Three years ago EconLog hosted an excellent discussion of means tests. The blogs were excellent, and comments by readers were sometimes even better. “White Detroiter”, for example, wrote:
There still are some programs that include wealth as a means test. Supplemental Security Income (SSI) doesn’t allow you to have more than $2,000 in savings and still receive benefits.
A few years ago I knew someone who was on SSI but had a part time low wage job. She lived in a very low rent trailer park and used the public bus system to get around (she was legally blind so she had no use for a car). Between the SSI and her part time income she was capable of building significant savings but if she did she would lose her SSI. So she spent everything she had on things like marijuana and never really got ahead in life.
“White Detroiter” wrote in response to a comment of Bill Conerly:
Some welfare programs in the past had wealth as a means test. A family on welfare that lived frugally and accumulated an emergency reserve savings account risked disqualification, whereas the family that spent every penny that came in were sure to continue.
Both were responding to EconLog blogger David Henderson who, in an otherwise excellent post, wrote:
Without exception, every time I’ve seen someone advocate means testing, he uses income as his measure of means. This completely ignores wealth. Although income and wealth are highly positively correlated, the correlation is not close to 1.0. Therefore means testing would discriminate in favor of wealthy people with low income.
David Henderson, “Problems with Means Testing“, EconLog, 5 February 2010.
Wealth tests are frequently used in developing countries, and occasionally in high-income countries, such as Hong Kong, Australia and the United States. Sometimes, as in the example of SSI (a noncontributory basic pension in the US), the test is draconian.
As I have said many times, “means tests are taxes”. It follows that a wealth test is a tax on savings, just as an employment test is a tax on wage income, and an income test is a tax on all income.
“White Detroiter” provides a human face for the consequences of a wealth test on very modest SSI benefits. Incidentally, SSI also requires an income test, such that beneficiaries lose 50 cents of benefits for each dollar of “earned income” (such as wages) and one dollar for each dollar of “unearned income”, such as income from a pension, or interest on savings.
People respond to incentives – even when they are poor.
Tags: targeting
Today’s Tdj is an example of how people look at the question of “income support” in different ways. The commentators assume that the purpose of SSI and other means-tested benefits is to provide income, implicitly, as a transfer of income from the taxpayer to the beneficiary.
But SSI and other benefits are not intended to transfer income. Their purpose is to provide some minimal level of living that society deems adequate. In the example given below the woman had a part-time low wage job which, when SSI was added, provided her with current purchasing power above what she must have regarded as an adequate level of consumption. So, rationally, she could have saved the extra income or in this case seemingly irrationally spent it on marijuana. Her SSI should have been lowered to match her own evaluation of her consumption needs.
Now, the question before society is why would you want to reduce the level of consumption and potential saving of the average taxpayer so that someone like this woman, who by her very actions must be satisfied with her level of income, could save more and further build up her capital account? This policy in effect lowers the average taxpayer’s welfare so as to increase or maintain the capital account of people on the dole. Frankly, I have no idea why public policy would want to do this.
The same may be said for wealth means-testing. If people have saving in the bank why should others be asked to reduce their consumption and potential wealth to preserve the existing wealth of someone else? It’s not fair to the average taxpayer. Let people draw down on their wealth until they are truly in need.
Now if people receiving an grant want to work and are discouraged from doing so by the disincentive effects of taxation that is certainly unfortunate. But the bigger question is why the average taxpayer should continue to suffer cuts in their welfare when the level of living of the beneficiary rises above the standard society has determined as an adequate minimum.
To me, the entire discussion is premised on a false assumption: That the purpose of the transfers of the welfare state is to transfer income. No, it is not. Its purpose is to provide some minimum level of living, that is, some minimal basket of consumption goods for everyone who cannot provide it for themselves. Note: “Cannot provide for themselves”. Given its costs to the taxpayer, these transfers are not intended to preserve the wealth of the poor, who after all have the resources to purchase consumption goods on the own. Nor is it intended to supplement the resources a person has above the level determined as adequate to the rest of society.
Seen in light of the real purpose of support for the poor little in the comments made in the Tdj make sense.
Let me also note that the discussion says not one word about the costs to others of income support policies. Economics is about tradeoffs and scarce resources. There is no discussion of tradeoffs in this Tdj. In this sense, it is an incomplete discussion.