Means-Testing is Awesome
By Bryan Caplan
I’m against forced redistribution, even to help the deserving poor. Still, unless you buy the whole libertarian package, I understand taxing the rich to help the poor. What I can’t understand is taxing everyone to help everyone. Means-tested programs like TANF and Medicaid aren’t crazy; they take from Peter to pay Paul. Universal programs Social Security and Medicare are crazy; they take from Peter to pay Peter.
Even if you’re not into economics, universal programs should strike you as pointless. But they’re actually worse: When you tax Peter to pay Peter, you distort Peter’s incentives along the way. Of course, even means-tested programs require taxation. But they require much lower taxation than universal programs.
The main economic argument against means-testing is that means-based benefit reductions, like means-based tax increases, distort incentives. So they do. But which is worse? Heavily distorting incentives for the least productive segment of the population, or heavily distorting them for everyone? In any case, once you accept means-testing, there are simple ways to reduce the distortion. Most notably:
1. Phase benefits out gradually rather than discretely. Don’t give full benefits to everyone in the bottom 10% of the population, and zero benefits to everyone else.
2. Clearly distinguish between the deserving and undeserving poor. Helping orphans and the severely handicapped is a lot less distortionary than helping able-bodied adults. And of course “changing behavior in order to collect extra benefits” is part and parcel of being undeserving.
Just think about how small government would be if only the bottom decile got full Social Security and Medicare benefits, and these benefits were phrased out over the second decile. Right now, these programs are about 35% of the budget and growing fast. With this means-testing formula, they would shrink down to roughly 5% (or even less, since the richer live longer).
Admittedly, if we got to this point, I still wouldn’t be satisfied. The day we started means-testing all redistribution, I’d furrow my brow and ask, “So charity should be compulsory, but immigration restrictions are OK?” But I’ll take what I can get.