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September 19, 2013

BOHANON: The impulse to distribute wealth

The impulse to redistribute income did not begin with the Obama administration. In the 1970s, when income was seemingly more equally distributed, progressives called for increased government income redistribution.

There are two ways for government to redistribute income from the rich to the poor. The first is through universal benefit programs. The second is through means-tested benefit programs, which will be addressed in future columns along with why government should be doing any of this at all.

A universal benefit gives everybody a government benefit. Since all enjoy the goody, getting rid of it is politically problematic. That is why presidents Franklin D. Roosevelt and Lyndon Johnson made sure that all old folks got Social Security and Medicare benefits — they knew it would make the programs popular and untouchable.

To pick another example, many developing countries subsidize bread-making to make it available to all at below-market prices. As the poor spend a large part of their income on bread, there is likely some redistribution to the poor even though millionaires get cheap bread, too.

The problem with these universal transfers is they are costly. A recent Wall Street Journal article on fuel subsidies in developing countries noted they cost up to 10 percent of national Gross Domestic Product (GDP).

Someone has to pay for the subsidy for bread or fuel or whatever. In the final analysis, it is ordinary citizens who bear the taxes to pay for the subsidies. On average, the taxes required to support the subsidies exceed the benefit of the subsidies. In sum, a universal benefit is a rather odd and costly way of helping the poor.

One of the more famous and ill-fated universal benefit program was a plan by the 1972 Democratic presidential candidate, George McGovern, to give every man woman and child in the United States $1,000. At the time, it was considered hare-brained and McGovern lost in a landslide.

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