Nov 16th 2011, 20:36 by M.S.
ANOTHER line on foreign aid that I keep seeing on the internets lately is Ron Paul's quip: "Foreign aid is taking money from poor people in rich countries and giving it to rich people in poor countries." The second half of this quip identifies a real problem: too much foreign aid money gets cornered by local elites in recipient countries. Some of this is illegitimate cronyism or graft. Some is legitimate: foreign aid programmes have to be administered by well-educated locals, who generally come from well-off backgrounds and command relatively high salaries, all the higher as the foreign-aid programmes increase demand for their services. That's a tough nut to crack. Anyway, this is a real problem that merits attention.
The first half of the quip is nonsense.
Foreign aid is funded out of federal taxes. I'm not sure who Ron Paul would consider "poor", but the lower 40% of households in America pay no net federal income tax. They do pay social-insurance taxes, ie Social Security, Medicare and Medicaid, and a share of corporate taxes and federal excise taxes. Social-insurance taxes don't fund foreign aid; they fund social insurance. Any money that poor people in America might be contributing to the foreign-aid budget would come out of corporate and excise taxes. From 2000-2007, according to the Tax Policy Foundation, the bottom quintile of American households paid combined corporate and excise taxes of 2% to 2.8% of income. For the second quintile, the rate was actually lower, maxing out at 2%. Foreign aid accounted for 1.28% of the federal budget in 2009 and 1.5% in 2010. So the most a household in the bottom quintile might be understood to have contributed to foreign aid would be something like 1.5% of 2.8% of its earnings, or 0.042%. Mean household income for the bottom quintile in 2009 was $11,552. So you're talking about at most 0.042% of $11,552, which is $4.85. For the second-lowest quintile, you're talking 1.5% of 2% of an average income of $29,257, or $8.78. The proportion of America's foreign-aid budget that comes from poor people, rather than middle-class or rich people (all of whom, on a global scale, are extremely rich), is negligible, and it represents a negligible burden on those poor people's incomes.
But even this is overstating the case. The purpose of the earned income tax credit (EITC) is to make sure that poor people in America don't bear the burdens of the federal budget, especially those programmes that don't benefit them. At the lower end of the income spectrum, income taxes are a significant disincentive to work and tend to push people onto the welfare rolls; the EITC was introduced to compensate. That's the main reason why poor people pay negative federal income tax, and in fact people in the bottom quintile get more back from the EITC than they pay in income, corporate and excise taxes combined. Foreign aid is precisely the kind of federal budget burden that you don't want poor people to have to bear. The rational way to consider this is to think of the EITC as having exempted poor people from paying for foreign aid, among other programmes they shouldn't really be responsible for. But if Mr Paul thinks the EITC is insufficient to spare poor Americans from that burden, since they do still pay a share of corporate and excise taxes, then he is of course free to propose an additional refundable credit to poor people covering their share of corporate and excise taxes, presumably compensating by increasing the rates paid by rich people.* Somehow I don't think that reform is on Mr Paul's agenda.
* But really, even this overstates the case. Some excise taxes, like the gasoline tax, are dedicated to specific trusts and don't pay for foreign aid; the gas tax pays for highway construction. The main "general fund" federal excise taxes paid by poor people are the alcohol and cigarette taxes. The point of such excise taxes is usually to make people who engage in certain kinds of consumption pay for the externalities of those kinds of consumption, and/or to discourage those kinds of consumption. So the cigarette tax attempts to discourage people from smoking and, in a loose sense, compensates society for their extra medical bills. It would be silly to refund poor people's cigarette taxes to them on the basis that they shouldn't have to pay for various federal programmes; that would frustrate the whole purpose of the cigarette tax. Given that we have a cigarette tax, you could say, each time a poor person buys a pack of smokes and pays excise tax on it, that they've now been forced to contribute to foreign aid or to the annual budget of Yellowstone National Park or what have you, but that's silly. If you don't want to pay for federal budget operations with your excise taxes, don't smoke. If you're really concerned about the regressive nature of excise taxes, you might get working on that problem; since poor people are more price-sensitive, it might make sense that we could get the same amount of dissuasion by charging poor people a $1 excise tax and rich people a $10 tax for the same pack of cigs or bottle of vodka. (That certainly explains why rich people tend to be alcoholic chain-smokers. On "Mad Men", anyway.) But given that Ron Paul actually wants to eliminate income taxes and fund the government almost entirely on excise taxes I again think this isn't his top priority.
(Photo credit: AFP)
In this blog, our correspondents share their thoughts and opinions on America's kinetic brand of politics and the policy it produces. The blog is named after the study of American politics and society written by Alexis de Tocqueville, a French political scientist, in the 1830s
Advertisement
Over the past five days
Over the past seven days
Advertisement
Subscribe to The Economist's free e-mail newsletters and alerts.
Subscribe to The Economist's latest article postings on Twitter
See a selection of The Economist's articles, events, topical videos and debates on Facebook.
Advertisement
Readers' comments
The Economist welcomes your views. Please stay on topic and be respectful of other readers. Review our comments policy.
Sort:
Paul is wrong? Mmm...
Did you hear about that little thing called the National Deficit? You know, that little number of $15 trillion of US debt.
So... Is your solution to continue to borrow money (or print it thru the FED)to give it to other nations in the name of Foreign Aid?
Isn't the real point that foreign aid goes to the well to do in these poor countries? So you still have the rich getting richer and the poor getting poorer in those countries. And by the way, not by hard work, innovation and effort. They are getting richer by preference of the goverment. I believe that's been happening over and over again with foreign aid.
But I guess that's similar to the bank bailout here. Isn't it the 'rich' banks who got bailed out and not the struggling home owner who should have never received that kind of loan. That loan which is just a bad investment promoted by government programs.
Do your homework before you go off on taxes....Ron Paul has ALWAYS maintained that the poor in this country pay each and every time the federal reserve prints money...an inflated dollar hits the poor much harder than the rich...his argument is never about taxes....it is about spending!
Ron Paul 2012
@Officer Perez: maybe the point is that we should get serious, and worry about not borrowing money to pay for out of control expenditures, like defense and health-care entitlements, before we worry about 1% of the budget accounted for by federal aid. It's like saying I'm not going to McDonald's today to save money, while I plan my 2-week vacation to Disney at the most expensive hotel they have for me to stay at, which I have to max my Discover to fund. It makes no sense worrying about one less Big Mac.
I know you like to stir up the comments, M.S., but wow—questioning the inerrant word of Ron Paul? In public, no less? That's just overkill, and by more than a little bit.
sorry, last comment should read "....by foreign aid." Not "....by federal aid."
The bottom 40 percent pay via inflation. The cost of food, energy and housing continues to rise, and at a faster and faster rate.
Debasing our currency with genital washing programs in sub-saharan Africa, among the plethora of many, many useless international aid programs, is part of the problem, not the solution.
Poor people pay by way of the Inflation Tax. This is a tax that isn't on paper, but occurs when the Federal Government needs to secure funds by printing money, which they do when they are out of revenue and can't/won't borrow. This is actually how the poor bare the burden of our Federal Governments deficit spending. Additionally, the rich people who get control of the foreign aid in the other countries are typically more well off than the majority of American's who pay taxes. They might not be "poor" but they could use the money more than the foreign dignitary, or foreign military official.
Mark this day on your calendar: M.S. has acknowledged that the U.S. income tax system is entirely progressive.
I love irony. :)
Your analysis is incorrect. Any tax on anyone is a tax on everyone. The definition of a tax should be redefined as any government spending. Direct taxes, employment taxes, sales taxes, real estate taxes, indirect taxes, etc are the visible taxes. Inflation and government borrowing are invisible taxes. Income disparity is another invisible tax. As the tax burdens on the rich are increased, the wage disparity grows to make up the natural difference. Ron Paul is right and he is clear, unlike "The Economist"s fuzzy analysis.
FYI, the U.S. is poor. 15 trillion in debt. Repeat after me, we cannot afford it.
From Wikipedia: "On October 20, 2010, U.S. State Department notified Congress of its intention to make the biggest arms sale in American history - an estimated $60.5 billion purchase by the Kingdom of Saudi Arabia. The package represents a considerable improvement in the offensive capability of the Saudi armed forces.[41]" http://en.wikipedia.org/wiki/Foreign_relations_of_Saudi_Arabia#United_St...
OK, let me get this straight: Ron Paul's argument is that foreign aid hurts the poorest Americans via spending, which increases the deficit, which thereby promotes inflation.
So tell me this: why does inflation disproportionately hurt the poor, rather than the rich, since the poor don't have savings to debase? Presumably, their wages will increase with the additional cost of goods, unless inflation comes from abroad in the form of commodity prices driven by foreign demand... oh wait, I forgot, those kinds of shocks don't seem to matter in Paul's world.
And furthermore, if foreign aid is a miniscule and decreasing proportion of the national budget, then who cares? Your concern should be stopping a hyperactive defense establishment (fortunately, Mr. Paul seems to have this covered) and rampant healthcare entitlement inflation. Foreign aid should be a very distant priority.
Titles like that make me think that the number of comments is somehow correlated with your pay.
(sorry, couldn't resist).
Or that perhaps you just like reading lots and lots of comemnts.
Ah,,, so nice to hear from the banking industry on this.
Your statement:
"Foreign aid is funded out of federal taxes. I'm not sure who Ron Paul would consider "poor", but the lower 40% of households in America pay no net federal income tax. They do pay social-insurance taxes, ie Social Security, Medicare and Medicaid, and a share of corporate taxes and federal excise taxes. Social-insurance taxes don't fund foreign aid; they fund social insurance."
Is an outright lie as we silly American people actually do know that, as you say, "social insurance" taxes do not get directed to special social insurance accounts as you suggest, but are pilfered in the general fund. Moreover, those actual taxes now simply go to interest on the debt partially created by, and certainly under written by, the Fed itself(which your founders are owners of at this esteemed publication.)
Your system of fiat Money (began in 1913 and finally achieved in 1971 under Nixon) allows our government to spend without mandate of the people and is the honey pot our politicians go to when they have spent beyond their means for decades. Procuring additional monies which you create out of thin air depleting the money supply and in a very real sense, taking money right out of the pocket of "free Americans" unlawfully in the face of ill-enforced provisions of Constitution of the United States, dividing that money incrementally each time from its value and pocketing the difference and still sending us a bill for the debt.
How did I do???
In the words of your founders and their observers and conspirators in our government, these statements resonate clearly today to free Americans who are rising up;
"Permit me to issue and control the money of the nation and I care not who makes its laws.
--- Mayer Amsched Rothchild
"Since I entered politics, I have chiefly had men's views confided to me privately. Some of the biggest men in the United States, in the Field of commerce and manufacture, are afraid of something. They know that there is a power somewhere so organized, so subtle, so watchful, so interlocked, so complete, so pervasive, that they better not speak above their breath when they speak in condemnation of it."
--- President Woodrow Wilson, 1913
"This Federal Reserve Act establishes the most gigantic trust on earth. When the President (Wilson) signs this bill the invisible government of the Monetary Power will be legalized."
--- Hon. Charles A. Lindbergh, Sr., Dec. 23, 1913
"We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. We are no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a
government by the opinion and duress of a small group of dominate men. I have unwittingly betrayed my country."
--- President Woodrow Wilson, 1916
Let's hear that again:
"I have unwittingly betrayed my country."
End the Fed
Elect Ron Paul 2012
In America money that is collected in taxes, and the Federal Reserve’s printing press, is funded by those who cannot pass the costs down to the consumer. Providers write off losses and pass costs on to those who use, or consume goods or services. Poor folks that need things to live, collectively carry the most weight.
"If you don't want to pay for federal budget operations with your excise taxes, don't smoke."
Open to stripping freedoms and taxing everything now, are we?
You presume wages will increase. Prices ALWAYS increase faster than wages. And yeah, I've seen about a 20% drop in my frozen wage's purchasing power over the last 3 years.
Foreign aid is a distortion of wealth that enables countries to act differently, had they not received benefits, similarly, the market behaves differently when government manipulates supply side economics. Foreign aid exacerbates tyranny in the middle east and furnishes dictator's palaces in Africa, and even if it does do some good, it is immoral to make countries dependent on aid.
Also keep in mind that inflation is a tax.