Growing the Government on the Backs of the Poor

By Tomas J. Philipson

Wednesday, November 08, 2023

 

A recent CBO report revealed the true extent of the current deficits — the largest on record for an economy not in crisis. In funding the spending binge that drove the numbers, the White House says it favors a more progressive tax code where a larger share of income of the rich is taxed, and incomes below $400,000 are spared. Indeed, the president often attacks supposed tax breaks for the rich of previous administrations, and he repeatedly argues that higher-income individuals should be made to pay their fair share in taxes. However, actions speak louder than words, and his policies have put a larger burden on the poor to pay for our recent growth of government.

 

Whatever one thinks of the multiple trillions in increased spending since Biden took office, it can be paid for in several ways. One way could have been to raise taxes, perhaps through the new army of IRS tax collectors that he claimed would implement his progressive vision by going after the rich. Instead, the money was borrowed, with the Fed doing most of the lending through printing new money that dramatically increased the money supply. An increased supply of anything reduces its value, so the result was inflation — a higher exchange rate between money and goods — widely recognized by economists as just another form of taxation. 

 

If the 18 percent increase in prices since January 2021 had been the same across all goods and services, the inflation-tax would be neither regressive nor progressive — all income levels would take the same percentage cut in real incomes to fund the new spending. But the price growth we have seen has been more pronounced on larger budget items of the poor compared with the rich. For example, the 63.6 percent increase in gas at the pump is hardly noticeable to the 1-percenters because the share of their income spent on gas is minuscule. But it cuts deeply into the budgets of the poor who spend about 15.1 percent of their income on transportation. The same goes for the 19.8 percent jump in food prices, as food makes up about 31.2 percent of the budget of the poor but a declining share of income as households get richer. Most important, higher housing prices have made higher-income groups richer in terms of asset wealth, while the associated rent inflation has stung the poor — about 87 percent of the lowest wealth quartile are renters. The end result is that to fund his new spending, Biden’s inflation tax has the poor giving up a larger share of their real income compared with the rich. 

 

Adding insult to injury, the administration’s tsunami of new regulations have been regressive as well. University of Chicago economist Casey Mulligan finds that the increased regulatory burden introduced by the Biden administration amounts to 15.3 percent of income for the poorest households, but falls successively down to 2.2 percent for the richest ones.   

 

In addition, Biden’s policy platform to address his most prominent policy goal of reducing global warming is highly regressive. It focuses on displacing cheaper brown-energy sources with more expensive green ones. If green were cheaper, markets would adopt it without the government’s support. Biden claims this support makes green energy “cheaper,” but taxpayers foot the bill for the subsidies; that is, the Inflation Reduction Act is not free. Therefore, the act simply reallocates part of green energy’s higher costs charged as taxes. There is no free lunch for more expensive energy. But since the poor spend about three times as much of their income on energy as rich people do, at 8.7 percent and 2.9 percent, respectively, they suffer more from the higher green-energy prices that such displacement to costlier energy implies. 

 

A more progressive energy policy would focus on green-energy innovation that would lower energy prices below current ones, rather than raise them, thereby helping the poor the most. However, for the Inflation Reduction Act, 77.6 percent of new spending involved large-scale subsidies for costly replacement, compared with 1.7 percent set aside for innovation in terms of energy demonstrations. But the president claims the IRA subsidies are valuable because they create green “new jobs” for the poor. This is backward economics — it would equally apply to a public typewriter program replacing computers. More important, as the rich pollute far more than the poor on a per capita basis, the regressive nature of his current climate policy is particularly troublesome. 

 

Tax, regulatory, and climate policies are unfortunately not the only areas where the favored policy platforms of the White House clash with their stated goals. So-called Bidenomics is often left undefined, but it is defended by the White House as a set of goals rather than policy platforms. Chief among these goals is raising incomes of the poor and middle class, or “building the economy from the middle out and bottom up.” Few would disagree with these goals, so the question becomes what policies foster them. Unfortunately, not those of the Biden administration, since real wages have fallen while mortgage rates have risen. To implement these goals, look no further than to the policies of his predecessor which, as documented in the Economic Reports of the President 2018–20, induced higher real wages and lower mortgage rates, reduced poverty, and cut income and wealth inequality. 

 

Although such goals are admirable, the end results of the administration’s policies to achieve them are, unfortunately, not. Large governments are difficult to build off the backs of a rich minority, as Europeans know well. Theirs are funded with income taxes that are often less progressive than the U.S. Instead, they rely more on regressive payroll and sales taxes. After all the dust and rhetoric settles, the poor will have paid a larger price than the rich to fund our recent growth of government.