GMU economist Bryan Caplan is preaching “the gospel of means-testing” (his words, not mine!), but without much success. He doesn’t understand why. Could it be because many – not all – potential converts correctly see that means tests are taxes?
Why not means-test Social Security and Medicare? On the surface, this seems like a perfect liberaltarian reform. Libertarians should favor drastic cuts in government spending, liberals should favor drastic cuts in government spending on the rich, and both should favor the brighter fiscal future that the means-testing of major programs implies.
I’ve converted several libertarians to the gospel of means-testing, but – to the best of my knowledge – zero liberals. What gives?
Bryan Caplan, “Means-Testing and Political Economy“, EconLog, 9 June 2012.
Professor Caplan frames his proposal as a reduction in spending, so fails to see that means tests are equivalent to taxes on income and saving. Some commentators recognize this elementary fact. Here are two examples.
Scott Sumner writes:
I think this would be a bad idea. [A means test is] … a huge disincentive to save. And recall that the tax system already has other saving disincentives built in, so it would make the bias against saving much stronger.
Means testing is just another high implicit marginal tax on people who work hard and save.
[...] To my way of thinking, the fairest pension system is one where you get back what you paid in – plus interest.
If you feel that people at the bottom need more income, this should be paid out of general taxation.
Other commentators point out that Social Security (US public pensions) are already taxed at normal rates after a threshold level of income, so the discussion is really about increased marginal taxes for Social Security beneficiaries. I would add that it is also about imposing high taxes on the sick, which would result from means-testing the currently non-taxable Medicare benefits.
US taxpayers can place pre-tax retirement savings in sheltered plans, known as ’401k’ accounts. Withdrawals are taxable, but only at normal rates. Why not also means-test 401k withdrawals, for a “brighter fiscal future”? This follows logically from Caplan’s reasoning, yet he does not mention the possiblity.
Bryan Caplan (born 1971) is Professor of Economics at George Mason University, a public university in Fairfax County, Virginia, and Senior Scholar at the Mercatus Center, a home for libertarians at GMU.
Correction (13 June 2012): The paragraph beginning with “Other commentators …” was changed to show that that means-testing social security benefits amounts to a potentially large tax on the elderly who are sick. (Medicare benefits are not currently subject to tax.)