never occur. If one understands the code (I am a tax law student from way back), one then understands why anyone with an income of greater than $150,000 a year really needs an expert to assure that they take full benefit of what it makes available. The US Tax Code is the single law most responsible for the massive disparity in incomes and wealth in our society. Nothing else compares.

  18. “I wrote about a paper by Suzanne Mettler that included a survey showing that a large proportion of beneficiaries of government programs insist that they have never been beneficiaries of any “government social programs”

    To me, you seem to say these people receiving social security are off the mark because they don’t understand it is a “governmet” program. I see it as you not understanding that it is the “social” (in the eyes of beneficiaries “welfare”)part of the phrase that recipients do not accept.
    Social security has never been “marketed” as a “welfare” or “social” program, but as a pension.

    Now, people may (or may not – there are a hell of a lot of people who die before collesting any social security) get more out of it than they paid into it, but it is not at ALL hard to understand why people view it as a “right” and not a social service program for the poor.

    Everyone I know feels that they paid into SS, and have a RIGHT to get the “their” money back – just like buying an annuity. They don’t consider it any more a social program than I consider my pension or 401(k) savings a government welfare benefit.

    Now if govenment (or more accurately, people more liberal in their views) want to say that social security is nothing more than welfare…..well, beware of what you wish for, because that could very well be the death bell for SS.

    “The Social Security taxes you and other workers pay into the system are used to pay for Social Security benefits”

    And finally, I would remind people that the law itself is entitled:
    Old Age, Survivors, and Disability INSURANCE

    How many people would consider the Health Care and Affordability Act (Obamam care)a “government social program”? It may be mandatory, it may be useful, it may increase social welfare, but if I am paying for it, I would not consider it a “government social program” in any normal meaning of the word.

  19. @Jay. Yes indeed. The traders running the now defunct Icelandic banks borrowed at near ZIRP from Japan and look at the mess Iceland got into. Someone said to me Iceland is the land of Viking raiders, it’s in their blood, as a partial explanation for the financial mess Iceland got into.

  20. “So there may be some reason for hope.”

    Not really, but I understand you have to end it somehow.

    Also I have to agree with others that the point about “self-interest” touches a sore point. With rampant “Ethical Egoism” abounding, it’s painful to hear as a “solution”. That said, it’s also the truth – unfortunately the most effective way to appeal to any constituency is via their self interest. I wish it was otherwise.

    If he hadn’t been raised from the dead, Jesus would rolling in his grave.

  21. @Roy Davis, “Your simple question is much too sophisticated for the “average” consumer or citizen. Most have no idea what a tax deductible. For most, it means “free”. Absurd. Economics, even this simple, is not taught it high school, and most majors don’t cover such stuff in college either. It is almost laughable to ask such questions of an American with a high school diploma (decreasing in percentage as we speak) when a terrifying number of such a citizens cannot even name the three branches of government.”

    THIS depraved bit of talking points analysis has GOT to stop.

    It was a DELIBERATE strategy to NOT teach the *basics*.

  22. MK asked, ” … who are these mythological people who pay more into Social Security than they get out?”

    Calculations over the years have shown the Old Age Survivors Insurance (OASI, what we call Social Security) payments have represented a positive return to most recipients. And that was great as long as income to the fund (payroll taxes, employer match and self-employment taxes) exceeded payments.

    Since current income to Social Security (Payroll taxes, employer match and self-employment taxes) is not enough to fund current Social Security payments, a portion of my income tax will be used to make up the difference. This additional cost (to taxpayers in general and to me specifically and indirectly) is a cost that is not included in so called calculations that show a positive return to Old Age Survivors Insurance.

    What about the interest income from the bonds in the Social Security Trust Fund? Where does that interest come from ($108 billion last year)? The general fund which means tax payers including me.

    And it will get worse when our legislators finally decide to do something about it by increasing payroll taxes and reducing benefits.

    Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The $49 billion deficit last year (excluding interest income) and $46 billion projected deficit in 2011 are in large part due to the weakened economy and to downward income adjustments that correct for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink to about $20 billion for years 2012-2014 as the economy strengthens. After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers.

    Does this make sense? Of course. If everyone gets out more than they put in, the money has to come from somewhere. And that somewhere is us.

    By the way, the payroll tax holiday we’re getting to stimulate the economy is being paid by … the general fund. That’s you and me.

    Public Law 111-312 reduces the OASDI tax rate for 2011 by 2 percentage points for employees and for self-employed workers. The loss of payroll tax revenue due to this one-year reduction will be made up by transfers from the General Fund of the Treasury to the OASI and DI Trust Funds …

  23. I wonder what was peoples’ reactions when told that the mortgage interest deduction benefits the wealthier portion of the population and helps sustain hundreds of thousands of jobs in the construction industry?

  24. Thanks for reminding me about this and going into it more. It’s such a subtle point it’s elusive. You forget it, but it’s a great one. No wonder Republicans love to put these programs in the tax code. They don’t want to say that they are expanding government … and people buy it!

  25. Happiness in a people is in diret proportion to Equality via many studies.
    Today America ranks in bottom 5 on Equality in oecd nations
    Rank third as Least Taxed
    10% own 70% of Net Wealth
    10% own 70% of Financial Wealth.
    10% get 45% of individual Income

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