Mr. McDonald is a free-lance writer and editor living in Toronto.
The redistribution of income has become such a major activity of modern governments as almost to dominate the political scene. In 1986 transfer payments of one kind or another consumed nearly half of the United States’ Federal spending and more than half of Canada’s.
In fact the “principle of making equalization payments” is embodied in the Charter of Rights and Freedoms which now is part of Canada’s Constitution.
The idea of lessening the disparity between people’s incomes appeals naturally to social theorists. The “society” they study is an abstraction to which they impute properties that are both individual and personal.
The assumption is that if people are poor it is not because they are lazy, or incompetent, or lacking in marketable skills, but rather because society has failed them. Consequently it is up to society to remedy the matter; its agent the State must be called in to do the job.
If that theory were still to be tested, governments’ preoccupation with applying it could perhaps be understood. Instead it has been tested, and the results are available.
In 1984 Statistics Canada published a pamphlet (Charting Canadian Incomes, 1951-1981) which showed that the share of income among population groups has been stable over the three decades 1951 to 1981.
“We have divided the population into five equal groups from lowest to highest income. Each income group represents one-fifth of all families and unattached individuals. We find that the share of income for each group is the same in 1981 as in 1951 when income (including social benefit payments) is considered. The lowest income group, for example, had 4% of income both in 1.951 and 1981. This means that although each group’s income has increased substantially, there’s been no movement toward greater equality between groups.”
No doubt social theorists will take the passage in parenthesis as evidence that had it not been for the social benefit payments, the disparity between income groups would have been greater.
They could point, for example, to other tables in the pamphlet which show that social benefits have become increasingly important for the lowest income group and for the elderly.
Between 1951 and 1981, social benefits as a percentage of income in the lowest income group rose from 29 per cent to 57 per cent. Among the unattached elderly, the percentage rose from 47 per cent to 50 per cent; among elderly couples from 26 per cent to 36 per cent. Those percentages are considerable; without the benefits it appears that the lowest group would have fallen further behind.
But wait. These are equalization payments and the object of the exercise was to produce greater equality between the groups. That didn’t happen despite the fact that during the same period social benefit payments were raised substantially. In the past 20 years the proportion of Canada’s federal government spending on social programs has risen from 25 to 42 per cent.
Consequently it’s hard to escape the conclusion that if the social benefits had not been there many of the individuals who make up the lowest income group would have worked harder to increase their incomes and put more aside for retirement. Some might have moved up into the next group, others would have worked hard to stay in place.
Similarly at the other levels, where social benefits make up smaller percentages of total income (e.g., increasing from 5 to 9 per cent in the middle group and from 2 to 3 at the top), the fact that they were present was a disincentive to increasing earnings or savings.
In short, government transfer benefits seem to have little effect upon the bell-shaped curve of income distribution.
However, the availability of benefits affects the behavior and attitudes of people, which in turn affect their incomes. The groups are composed of individuals, each of whom is unique, a fact that tends to be overlooked by the theorists who deal in statistics. It’s the groups they are concerned with.
Nevertheless the individuals are affected. Assurance of the benefits affects behavior in two ways.
First is the material disincentive mentioned above: a lesser inclination to increase earnings or savings, compounded by a tax burden that is seen as funding the benefits. Second is the moral effect.
Frederic Bastiat wrote that “The law can be an instrument of equalization only as it takes from some persons and gives to other persons. When the law does this, it is an instrument of plunder.” (The Law)
Recipients of the benefits are beneficiaries of plunder. Consciously or not, and regardless of the differing proportions of income they are obliged to contribute through taxes, they are accepting something that has been taken from someone else,
Sooner or later whole populations are involved, Even people whose incomes are below taxable rates are paying through consumption taxes,
This engenders a sense of entitlement to benefits that no one has any way of relating to what they, as individuals, have contributed. Rich or poor, it is their due. It is also something, if not for nothing, then often for very little.
It is in this divorcement of effort from reward that the danger lies. It is as close to cheating as makes no difference. The cheating may be done by the State but the citizens are party to it.
To illustrate: A friend advised a major oil company about “downsizing” so as to adjust to declining business. He noticed that quite senior people who had accepted early retirement on generous terms, including capital settlements, were being inconvenienced by having to drive their Cadillacs to the local unemployment office in order to draw the benefits they were entitled to for 52 weeks after being “laid off.”
The same friend took his lawnmower to the local small engine expert and asked where the expert’s assistant was. “Oh! He’s off for six months, drawing unemployment insurance.” The assistant immigrated to Canada some years ago from Eastern Europe, examined the social security arrangements, and decided that if that was the way Canada set the rules he would be foolish not to play by them. So he uses the six months “lay-off” to work around his house and add to its value, which at the time of writing is about C$285,000.
Now you could say that the former executives of the oil company are not cheating: they are collecting what the law provides. It is the law that is at fault. But they are already compensated, and generously, for their severance. Do they not feel a twinge of conscience? Perhaps not. The State’s intrusion has blunted it.
The lesson is drawn more plainly from the former European. He had grown up behind the Iron Curtain, where the State is sole employer, and cheating it is less a moral issue than an ingredient of survival.
These examples reveal the flaw in social theories of redistribution. It rests in their separation of donor from beneficiary, of effort from reward, and in the merging of individuals into groups.
Bastiat had the sense of it when he wrote of persons, of the law taking from some and giving to others. It is when decisions are removed from persons and are made for them collectively that the trouble starts.