Wednesday, January 23, 2019

Should Individuals Direct Government Poverty Relief Efforts?

by Jacob Maichel, Graduate Assistant, Gwartney Institute

“No Taxation without representation.” This phrase has been forever ingrained into the history of the United States, a call to be able to influence where early Americas tax dollars went. Today we still lose the majority of our tax dollars to transfer payments made by the government - about which individuals have no say. Forced giving is not my biggest concern; rather, it is the inability to dictate where the money will go.

In economics, a Pareto improvement occurs when one party is made better off without making anyone else worse off. Government redistribution of wealth through transfer payments as they exist now will never be a Pareto improvement because governments do not have enough information to make the best decisions with people's tax dollars regarding transfer payments. Do you know who has more information? Individuals, and acting in their own self interest they could provide more efficient outcomes than in the status quo.

It may sound counter-intuitive that people acting in their self-interest would be better for society, but really it makes sense. If we accept that central planners fail (e.g. communism) because they lack information to adequately distribute resources where do we look? The answer as always is to give control to individuals. Armed with better information about the specific problems those in need face, giving individual “donors” a choice as where to send their tax dollars allows for the use of decentralized knowledge to direct those funds.

If I wanted to go help the homeless in my community I would likely go out and volunteer at the homeless shelter closest to home rather than send my money off a shelter in another state. The same principle should apply to transfer payments taken from individuals via the federal income tax. If the government took these dollars and instead created an environment of “forced giving” and let people choose which charities or programs money went to, we would experience an increase in society’s utility.

People in Texas could give to programs that benefit them while I could give to programs in Kansas that I and others around me benefit from the most, rather than someone in D.C. deciding what everyone gets. The government shifting from the position of sole arbiter of transfer payments to allowing individuals to pursue their own interests would be a massive win for quality of life in the United States. 

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