Gramm, Early and the unrecoverable problem

Phil Gramm and John Early have penned a new WSJ post based on their stunning new book. Both are based on an amazing fact: The numbers used by the Census Bureau and countless subsequent researchers to define income inequality and poverty exclude taxes that reduce the incomes of the rich and transfers that increase the incomes of the poor. The latter obviously plays a role in how many Americans fall under the Census Bureau’s definition of poverty.

In concrete terms, the new refundable tax credit cannot mathematically contribute to alleviating the measured child poverty because

“Income figures used to calculate official poverty rates do not count refundable tax credits as income for recipients.”

This is wonderful for proponents of ever-larger transfer programs, as it creates a problem whose solution can never be measured!

The more general problem

The Census Bureau fails to include two-thirds of all government transfers to households in the income figures it uses to calculate not only poverty but also income inequality and income growth. In addition to not counting refundable tax credits paid by U.S. Treasury Department checks, the official measure of the Census Bureau does not count food stamps, Medicaid, the children’s health insurance program, rent subsidies, energy subsidies, and health insurance subsidies under the Affordable Care Act. Overall, benefits provided in more than 100 other federal, state, and local transfers are not counted as recipient income by the Census Bureau

The book goes on to show how this startling omission turns on its head pretty much everything you’ve heard from the hyperventilating classes about income inequality. Granted, spending millions on bad health insurance that people are worth a lot less than a dollar on the dollar isn’t quite the same as cash, but there are plenty of cash or cash equivalent transfers.

One question I don’t know the answer to: Do ​​resource-tested programs count referrals from other resource-tested programs as “receipts”? For example, if a program is only available to people with annual incomes of less than $50,000, does that number include other means-tested programs? Even those who send cash instead of benefits in kind like rent, energy and health insurance subsidies? I assume largely no. If not, the incentives for means-tested programs are far worse than meets the eye. Facts welcome.

One could easily reply that that is fine, but evil capitalism has created greater pre-tax and pre-transfer inequality, and it is only through the mercy of ever-larger transfers that some measure of stability has been restored. Well, what’s the cause and what’s the effect — greater pre-tax inequality before transfers, or the vast expansion of means-tested programs, all of which contribute to the staggering marginal tax rates facing less-opportunity Americans? The book argues convincingly for the latter. I’ll cover that later. With that in mind, they anticipate the argument.