What is the “leaky bucket experiment”? In the words of Okun: "The money must be carried from the rich to the poor in a leaky bucket. Some of it will simply disappear in transit, so the poor will not receive all the money that is taken from the rich."
Basically, the leaky bucket experiment was a concept developed by Okun that explains how money in our economy flows from the rich to the poor in an inefficient matter. He uses the term “leaky bucket” because we can imagine a situation where the rich carry money to the poor using a cracked bucket in which some money falls out on the way. However, we may wonder just how big these cracks are, that is to say, just how much money is leaked in transit, and where does it go? In figuring this out, we are able to estimate just how inefficient our system is.
The method in ...view middle of the document...
In this case, money leaks from the taxes to all of the costs associated with managing and attempting to create a “fair” welfare program.
So as we can see, much of the taxpayer’s dollar is lost directly in what I would consider the “vertical” transfer, that is, from one level of the chain to the next. Now, what about the “horizontal” aspects of the transfer? Within each level of the chain comes a sort of “side effect” caused by the people involved in that level. For example, starting at the top, the rich people pay MUCH higher taxes on certain portions of their income as their income increases. Some of these taxes reach up to a 90% rate once they hit a certain margin. On the other end of the spectrum, sometimes it pays for the poor to make less money because as they make more, they may end up working and making an income equal to or less than what they were getting from welfare, so why work? As we can see, this system creates much inefficiency because on both ends, particularly at the very top and the very bottom, people are often better off working less. [This adds to the support of Okun’s point that our system has failed in its efforts to achieve a more “fair” or efficient economic system]
Okun wrote his thoughts on the subject in 1975, more than 30 years ago, when he made his claims that the inefficiency, or the “leaks in the bucket” weren’t very large. Unfortunately, from one year to the next the situation may change greatly, which makes it nearly impossible to determine exactly how much of the tax money actually reaches the poor, and in any case, I am certain that the cracks are much larger now than they were in Okun’s time. It is possible that less than fifty cents to the dollar is transferred from the rich to the poor in the end. I do feel that Okun has succeeded in properly illustrating to us the inefficiencies in our self defeating system.