What an excellent and concise statement of these issues. The welfare state is founded on magical thinking. Denying economic laws doesn't make them go away, it makes economic success go away.
Government welfare destroys the sense of community that transforms individuals into a society.
Or to put it another way, the more government takes over the role of the community, the less people feel they have anything in common with everyone else; in fact, they begin to see everyone as competitors for government largesse.
The welfare state is effectively forced consumption. Rather than spending your money as you like, the government takes it and makes all of your spending decisions/priorities for you. At a certain point (57 pct of GDP!) you aren’t getting freebies from other people’s money- you are paying for your benefits yourself with the government deciding how your own money will be spent.
The strange thing is that Europeans know the welfare state rests on regressive taxation - VAT, energy and sin taxes, high average income tax rates and high marginal tax rates on what would be middle class incomes in the US- it is not funded by billionaires or “the rich” anywhere in the world- and yet they are still happy to let the government determine how their wages are spent.
Imagine if American pols told the truth about how a welfare state had to be funded- say a 22 pct VAT, $8 gas and 40 percent taxed on $70k of income with no deductions?
I once looked into French payroll taxes. The US FICA payroll tax is technically paid half by employer, half by employee, but it still totals 15.3%, although it does have the benefit of being visible as a deduction on paychecks. The French payroll tax was 45% and paid entirely by the employer and invisible to employees (although I suppose pay stubs could show it). Their VAT was 20%, but because VAT is included in shelf prices, it also is invisible to buyers. Income taxes were 30-40%. It’s no wonder they don’t realize how much tax they pay.
I have a soft spot for the original conception of the welfare state -- free markets + Bismarck. Compulsory insurance. We don't let people starve in the streets, so the compulsion is necessary to counter moral hazard. But this has been surpassed by a train load granting more. That's what the word "socialism" means today, a vehicle for eliciting more.
That's still going on in Sweden, but the high taxes are redistributing to the young, from workers, and to the old. Such intra-generational redistribution is perfectly capable of being accomplished within families.
I recently came across a YouTube video of Gary Becker speaking of the ACA. He thought he could support catastrophic insurance that was compulsory. I presume, and am not against, subsidizing it for the poor.
The problem is- who is going to vote for that? If implemented it won’t lead to tax cuts- as the current level of taxation (or likely more) will be needed to balance budgets even after large cuts (at least given current deficits of 6 pct of GDP).
The dependencies won’t like it (neither seniors or the poor) and the productive aren’t likely to get any sweeteners.
I suppose the argument is “or else”- ie if we don’t reform then taxes will have to skyrocket.
Seems more likely we will try higher taxes and debt monetization before we resort to sensible reform - because neither pols nor voters are sensible.
I always thought it would be nice for every party represented in Congress to have submit a hypothetical plan to balance the budget in five years and then keep it balanced for a successive ten. This would at least open people’s eyes to the scale of the problem and the scale of tax hikes and spending cuts that would be necessary to restore fiscal sanity. It might at least change the debate, as parties that try to sell either tax cuts or new handouts or even the idea that “billionaires” can be fleeced to solve our fiscal problems would be laughed out of town.
What an excellent and concise statement of these issues. The welfare state is founded on magical thinking. Denying economic laws doesn't make them go away, it makes economic success go away.
Well, common sense from an economist! Thought I'd never see the day! Well done, John!
BTW, it should be "when you run out of other people’s money", not "when your run out of other people’s money"
Government welfare destroys the sense of community that transforms individuals into a society.
Or to put it another way, the more government takes over the role of the community, the less people feel they have anything in common with everyone else; in fact, they begin to see everyone as competitors for government largesse.
The welfare state is effectively forced consumption. Rather than spending your money as you like, the government takes it and makes all of your spending decisions/priorities for you. At a certain point (57 pct of GDP!) you aren’t getting freebies from other people’s money- you are paying for your benefits yourself with the government deciding how your own money will be spent.
The strange thing is that Europeans know the welfare state rests on regressive taxation - VAT, energy and sin taxes, high average income tax rates and high marginal tax rates on what would be middle class incomes in the US- it is not funded by billionaires or “the rich” anywhere in the world- and yet they are still happy to let the government determine how their wages are spent.
Imagine if American pols told the truth about how a welfare state had to be funded- say a 22 pct VAT, $8 gas and 40 percent taxed on $70k of income with no deductions?
I once looked into French payroll taxes. The US FICA payroll tax is technically paid half by employer, half by employee, but it still totals 15.3%, although it does have the benefit of being visible as a deduction on paychecks. The French payroll tax was 45% and paid entirely by the employer and invisible to employees (although I suppose pay stubs could show it). Their VAT was 20%, but because VAT is included in shelf prices, it also is invisible to buyers. Income taxes were 30-40%. It’s no wonder they don’t realize how much tax they pay.
41 percent marginal tax rate over €83k, and then 45 over around €180 plus some surcharges at €250k and €500k
Thanks. I ought to update my notes.
I have a soft spot for the original conception of the welfare state -- free markets + Bismarck. Compulsory insurance. We don't let people starve in the streets, so the compulsion is necessary to counter moral hazard. But this has been surpassed by a train load granting more. That's what the word "socialism" means today, a vehicle for eliciting more.
That's still going on in Sweden, but the high taxes are redistributing to the young, from workers, and to the old. Such intra-generational redistribution is perfectly capable of being accomplished within families.
I recently came across a YouTube video of Gary Becker speaking of the ACA. He thought he could support catastrophic insurance that was compulsory. I presume, and am not against, subsidizing it for the poor.
Europe needs progressive taxation of consumption even more than the US does. That plus Danish business and immigration regulation.
The problem is- who is going to vote for that? If implemented it won’t lead to tax cuts- as the current level of taxation (or likely more) will be needed to balance budgets even after large cuts (at least given current deficits of 6 pct of GDP).
The dependencies won’t like it (neither seniors or the poor) and the productive aren’t likely to get any sweeteners.
I suppose the argument is “or else”- ie if we don’t reform then taxes will have to skyrocket.
Seems more likely we will try higher taxes and debt monetization before we resort to sensible reform - because neither pols nor voters are sensible.
I always thought it would be nice for every party represented in Congress to have submit a hypothetical plan to balance the budget in five years and then keep it balanced for a successive ten. This would at least open people’s eyes to the scale of the problem and the scale of tax hikes and spending cuts that would be necessary to restore fiscal sanity. It might at least change the debate, as parties that try to sell either tax cuts or new handouts or even the idea that “billionaires” can be fleeced to solve our fiscal problems would be laughed out of town.
John,
You’re not winning friends who hold the welfare state as sacrosanct.
I love it!