The fiscal illusion: is this why Owen Jones defends benefits for wealthy pensioners?

There are a number of theories about why government spending in developed countries has such a persistent upward tendency, only coming to a halt once the public has been so thoroughly milked that for most types of taxes, the peak of the Laffer curve comes within sight. But the most plausible ‘Occam’s razor’ style explanation is the fiscal illusion effect: the benefits of Big Government are tangible and concentrated; the costs are obscure and dispersed.

On the one hand, most of us have no idea how much government largesse actually costs us. We know how much income tax, employee national insurance and council tax we pay, but those account for not even half of total tax revenue. All other taxes and quasi-taxes are more or less opaque. Could you give a realistic estimate of how much you pay in VAT, fuel duty, the various alcohol duties, air passenger duty and climate change levy, etc.? Could you guess what proportion of so-called ‘employer’ national insurance rates has actually been subtracted from your salary, or what proportion of so-called business rates and corporation tax is actually added to the consumer prices you pay? Do you know what part of your electricity and heating bills are explained by renewable energy obligations, a tax in everything but name? No, because these are paid in dribs and drabs, spread out, scattered, and often obfuscated. 

Yet at the same time, if you receive income transfers from the government, you will presumably have a fairly good idea of the sums involved. Transfers such as Child Benefit or Winter Fuel Payment are discrete, regular and tangible, and the same applies to near-cash equivalents like free TV licenses or free bus passes. Libertarians sometimes argue that the state grows by robbing Peter to pay Paul, thus securing Paul’s vote. But nowadays, a substantial proportion of government activity consists of robbing Peter to pay Peter. More precisely, of picking Peter’s back pocket many, many times, taking only a small sum each time, and then eventually handing him back a large sum at once and upfront. These mechanisms were identified over a hundred years ago by the proto-Public Choice economist Amilcare Puviani, and systematised in the 1960s by James M. Buchanan. Universal pensioner benefits in the UK, which have recently come under fire because they extend to households who are not ‘needy’ by any stretch of the imagination, fit that description quite neatly.

Friends of Big Government rely on fiscal illusions, because governments could not grow as fat without them. This is why there is nothing surprising or inconsistent if a commentator such as Owen Jones now defends benefits for wealthy pensioners. If you want fiscal exploitation to work in the long run, you have to keep the milk cows happy, which means throwing them some goodies once in a while, exclaiming ‘see, you’re getting something in return for that milk!’ Advocates of government obesity like Jones know this, as the following passage shows:  

‘Stripping the welfare state of its universalism will breed a middle-class that is furious about paying large chunks of tax, getting nothing back and subsidising the supposedly less deserving.’

Ending universal old-age benefits would not just be fiscally sound. It would also be a – very small –step towards greater fiscal transparency. No wonder the Owen Joneses of the country are railing against it.