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Why They Call it “Transfer Payments”

Professor Anthony Krautmann

A recent article by John Merline in USA Today highlights a particularly odd activity of government: it is primarily a check-writer. While efficiency dictates that the role of government is to correct market failures (i.e., public goods), equity dictates that government strives to enhance an equitable distribution of income.

Total government revenues in the U.S. were $5.3 trillion in 2016; the latest “guesstimate” is $6.6 trillion for 2019. What does government do with all that money? Does it use it to build roads, for the military, and for education? Well yes – but the vast majority of the money collected by government is returned to individuals in the form of Social Security, Medicare, Medicaid, and other transfer programs. For example, this year the federal government will collect $3.4 trillion in revenue (mostly income taxes from individuals and corporations). Of this $3.4 trillion collected, $2.9 trillion (85 percent) is returned as direct payments to individuals. The federal government then borrows another $1 trillion to help pay for everything else military, roads, parks, law enforcement, education, etc. That is, government is essentially a vast wealth transfer engine who “robs Peter to pay … Peter!”