“We take money from poor people in rich countries and give it to rich people in poor countries . . .” Huh??

by Andrew Gelman on June 24, 2011 · 10 comments

in Foreign Policy,Political Economy

Yesterday I pointed to a quote from Israeli leader Shimon Peres, who expressed skepticism about foreign aid (although perhaps, according to commenters, his problem is only with non-military aid).

I noticed another odd thing about Peres’s remarks. Peres said, “Giving is problematic. We take money from poor people in rich countries and give it to rich people in poor countries.”

I don’t know enough about foreign aid to comment on this last part—Israel is a middle-income country so it doesn’t really fit in either category—but let me express objection to the first part of the claim, that “we take money from poor people in rich countries.”

U.S. foreign aid is coming out of the Federal budget, right? And Federal taxes are mostly paid for by upper-income Americans, not poor Americans. Here are some numbers from Tony Fratto, by way of David Leonhart: the people in the top 5% of income pay more than 60% of the Federal income tax, while the bottom 50% pay less than 3%.

This is not an argument about fairness—as Leonhardt points out, high-income people have a lot more income and so of course they pay most of the taxes!—but it does seem to decisively shoot down the claim that the Federal budget (and, by extension, parts of it such as foreign aid) are being paid for by “poor people.”

{ 10 comments }

Manoel Galdino June 24, 2011 at 11:41 am

I think he is thinking more broadly. These taxes could be used to transfer money to poor people, or that at least parte of the taxes paid by poor people could be reduced…

Andrew Gelman June 24, 2011 at 11:58 am

Manoel:

Maybe, but if he thinks that, that’s just silly. Any money could be transferred to poor people, but I see no reason to think that if the foreign aid budget were cut, this would result in increased spending for the poor. Or that taxes would be reduced on the poor rather than on the rich.

Michael June 24, 2011 at 10:57 pm

It’s not silly at all. Extending Meltzer and Richard or any other subsequent model of taxation and redistribution to a world with different kinds of expenditures, any money that is being spent on foreign aid would otherwise be redistributed within country. In equilibrium, the utility per dollar from foreign aid is equal to the utility of direct redistribution (with equal portions for all) per dollar for the median voter. So if you remove the option of foreign aid, more money is directly redistributed and the tax rate stays the same. Rational individual actors would thus collectively choose to redistribute more money within country without foreign aid than with foreign aid. So the idea that foreign aid takes money out of the pockets of poor people in rich countries is not so far fetched.

More broadly, this logic applies to any expenditure on which the median voter prefers to spend some money, but the poor would be better off if that money were directly redistributed. For example, assume that the richer you are the greater utility you get from expenditures on national defense as opposed to direct redistribution. The median voter will thus prefer a higher rate of defense spending than is less beneficial to the poor. Whether or not this is morally preferable, the poor within rich countries would be better off with more direct redistribution and less money spent on foreign aid, national defense, or any other program that does not put money in their pockets, than the median voter will allow.

P.S.

In practice, do I think that that if a rich country cut foreign aid the poor in that country would receive more either through redistribution or targeted lower taxes, as opposed to the rich getting the tax benefits? No, I don’t. But that’s because because cutting foreign aid is presumably correlated with being conservative and thus cutting social services and instituting flat/regressive taxes as well.

Andrew Gelman June 25, 2011 at 1:34 am

Michael:

It sounds like what you want to say is, “Foreign aid takes money from rich people in rich countries that could be distributed evenly among people in rich countries.” But that’s not what Peres (as reported by Tabarrok) said. He said that, for foreign aid, “we take money from poor people in rich countries.” Not the same thing at all.

Sorry, but as a statistician I can’t avoid being literal.

Michael June 25, 2011 at 2:54 am

Whether you get one fewer dollar from a rich person or have to give up one more dollar of your own, you’re out a dollar. Whether or not a particular level of foreign aid is a good thing for an individual depends on how much they benefit from foreign aid. If foreign aid provides more benefit to richer people who are better able to capitalize on the economic opportunities in another country that come with providing it with aid, then poor individuals will prefer less foreign aid than richer individuals and would do better to have that extra dollar in their pocket, whether or not its provenance is suspect of socialist redistribution.

However, if you want to be literal I would say that “foreign aid takes money from every taxpayer in rich countries.” You rely on statistics about US federal income taxes to argue that the poor aren’t footing any of the bill for foreign aid. First, the division between federal payroll taxes and federal income taxes is largely an accounting gimmick. This would be particularly true if Social Security were “reformed” to avoid the general fund having to pay back the portion of U.S. debt that is owed to Social Security, but even without that ignoring payroll taxes ignores athird of federal tax revenue that the poor do contribute to significantly. Payroll taxes may not “literally” go to foreign aid, but for all practical and substantive purposes it does because money is fungible (and in fact payroll tax dollars literally do go to foreign aid because Social Security takes in more than it pays out and the excess goes into the general fund).

Second, Europe relies much more heavily on high VAT taxes under which the poor are very much footing a portion of the bill for foreign aid.

Finally, let’s all have a good laugh at the expense of an Israeli politician suggesting that there is a moral problem with foreign aid. In the words of my favorite fictional president, “Can we have it back please?”

OneEyedMan June 24, 2011 at 1:07 pm

I had the same thought as Galdino. When you ask electorates what they want to do to balance budgets, they pretty much always say cut foreign aid first. So it isn’t a stretch to imagine that various welfare state costs would be a prominent alternative, given that they make up such a large share of budgets.

Joe June 24, 2011 at 2:53 pm

FWIW, this exact back and forth has taken place before. Peres’ sentiment is a paraphrase of Peter Bauer, a critic of foreign aid. The quote from Dissent on Development (1976):

[Foreign aid is] inevitably partly regressive because many taxpayers in donor countries are poorer than many people in recipient countries. This regressive aspect is increased in practice by the fact that foreign aid benefits better-off people within recipient countries, notably members of the urban population and especially politicians, civil servants, academics, and certain sections of the business community

In response, Paul Mosely wrote in a 1987 book (Foreign aid, its defense and reform):

The first part of this proposition is dubious because in every donor country very poor people pay no tax at all…

Andrew Gelman June 24, 2011 at 6:02 pm

Joe:

Thanks. I’m glad to see that this claim has already been shot down! Maybe someone can explain this to Peres and others in the Israeli government, and then they won’t feel so bad about all the aid they receive.

Patrick McCann July 17, 2011 at 6:21 am

I always find it bizarre when this claim about the poor paying no taxes is made. Persons often cite analysis regarding how much income tax is paid by the poor. How quickly they forget that income tax is only half of federal revenue and the substantial size of the payroll tax, which I paid even on my graduate school stipend when I was impoverished by federal standards. Perhaps they forget that payroll taxes aren’t held in some large vault for their retirement, but fund general operations.
http://www.taxpolicycenter.org/briefing-book/background/numbers/revenue.cfm

Rubina Nazar September 7, 2013 at 1:25 pm

i want help i m belong poor family i hve no job no home

Comments on this entry are closed.

Previous post:

Next post: