One strategy for reducing the need for public funding is to ‘target’ some benefits, so that only the poor receive them. Whilst this may appear to be politically attractive, in reducing overall tax levels, targeting is inefficient in economic terms and it may have unintended consequences:
- Bureaucracy, so-called ‘means-testing’, is required to check whether people do or do not qualify for free services. The cost of this bureaucracy is a drag on the economy, in reducing the wealth available for everyone (except the bureaucrats) to spend on things that they would like to have.
- People may be discouraged from working, or from getting a better job, if their extra income would be offset by a loss of benefits.
Targeting is disadvantageous for people on low to medium incomes. This can be illustrated by a hypothetical example of individuals’ payments for dentistry in a wealthy country, which might produce the following figures:
|Pre-tax income||Paying own dentistry cost||Dentistry cost if totally tax-funded||Dentistry cost if tax is targeted|
|Price||% of income||Tax Charge||% of income||Price + Tax||% of income|
This chart assumes that everyone would incur similar costs if they paid for their own dentistry, but it shows that the costs would fall most heavily upon wealthy people if dentistry were totally funded by a progressive income tax like that described above (188.8.131.52).
If the benefit of free dentistry were only made available to those earning less than €15,000, to halve the cost to the public purse, the tax paid by the wealthiest people to contribute to dentistry is reduced – but middle-income people would pay more. Those whose earnings are just over the threshold for free dentistry would pay the highest percentage. Many people would see this as unfair.
The justification usually offered, for targeting tax, is that the government believes that it cannot realistically charge more tax in total – as described in the next sub-section – yet it would still be offering a benefit to the very poorest in society. The benefits to the rich, and the penalties to those on middle incomes, do not get mentioned.
© PatternsofPower.org, 2014
 This example was chosen to illustrate what people might pay for dentistry under different models of public funding. Tax payments are not allocated to a specific purpose, but it would be possible to calculate the cost of a dentistry benefit as a proportion of the total revenue from income tax, and therefore to calculate how much of an individual’s income tax could be considered as payment towards that benefit.
The table is based upon the following (hypothetical) figures:
People earning less than € 15,000 would qualify for free dentistry if the tax were targeted.
Dentistry would cost 1% of tax revenue for a universal benefit, but 0.5% for a targeted benefit.
Income tax is 20% for income over € 10,000, and 40% for income over € 40,000.
€ 300 is the price charged by the dentist.