Merit Motives and Government Intervention: Public Finance in Reverse

57 Pages Posted: 17 May 2000 Last revised: 17 Oct 2010

See all articles by Casey B. Mulligan

Casey B. Mulligan

University of Chicago; National Bureau of Economic Research (NBER)

Tomas Philipson

University of Chicago; National Bureau of Economic Research (NBER)

Date Written: May 2000

Abstract

A common view in public finance is that there is an efficiency-redistribution tradeoff in which distortions are tolerated in order to redistribute income. However, the fact that so much public- and private redistributive activity involves in-kind transfers rather than cash may be indicative of merit motives on the part of the payers rather than a preference for the well-being of the recipients. Efficiency-enhancing public policy in a merit good economy has the primary purpose of creating distortions and may only redistribute income from rich to poor in order to create those distortions the reverse of the conventional efficiency-redistribution tradeoff. We discuss why the largest programs on the federal and local level in the US including Social Security, Medicare and Medicaid, and Public Schooling seem consistent with the reverse tradeoff rather than the classic one. Transfers are not lump sum in a merit good economy, and explicitly accounting for this when calculating tax incidence reduces the estimated progressivity of government policy. As one example, we calibrate the conventional life-cycle model to show how the amount of over-saving induced on the poor by Social Security hurts them at least as much as the progressive' benefits help them. When the distortions outweigh fiscal transfers in this manner, the classic efficiency-redistribution tradeoff cannot justify the program and the program is far less progressive than conventional analysis suggests.

Suggested Citation

Mulligan, Casey B. and Philipson, Tomas J., Merit Motives and Government Intervention: Public Finance in Reverse (May 2000). NBER Working Paper No. w7698. Available at SSRN: https://ssrn.com/abstract=228991

Casey B. Mulligan (Contact Author)

University of Chicago ( email )

1126 East 59th Street
Chicago, IL 60637
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773-702-9017 (Phone)
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National Bureau of Economic Research (NBER)

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Tomas J. Philipson

University of Chicago ( email )

Graduate School of Business
1101 East 58th Street
Chicago, 60637

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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