Paternalism and Government Intervention - Public Finance in Reverse

with Tomas J. Philipson


The fact that so much public- and private redistributive activity involves in-kind transfers rather than cash may be indicative of paternalistic motives on the part of the payers rather than a preference for the well-being of the recipients. This paper attempts to analyze the common implications of various forms of paternalism, such as those induced by information deficiencies or merit motives , and show how they differ from standard implications of classic public finance. A common view in public finance is that there is an efficiency-redistribution tradeoff in which distortions are tolerated in order to redistribute income. We argue that many forms of paternalistic motives induce the reverse tradeoff to the one stressed in classic public finance. When paternalistic motives are present, efficiency-enhancing public policy 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 paternalistic tradeoff rather than the one stressed in classic public finance. We argue that explicitly accounting for paternalism when calculating tax incidence reduces the estimated progressivity of government policy because transfers are not zero-sum under paternalism. 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.

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© copyright 1999-2000 by Casey B. Mulligan and Tomas Philipson.