FINANCES – WHAT ARE TRANSFER PAYMENTS?
Broadly speaking, transfer payments are taxes paid by one sector of a population that are transferred as income to another sector. Today, the term is synonymous with welfare—income taxes paid by the working population are transferred to the poor, the aged, and the disabled, usually to ensure a decent standard of living to all citizens. Unlike taxes paid to provide security, infrastructure, or services, no overall economic value is created by transfers.
Some of the money transferred will enter the economy as the recipients consume goods and services; but this will be offset, or more than offset, by monies not spent by taxpayers and by the transaction costs of the transfer.
A few centuries ago the most common form of transfer payment took the form of taxes transferred to royalty and aristocracy for their personal benefit and prestige! It resulted in magnificent palaces, jewel collections, and objects of art. Some of it was returned to the economy in the form of payments to craftsmen—masons, jewelers, sculptors, and painters—and thus provided employment; but most of it was amassed in unproductive assets that were static or that even incurred high maintenance costs. Efficient rulers could argue that their administrative and military skills amply justified these rewards, but in fact conspicuous waste was highly visible—and highly resented. In the West, these practices were largely swept away in a series of revolutions and replaced by governmental models that encouraged value-creating investments in industry and infrastructure.