Means Testing Isn't "Awesome"
By David Henderson
Over two years ago, Bryan Caplan posted on why means testing is “awesome”. He didn’t actually make that case, though. The case he actually made is that means testing is a good idea. “Awesome” is a step above “a good idea.”
I wrote a post critical of his. In it, I made three criticisms of means testing. The first is that the implicit marginal tax rates that means testing would require could be quite high. I wrote:
Just eye-balling the data, I estimate that the bottom decile (about 8 million families) in 2008 had income between $0 and $17,500 and the second from the bottom decile had income from $17,500 to about $28,500. So that’s $11,000 of income over which to phase out a $5,000 benefit. The implicit marginal tax rate from that phase-out alone is, therefore, $5,000/$11,000 or 45%. That’s on top of other tax rates.
I also pointed out that there are two measures of means: wealth and income. Wealth is a better measure of means but I noted that income is the measure likely to be used. I wrote:
Therefore means testing would discriminate in favor of wealthy people with low income. Because the most expensive programs for which means testing is advocated tend to be for the elderly, this is an even bigger problem. Among the retired population, the correlation between income and wealth is even weaker, I believe, than among the population in general.
Finally, I pointed out that there’s a fairness issue here. I wrote:
Again, because the programs at issue tend to be for the elderly, there can be huge differences in income because one family saved a large percent over the years, and is earning interest and dividends on that income, and the other family saved 0 and relies on Social Security. This could be so even though the two families had a similar age-earnings profile.
Bryan argued with me:
Right now we already means-test a lot of programs, such as Medicaid, food stamps, and housing vouchers. Question: Should we make the entire population eligible for these programs, regardless of income and wealth? If not, why not? If you don’t want to transform existing means-tested programs into universal programs, why don’t you want to transform existing universal programs into means-tested programs?
That persuaded me. Here’s where I cried uncle. Specifically, I wrote:
I don’t want to see means-testing removed for those programs because I think my arguments I gave earlier are outweighed by the huge cost of expanding those programs greatly. I don’t have a good argument and I think you have correctly identified something that I didn’t even know was there: status quo bias.
My point with this post is not to take back what Bryan persuaded me of. Rather, it’s to try to persuade Bryan and others who share his view to admit the criticisms that many others, including Scott Sumner and I, have made. Bryan re-advocated means testing in his latest post without even hinting that these three problems I raised are indeed problems.