The targeting of tax can protect the poor, but the wealthy are the greatest beneficiaries; those on low pay suffer disproportionately
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 total 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 of tax is usually implemented by having an income threshold, below which a benefit is free and above which people must pay for their own services. The economic impact of such a policy can be illustrated by the example of dentistry. If free dentistry were made available to those earning less than $15,000, for example, this would be a burden on the public purse. If the average cost of an individual's dentistry were $150 a year, it can be seen how people on different incomes would be affected if the free dentistry service were totally funded by a progressive income tax like that described above (3.2.4.1):
· Someone earning $14,000 a year would have the benefit of free dentistry and would be paying very little tax.
· Someone earning $15,100 a year would be spending almost 1% of their income on dentistry (although they would still pay very little tax).
· Someone earning $150,000 a year would only spend 0.1% of their income on dentistry. Their tax bill would be somewhat higher than would have been the case if no public dentistry service had been provided.
The cost of dentistry is thus proportionately higher for people on relatively low incomes with tax targeting. This seems unfair. And it has been reported that Britons are 'pulling their own teeth out with pliers' because they can't access NHS dentists [a dentist working under Britain’s National Health Service (NHS) would be free for people on low incomes].
The justification usually offered, for the targeting of tax, is that the government believes that it cannot politically charge more tax in total – yet it would still be offering a benefit to the very poorest in society. Tax targeting benefits wealthy people, because the cost burden in extra tax would fall most heavily on them if free dentistry were made available to everyone in the country. The relative penalties for those on lowish incomes are often ignored.
(This is an archive of a page intended to form part of Edition 4 of the Patterns of Power series of books. The latest versions are at book contents).