(The latest version of this page is at Pattern Descriptions. An archived copy of this page is held at https://www.patternsofpower.org/edition02/3245.htm)
One strategy for reducing the need for public funding is to ‘target’ some benefits, so that only the poor receive them. Whilst this may appear to be politically attractive, in reducing overall tax levels, targeting is inefficient in economic terms and it may have unintended consequences:
· Bureaucracy, so-called ‘means-testing’, is required to check whether people do or do not qualify for free services. The cost of this bureaucracy is a drag on the economy, in reducing the wealth available for everyone (except the bureaucrats) to spend on things that they would like to have.
· People may be discouraged from working, or from getting a better job, if their extra income would be offset by a loss of benefits.
Targeting is disadvantageous for people on low to medium incomes. This can be illustrated by a hypothetical example of individuals’ payments for dentistry in a wealthy country, which might produce the following figures:[1]
|
Pre-tax income |
Paying own dentistry cost |
Tax charge for public funding |
Total cost if targeted |
|||
|
Price |
% of income |
Tax Charge |
% of income |
Price + Tax |
% of income |
|
|
€10,000 |
€300 |
3.0% |
- |
- |
- |
- |
|
€15,000 |
€300 |
2.0% |
€75 |
0. 5% |
€315 |
2.1% |
|
€30,000 |
€300 |
1.0% |
€300 |
1.0% |
€360 |
1.2% |
|
€150,000 |
€300 |
0.2% |
€3,750 |
2.5% |
€1,050 |
0.7% |
This chart assumes that everyone would incur similar costs if they paid for their own dentistry, and it shows that the costs would fall most heavily upon wealthy people if dentistry were funded by a progressive income tax similar to that described above (3.2.4.1). If the benefit of free dentistry were only made available to those earning less than €15,000 (corresponding to the poorest 20% of the population in this example), the tax paid by wealthy people to contribute to dentistry is reduced – but it increases the total cost for a low-paid person. Most people would see this as inequitable.
© PatternsofPower.org, 2014
[1] This example was chosen to illustrate what people might pay for dentistry under different models of public funding. Although tax payments are not assigned to a particular purpose, it would be possible to calculate the cost of a dentistry benefit as a proportion of the total revenue from income tax – and therefore to calculate how much of an individual's income tax could be considered as payment towards that benefit.
The table is based upon the following (hypothetical) figures:
It is assumed that 20% of the population wouldn't have to pay for dentistry if the benefit were targeted, which is the proportion who earn less than the € 15,000 maximum for free dentistry.
Income tax is 20% for income over € 10,000, and 40% for income over € 40,000.
€ 300 is the actual cost of dentistry per person.
€ 30,000 is the income at which the dentistry component of tax equals its actual cost; mathematically there must be such an income, at which a taxpayer 'breaks even'.