Increasing Inequality By Purposely Diminishing Government Productivity

In a complex and rapidly changing economy it is easy to conclude that there is an uncontrollable dynamic at work: the world moves according to the flow of technology and no one knows where that will lead.  If the trend is to create a few economic winners and a lot of losers, then that is just the way it has to be.  Anthony B. Atkinson refuses to accept the inevitability of such market solutions.  In his book, Inequality: What Can Be Done?, he continually reminds us that government, as the representative of all the people, can and must play a role in determining where technology might lead us.

Atkinson is concerned with identifying actions that are consistent with economic growth and will assist in limiting the continuing increase in inequality.  He arrives at 15 distinct proposals for actions that could be taken, and suggests several others that require more study.  The very first addresses the influence of the government as an investor in technological progress.  He points out that the research that has provided us with the high-tech gadgets we have so come to love was directed and funded by the federal government.  The government has a definite role to play in developing technology, and it also has a role in defining how technology will be implemented. 

“….when making decisions supporting innovation—whether concerned with financing, licensing, regulating, purchasing, or educating—the government should explicitly consider the distributional implications.”

A number of companies have sprouted in recent years that, under the mantle of economic efficiency, have attempted to replace full-time regulated workers with part-time workers available on demand who receive little in terms of benefits.  Take Uber, for example.  What are the “distributional implications” of this trend?  If the result is that a new category of low-paid day-laborers is being created to compete with full-time workers with benefits, then the government could and probably should intervene.

The last decade has seen many semi-skilled jobs replaced by innovative uses of technology.  The result has been movement of workers into less-skilled, lower-wage positions in service industries.  It is often assumed that service jobs are less amenable to innovation and increases in productivity.  Atkinson believes this is a false assumption, and when it comes to a critical service provider—government—it is a dangerous assumption.  The efficient administration of governmental services is of the utmost importance in a healthy society.

“The achievement of an equitable society depends to a considerable degree on the effectiveness of the public administration and the quality of its dealings with citizens.  Repressive administration may be cheaper, but a fair society needs to ensure that its operations—in the fields of taxation, public spending, regulation, and legislation—are just, transparent, and accepted.  This requires resources.  Moreover, as societies become richer, so too they become more demanding in their standards.”

Those who are experiencing social or economic difficulty are most in need of a public administration designed to facilitate the dispersion of aid.

“Economic inequality is often aligned with differences in access to, use of, or knowledge of information and communication technologies.  For middle-class taxpayers, filing a tax return on-line may be a time-saving operation, but for a person who has just become unemployed, applying for benefits on-line may be a worrisome challenge.”

A few examples from the United States will illustrate Atkinson’s point about the need for efficient public administration if fairness and justice are to be maintained.  Since Atkinson brought up the issue of tax returns, let’s begin there.

For most people, filing a tax return is a matter of gathering together information that is already known to the Internal Revenue Service (IRS), specifying that information in a form and sending it on to the IRS so it can check to see if the data has been properly reported.  It is immediately apparent that there is an unnecessary step here.  Why not have the IRS accumulate the information and convert it into a tax assessment specifying either a bill for any underpayment of taxes or a declaration of an overpayment and eligibility for a refund?  That is exactly what the IRS must do anyway to check a submitted tax form.  The person could then choose to accept the assessment or enter modifications for items that had been missed or were incorrect and resubmit it.  This process is in place in a number of countries and seems to work just fine.

The investigative website Propublica explains why such a reform cannot happen in our country in the article by Liz Day: How the Maker of TurboTax Fought Free, Simple Tax Filing.

“Imagine filing your income taxes in five minutes — and for free. You'd open up a pre-filled return, see what the government thinks you owe, make any needed changes and be done. The miserable annual IRS shuffle, gone.”

“It's already a reality in Denmark, Sweden and Spain. The government-prepared return would estimate your taxes using information your employer and bank already send it. Advocates say tens of millions of taxpayers could use such a system each year, saving them a collective $2 billion and 225 million hours in prep costs and time, according to one estimate.”

“So why hasn't it become a reality?”

“Well, for one thing, it doesn't help that it's been opposed for years by the company behind the most popular consumer tax software — Intuit, maker of TurboTax. Conservative tax activist Grover Norquist and an influential computer industry group also have fought return-free filing.”

In an ideal world, the government would be striving to make the tax collecting process as simple and transparent as possible, by providing pre-filled returns for as many people as possible.  That is what productivity in the service sector is all about.  In fact, the IRS could provide the exact same service that Turbo Tax provides—and provide it for free!  How is that for productivity?

Instead, we have commercial companies who exert their influence by throwing money around to protect their parasitic revenue streams.  They are assisted by ideologues like Grover Norquist whose goal is not efficient government, but rather the failure of government.  He and his cronies in the Republican Party wish to starve the IRS of funds and watch it perform so poorly that people will resist paying any federal taxes.

For many, this conflict between government efficiency and corporate or political profit is of little concern.  Unfortunately, it is often those with the least earnings who are forced to get assistance from for-profit agencies in order to file their tax forms.  Financial records become complicated when one makes a lot of money.  They also become complicated when one earns little income and receives public assistance.  If some people have their way, the process will grow even more complicated.

The Bloomberg Editorial Board published a note titled How to Make the Tax code Even Worse.  Here we are warned that one of the most effective tax features—one that has long had bipartisan support—is being undermined by corporate greed and political opportunism.

“Consider a scheme Congress may soon take up for some individuals applying for the earned income tax credit, once a relatively straightforward process. If a report from the Senate Appropriations Committee is heeded, what was once a one-page form for claiming the credit could expand to four or five pages, padded out by pointless and bewildering new questions.”

“The likely result would be that those eligible would either forgo their credits or hire tax services for help. As it happens, H&R Block, the largest such service, helped write a report recommending the changes. Complexity has its advocates.”

In addition to the corporate profit motive, there are the politicians who believe that any assistance to a low income person is a disincentive to work.  Any welfare assistance should therefore be small in amount, difficult to obtain, and be of short duration.  That provides an explanation why some would be in favor of more complex tax reporting for the earned income tax credit—it is better to harm 10 people than to let one person get more than is allowed under the law.

Nowhere is government more inefficient and more purposely harmful than in its administration of the welfare system.  Kaaryn Gustafson, a law professor at the University of Connecticut, published an article in the Journal of Criminal Law and Criminology in 2009 titled The Criminalization of Poverty.

“Lost in these contemporary understandings of welfare is the association of welfare with wellbeing, particularly collective, economic wellbeing. Many of the current welfare policies and practices are far removed from promoting the actual welfare of low-income parents and their children. The public desire to deter and punish welfare cheating has overwhelmed the will to provide economic security to vulnerable members of society. While welfare use has always borne the stigma of poverty, it now also bears the stigma of criminality.”

“Throughout the 1970s, '80s, and '90s, the value of the welfare grant, adjusted for inflation, declined dramatically. The weighted average maximum benefit per three-person family was $854 in 1969 (in 2001 dollars), but plummeted to $456 by 2001. It became increasingly hard for welfare recipients to cover their most basic expenses-food, clothing, and rent-with their welfare grants. Unable to survive on welfare checks and facing barriers to employment, many welfare recipients turned to other sources of income, whether help from kin or participation in underground labor markets, and attempted to hide those sources from the welfare office for fear of losing the small checks they received.”

The government was purposely made less-efficient with the express intent of limiting access to assistance to those unable to keep up with complex reporting requirements.  Social workers who were once directed to provide assistance to those in need became fraud detectors whose goal was to find cheating and withdraw assistance.

“Office caseworkers, hired to replace the social workers, processed the routine paperwork that welfare recipients regularly submitted to the office to document their continuing financial need. In a process known as "churning," the federal government increased the amount of information and paperwork required to determine welfare eligibility, and denied benefits to low-income families who failed to keep up with the paperwork. Income-eligible families were removed from the aid rolls for their failures to provide verification documents in a timely manner.”

Being caught and punished for some violation of the rules (the most common of which seems to be missing a mandatory meeting at the welfare office) is referred to as sanctioning.  States have the discretion of punishing an individual by limiting his or her access to funds or they can choose to punish an entire family for one member’s sins with a full-family sanction.

“….a study conducted by Yeheskel Hasenfeld found that approximately half of the sanctioned adults surveyed did not know they had been sanctioned.   For these families, the welfare system may seem so complex, arbitrary, and mystifying that they cannot determine why their benefits are fluctuating. This suggests that rather than creating a set of incentives that will ‘make work pay,’ the current welfare system is simply punishing people who cannot figure out how the system works.”

More on our current welfare system can be found in Race and the Criminalization of Welfare.

Atkinson is certainly correct in assuming that government provision of services can be made more efficient.  He is also correct in concluding that those most in need of government assistance have much to gain.  Inefficient government does contribute to inequality.