Working Paper: NBER ID: w7698
Authors: Casey B. Mulligan; Tomas J. Philipson
Abstract: A common view in public finance is that there is an efficiency-redistribution tradeoff in which distortions are tolerated in order to redistribute income. However, the fact that so much public- and private redistributive activity involves in-kind transfers rather than cash may be indicative of merit motives on the part of the payers rather than a preference for the well-being of the recipients. Efficiency-enhancing public policy in a merit good economy has the primary purpose of creating distortions and may only redistribute income from rich to poor in order to create those distortions the reverse of the conventional efficiency-redistribution tradeoff. We discuss why the largest programs on the federal and local level in the US including Social Security, Medicare and Medicaid, and Public Schooling seem consistent with the reverse tradeoff rather than the classic one. Transfers are not lump sum in a merit good economy, and explicitly accounting for this when calculating tax incidence reduces the estimated progressivity of government policy. As one example, we calibrate the conventional life-cycle model to show how the amount of over-saving induced on the poor by Social Security hurts them at least as much as the progressive' benefits help them. When the distortions outweigh fiscal transfers in this manner, the classic efficiency-redistribution tradeoff cannot justify the program and the program is far less progressive than conventional analysis suggests.
Keywords: No keywords provided
JEL Codes: H11; H22; H23; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government policy (F68) | economic outcomes for the poor (I32) |
| social security (H55) | oversaving by the poor (D14) |
| oversaving by the poor (D14) | harm to the poor (I32) |
| fiscal policy (E62) | regressivity of regulatory policy (L51) |
| government programs (H53) | distortions in consumption for the poor (D11) |
| design of public programs (H53) | welfare of the poor (I30) |