Democracy in America

American politics

Foreign aid

Why Ron Paul is wrong

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)

Readers' comments

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The Magic Iguana

I was contemplating a subscription to The Economist however after reading the skewed articles written on Ron Paul I've decided against it.

Fox,CNN and now The Economist, what a shame!

7Redacted

The bottom 40% pay the inflation tax (just like all Americans who aren't fabulously wealthy) and you even admit this money goes to rich people in poor countries. So I don't really see how you can call Ron Paul "Wrong". Whether or not you agree to the relative merits of foreign aid is a completely different issue itself.

BeeEss

I find it interesting that Yahoo news audiences, although less sophisticated in readership and commentary, still see the demonization and marginalization of Dr. Paul for what it is. Why is that I wonder? Also, if we redirected all these drops in the bucket characterizations of our tax dollars as if it's like water, to something useful other than imperialistic manipulation that doesn't work, well, I must be crazy to suggest such a thing.

Brad772

Hi. I think what Ron Paul is saying in the second part is that the money would be well spent on poor people in rich countries. By giving foreign aid the rich country is depriving its poor citizens of whatever they would benefit from having that money in the fiscus. Hence taking from poor people!

nrickert22

Completely out of context. Dr. Paul's position is that the spending and the deficit is what robs the poor and middle class in this country. Therefore, you can then connect the dots and say that, in Dr. Paul's own words, "Foreign aid is taking money from poor people in rich countries and giving it to rich people in poor countries?" This wasn't a revenue collecting tax issue, it was a revenue stealing inflationary tax issue. What a terribly misguiding article!

Francis S Dixon

i understand how his foreign aid policies and his claims sound exaggerated, but i think he's looking at the national economy from a much larger and more long term perspective than most people think. in my opinion, right now we're on the decline in hegemonic stability. i think his concern is more with our economic growth rate relative to the growth rate of other economies. even if we hit the trough of our business cycle and begin expanding again, whats important in hegemonic stability isn't whether your economy is growing, its how it grows relative to other economies. when your the hegemony, you begin trying to help/control/influence more than your supposed to. its human nature. whether its the cost of wars or foreign aid, hegemonies bare the expense, while other nations invest in their economies and begin growing at a faster rate. we begin inevitably spending more than we invest, increasing our potential of internal decay. the key to keeping hegemonic hierarchy is to be able to see when your degree of hegemony is on the decline, and temporarily get out until the condition reverses itself.

B. Cox

For the Economist, this is disappointing. Every dollar that our government gives away increases our debt and increases the federal government's need to (print) money. Ergo, we have an inflationary event taking place. This begs the question, 'what does that matter?' Let's say inflation affects the nation's poor most poignantly. And let's imagine that they feel it the most. Because we can say that probably, as prices of items increase and the wages of the poor lag far behind, they are most likely affected. We can buy this idea, right? Now let's say, hypothetically, that these '40%' pay zero tax. They don't even pay a dime in tax. Nothing, nada, nil. And because they don't directly pay into the system, we don't see that they are contributing to foreign aid. Because in our hypothetical, no money leaves their wallets and ends up in Pakistan, because none of their money goes to taxes. Well, then what's the problem? They aren't paying tax, so they should be fine! Right?! After all, they aren't paying taxes! Ok... I think I get it now. As the government spends, prints, and inflates, we all must pay for it. If the value of my money decreases because of inflation, I'm going to need more dollars to do the same things I normally do. Now let's say the bread that Joe Poorguy was buying was a buck in the year 2000. Well now it's 2012 and that same loaf costs him nearly two bucks. His wages have barely increased, so now Joe has to spend more of his paycheck on loaves of bread. Joe is absolutely paying for money to go to Pakistan. He's just doing it by spending more on bread. (And oh yea... he is paying tax too. So... well, that sucks)

Tony M. Fernández

Taxation is not the only way that the poor in this country get robbed. Have we forgotten about monetary inflation? Apparently. That hurts the poor most of all as they are most sensitive to rising prices and their investments typically don't earn much interest to beat inflation. Furthermore, the money that is used for foreign aid instead could have been used for capital investment at home. That's what furnishes jobs.

For a publication that claims it knows the field, it sure forgot how to do a thorough economic analysis on this hit-piece.

hohan

Is journalism dead today? The two hyperlinks that provide the basis for the numbers espoused in this article aren't even from the US government but from other articles. Wiki does a better job citing references. Assume the numbers are right for a second, 1.5% of nearly 4 trillion in spending according to the US OMB is still 40 billion dollars. So, is Ron Paul wrong that were the US to spend even half of this sum on the poopr people within our own borders they wouldnt be better off?

stevemcgee99

"Foreign aid is funded out of federal taxes." - For an economist, this is a BS statement. Facts and reason are pretty important in economics, right?

What percentage of the federal budget is funded by taxes? Where does the rest of the money come from?

" ..are dedicated to specific trusts and don't pay for foreign aid" - Again, doesn't this author listen to Obama, Newt and Romney, the GAO and CBO? Please explain where the money in these trusts is, if it is not, as the federal government admits constantly (in the congressional record, for one source) that all funds collected each year are spent. The trusts are 'accounts payable', not funds.

The author's statements are false, as they ignore significant facts. Pretty disappointing, since this is a reputable magazine about *economics*. Sure they may ignore, or be ignorant of, facts like where the bulk of foreign aid goes, but this article is confused about the US budget.

To the editors - if the Economist is interested in political arguments, why not focus efforts on convincing people of the merit of foreign aid, and the moral argument for all US citizens to share the wealth?

brott521

I just wanted to say I feel as though this article is over-speculating what Ron Paul is trying to say. Yes, those funds for foreign aid aren't being directly withdrawn from the lower 40% of American citizens but it is being given away at the expense of that percentage. They could be benefiting from keeping that money in this country; however, that is not the case. If people feel that nit-picking Ron Paul's every word is justification for thinking he's crazy, you're obviously wrong. He is for the people and that is pretty obvious. Stop trying to "read between the lines", Ron Paul tells it like it is and sorry I guess you have never lived in that lower 40% to know that your current government is destroying the Constitution. Vote Ron Paul if you believe in actual freedom!!

guest-iiowslo

The Economist doesn't understand inflation? BWAHAHAHAHAHAHAHAH!!!!! WOW!! M.S. who ever you are, I put right up there with Stephen Glass from The New Republic. BWAHAHAHAHA

L1berty4All

The central problem is not how foreign aid is funded by the federal government, but rather the way in which the federal government handles it's budget. Foreign aid, taken by itself, represents a small portion of federal expenditures, but because the totality of yearly federal expenditures exceeds federal revenue the US government must take loans or print money. Both of those options decrease the value of the US dollar. The result is lower purchasing power, a decrease in the real value of saved funds and diminished investment opportunities. This type of inflation likely impacts those with the lowest incomes first and most harshly. So, when Ron Paul says that foreign aid takes money from poor people in this country, he could mean that foreign aid contributes to the devaluation of the currency.

Sup432

First off, the states collect excise taxes, not the federal reserve. Anyone who's ever taken a US government class or an economics class knows that. The federal reserve collects federal income taxes. And actually, when you think about the 51% who DON'T pay federal income taxes, the congressman has a decent argument. Additionally, the few rich people who actually do pay federal income taxes go through great lengths to get deductibles so that they keep more of their money. So you have more of the middle class contributing to the federal revenue.

Treg4RonPaul

How about this, take a 1,000 person survey of American families of 4 who make $30,000 per year or less and ask them if it is "ok for you to take $9 dollars and give it to rich people in poor countries". Ask them it it is "ok to give $9- (about an hours work), to give to some "well-educated locals, who generally come from well-off backgrounds and command relatively high salaries" who then keep about 75% of that $9 dollars. See what the American poor and middle class say about that - "economist". The "economist" continues to be a fool, not really for free enterprise and not really against it, just comfortably in the Status Quo.

KasHerPL

All taxex ale moved forvard to connsument. So if you rise some taxes the prices will go up. So it is tru that poor people pay taxex to foregin help. Just please remember that price rise is means more to poor guy than to rich guy. So who wyolud be the one affected with foregin help? Ron Paul is right. Just it is a little shame on The ECONOMIST to write something so flat thinking as that.

guest-iiwjjjs

Dear Economist
You just don't really understand. Every dollar sent over to a foreign country is a dollar not spent on our aging infrastructure, clean water, parks, and assistance to the less foretunate in this country.

So yes sending dollars to foreign countries takes money from the poor by increasing basic living costs, deteriorating our infrastructure, and having less money to assist the less fortunate.

And if the people really want to help the poor, they would not insist on high dollar wages. Sorry but it just does not take an Einstien to hand out food.

alaskaone

M.s. is deliberately dodging the point. There is no authorisation in the constitution for charity domestically or abroad.

stevemcgee99 in reply to alaskaone

Exactly. How about this? If you want to send money, send yours. If you don't, don't.

This is one of the main current arguments yet it is not stated explicitly. Americans DO NOT all agree on things. We have different values - different ideas about 'right' and 'wrong'. You'd figure a moral relativist would understand that.

The argument against much of the government spending is that many people who are paying for it are against it. It's a better policy to enable and facilitate charity than it is to force charity. This is true especially today when transaction costs are so low.

In other words, obeying the law in the constitution would resolve many of the conflicts in the US, since it was written to bring together 13 + different groups together.

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