Means-Testing

by Ed Sawicki - March 6, 2021

What do you think when politicians (usually Republicans) say we need “means-testing” for social programs? The implication is that the wealthy are getting a free ride off of your tax dollars.

If you're like most people, it resonates with you. We have a huge social inequality problem in the United States. You don't want the wealthy getting more advantage than they already have.

What you may not realize is that means-testing requires building and managing complex systems to deal with it. The cost of such systems, over the long haul, is almost always higher than the amount of money saved. The segment of society most in need will be burdened with more complexity – more hoops to jump through – more delays.

Republicans are for smaller government, yet they often want means testing, creating larger and more complex bureaucracies. Democrats generally don't support means testing, but in the 2016 campaign season, Hillary Clinton advocated means-testing for Social Security. Senator Bernie Sanders proposed eliminating the cap on payroll deductions (thus simplifying payroll deductions) that would force high-wage earners to pay more.

Note: If you're a believer in Modern Monetary Theory (MMT), you'll have a problem with the top portion of the following diagrams, where tax dollars fund government spending. However, you should not have a problem with the bottom portions of the diagrams that show the spending side.

The hard way

With means-testing for social programs, the means test criteria must be decided on for each social program. Then a system needs to be designed to implement it. These are costly. If they need to interact with other government (federal, 50 states, and several territories) computer systems, the cost can be huge. All because you want to be sure a rich family isn't gaming the system.

News flash! The systems are already being gamed. One reason is that complex systems are easier to game, less secure, and more expensive than simpler ones. Reduce a system's complexity and it's less likely that any abuse is undetected for long. Monitoring and enforcement are more robust.

Is there a better way?

Yes, there is. Let's use the existing system that already does means-testing. It's existed since August 15, 1861. It's the federal income tax, where the tax rate varies according to income (means). The organization and infrastructure already exists. Nothing new needs to be created.

We already do means-testing when taxes are collected. Why do it again when we spend money on social programs? Forget the means-testing for social programs and make the system more efficient and less expensive.

Why be afraid that the wealthy may game the system when they're paying for social programs through their taxes as well as you?

If the wealthy don't pay sufficient taxes to cover the cost of the benefits they receive, raise the upper marginal tax rates.