Monday, December 31, 2012

Automatic (Withholding) For The People

My masochistic streak compels me to browse through the General Social Survey every now and again to remind myself what folks' attitudes are towards government spending. If, like me, you're skeptical of surveys thanks to the wonders of signaling theory or experimenter effects, try to take heart that the GSS gauges opinion rather than reports of activity. The voting process really isn't all that different, except perhaps that voters appear to be influenced even more strongly by the personality of candidates than they are by anonymous survey researchers. So perhaps it's wise to temper the interpretation of GSS data, but we probably needn't disregard it completely.

Anyway, you can browse government spending variables for the 2006 survey here. With a few exceptions (and the partisan bias is strong, often swamping race, gender, SES and age variables in regressions), respondents overwhelmingly favor either current or higher levels of government spending. We've also known for some time that the median survey respondent (in the GSS and other surveys) systematically errs about the size and the distribution of federal budget. I encourage you to review your copy of Bryan Caplan's Myth of the Rational Voter and remind yourself that respondents believe foreign aid to be a significant portion of the federal budget. I also encourage you to ask friends and family to a) explain the differences between the budget deficit, the current account deficit and the national debt and b) describe the difference between "mandatory" and "discretionary" spending and to estimate the relative proportion between the two in a typical fiscal year. Unless the people you know make a living working with this stuff, their answers may surprise you.

You might also be surprised that most folks don't know offhand what their tax burden is. I'm not talking about tax incidence here, since even professional economists can only provide statistically-generated estimates of labor supply elasticities; no, I mean the tax burden in the plain accounting sense. Try this: ask your friends and family what their tax bill is and watch the mental cartwheels. Most folks I've talked to know very well what their bi-weekly take-home pay is and they know their gross annual salary, but they've got to unthread their navel fluff to get at their actual tax obligation. One of the chief architects or automatic withholding and perhaps the most famous economist of the 20th Century Milton Friedman recognized this and in a 1995 interview with Reason remarked: "I have no apologies for it, but I really wish we hadn't found it necessary and I wish there were some way of abolishing withholding now." He understood the dangers of a functionally absent price system: voters could get a bunch of goodies from politicians without ever having to closely examine the price tag. If you want a way to get the public to sign on to higher levels of government spending, I can't imagine a more effective strategy.

This is important for euvoluntarists because it may be plausible that voters feel as if they're making something that walks and quacks a bit like a euvoluntary trade when they back spendthrifty candidates, but they may be doing so under terribly warped pretenses. Abolishing automatic withholding may not fully restore a rational cost calculus to the median voter, but it's probably a good step in the right direction. It might even be a good idea for voters to have to cut separate checks for each department they're financing. And to knock it off with the peacetime deficit financing.

Debts and deficits are symptoms.

Laws 1 and 2 of public finance: Deficits are future taxes; given enough time, all spending is discretionary. If Ricardian equivalence were an empirical phenomenon, economists would never have to point these out. Taxation and government spending are never euvoluntary, but good, sensible policy can steer us more in that direction. What a pity there are no political incentives to make it so.

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Do you have suggestions on where we could find more examples of this phenomenon?