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Archive for the ‘Dependency’ Category

The United States is going to become another Greece, and it’s largely because of poorly designed entitlement programs. As the old saying goes, demography is destiny.

Let’s look at just one piece of that puzzle. James Capretta of the American Enterprise Institute has a very sobering summary of how Medicaid has metastasized into one of the largest and fastest-growing entitlement programs.

You should read the entire article, but if you’re pressed for time, I’m going to share two grim charts that tell you what you need to know.

First, we have a look at how the burden of Medicaid spending, measured as a share of national output, has increased over time.

What makes this chart particularly depressing is that Medicaid was never supposed to become a massive entitlement program.

It was basically created so the crowd in Washington could buy a few votes. Yet the moment politicians decided that it was the federal government had a role in subsidizing health care for the indigent, it was just a matter of time before the program was expanded to new groups of potential voters.

And every time the program was expanded, that increased the burden of spending and further undermined market forces in the health sector.

This is why entitlement programs are so injurious to a nation.

But Medicaid isn’t just a problem because of its adverse fiscal and economic impact.

The program also is exacerbating the redistribution culture in the United States as more and more people get trapped in the web of dependency.

Which brings us to our second chart from Capretta’s article. Here’s a look at the share of the population being subsidized by Medicaid.

As a fiscal wonk, I realize I should care more about the budget numbers, but I actually find this second graph more depressing. In my lifetime, we’ve gone from a nation where the federal government had no role in the provision of low-income healthcare, and now nearly one out of every five Americans is on the federal teat.

Even though we’re far richer than we were in the mid-1960s when the program was created, which presumably should have meant less supposed need for federal subsidies.

For further background on the issue, here’s a video I narrated for the Center for Freedom and Prosperity.

I urge you to pay close attention to the discussion that starts at 1:48. I explain that programs with both federal and state spending create perverse incentives for even more spending. This is mostly because politicians in either Washington or state capitals can expand eligibility and take full credit for new handouts while only being responsible for a portion of the costs. But it also happens because the federal match gives states big incentives to manipulate the system to get more transfers.

P.S. All of which explains why I think Medicaid reform should be the first priority when looking at how to fix the entitlements mess, even before Medicare reform and Social Security reform.

P.P.S. I’m not overflowing with optimism that Trump will tackle the issue, but there is a feasible scenario for him fixing the program.

P.P.P.S. Regardless, one would hope all politicians would agree that it’s time to tackle rampant Medicaid fraud.

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Which state gets the biggest share of its budget from the federal government?

Nope, not even close. As a matter of fact, those two jurisdictions are among the 10-least dependent states.

And if you’re guessing that the answer is New York, New Jersey, Maryland, Connecticut, or some other “blue state,” that would be wrong as well.

Instead, if you check out this map from the Tax Foundation, the answer is Mississippi, followed by Louisiana, Tennessee, Montana, and Kentucky. All of which are red states!

So does this mean that politicians in red states are hypocrites who like big government so long as someone else is paying?

That’s one way of interpreting the data, and I’m sure it’s partially true. But for a more complete answer, let’s look at the Tax Foundation’s explanation of its methodology. Here’s part of what Morgan Scarboro wrote.

State governments…receive a significant amount of assistance from the federal government in the form of federal grants-in-aid. Aid is given to states for Medicaid, transportation, education, and other means-tested entitlement programs administered by the states. …states…that rely heavily on federal assistance…tend to have modest tax collections and a relatively large low-income population.

In other words, red states may have plenty of bad politicians, but what the data is really saying – at least in part – is that places with a lot of poor people automatically get big handouts from the federal government because of programs such as Medicaid and food stamps.  So if you compared this map with a map of poverty rates, there would be a noticeable overlap.

Moreover, it’s also important to remember that the map is showing the relationship between state revenue and federal transfers. So if a state has a very high tax burden (take a wild guess), then federal aid will represent a smaller share of the total amount of money. By contrast, a very libertarian-oriented state with a very low tax burden might look like a moocher state simply because its tax collections are small relative to formulaic transfers from Uncle Sam.

Indeed, this is a reason why the state with best tax policy, South Dakota, looks like one of the top-10 moocher states in the map.

This is why it would be nice if the Tax Foundation expanded its methodology to see what states receive a disproportionate level of handouts when other factors are equalized. For instance, what happens is you look at federal aid adjusted for population (which USA Today did in 2011). Or maybe even adjusted for the poverty rate as well (an approached used for the Moocher Index).

P.S. For what it’s worth, California has the nation’s most self-reliant people, as measured by voluntary food stamp usage.

P.P.S. And it’s definitely worth noting that the federal government deserves the overwhelming share of the blame for rising levels of dependency in the United States.

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At the start of the year, I argued that capitalism was the way to get more growth in poor nations.

Foreign aid, by contrast, hasn’t worked very well.

…there’s a big difference between good intentions and good results. If you examine the evidence, it turns out that redistribution from rich nations to poor nations is just as counterproductive as redistribution within a society.

But don’t believe me. Professor William Easterly of NYU spent many years at the World Bank working on issues relating to economic development and he’s written entire books on the failure of foreign aid.

And here’s some of what he wrote for Cato back in 2006.

The West’s efforts…have been even less successful at goals such as promoting rapid economic growth, changes in government economic policy to facilitate markets, or promotion of honest and democratic government. The evidence is stark: $568 billion spent on aid to Africa, and yet the typical African country no richer today than 40 years ago. Dozens of “structural adjustment” loans (aid loans conditional on policy reforms) made to Africa, the former Soviet Union, and Latin America, only to see the failure of both policy reform and economic growth. The evidence suggests that aid results in less democratic and honest government, not more. …Economic development happens, not through aid, but through the homegrown efforts of entrepreneurs and social and political reformers. While the West was agonizing over a few tens of billion dollars in aid, the citizens of India and China raised their own incomes by $715 billion by their own efforts in free markets.

One of the best critiques of foreign aid was written by an Indian back in 1972. The late Minoo Masani, who began his political career as a believe in socialism, learned through experience that markets work better than handouts.

…government-to-government aid distorts the international division of labour. It comes in the way of the natural laws of the market which should decide which country should produce what. …Government-to-government loans encourage socialism, communism and Statism, concentration of power, and waste. When a government aids another government, who disburses that aid? The government of that country. Aid thus transfers economic power from the people, the industrialists, the businessmen and the people to the hands of bureaucrats and politicians. The patronage the politician can dispense increases; the politicisation of economic life goes on. So, in a very direct way, every rupee of aid given by America or any other country or the World Bank to any aided country, including India, directly strengthens the forces of Statism, socialism and communism and weakens the forces of people’s free enterprise. It also breeds irresponsibility and waste.

He makes a great point that it is private investment that produces sustainable growth, not government-to-government transfers.

…one of the greatest disadvantages of government-to-government aid is that it discourages the investment of private equity capital in these countries. It does so because when one gets government-to-government aid at cheap rates, the temptation is not to raise equity capital abroad. This is a pity because our countries need foreign equity capital desperately. When foreign capital comes into India from any part of the world, it brings in foreign plant or machinery and engages Indian labour to work on it. It takes its profits out of the country only when it makes a profit. So such investment is in the interests of the Indian people. When a government-to-government loan comes, we have to repay the capital and the interest to the foreign government, however badly the money may have been wasted by our government. This is against the interests of the Indian people. So foreign private equity capital is good for India; government-to-government loans are bad for India. Let us hope we shall be spared them from now on.

Let’s look at some real-world evidence from the modern era.

In her recent Wall Street Journal column, Mary Anastasia O’Grady explains how aid has stifled the private sector in Haiti.

…why are so many Haitians still living in such dire poverty in the 21st century? Paradoxically, the answer may be tied to the way in which humanitarian aid, necessary and welcome in an emergency, easily morphs into permanent charity, which undermines local markets and spawns dependency. …The trouble is their assumption, too often, that poverty is caused by a lack of money or resources. This produces the wrong solution, one that prescribes getting as much free stuff to the target economy as possible. …The country has also been the recipient of billions of dollars in foreign-government bilateral and multilateral aid over the last quarter century. This enormous giving has created harmful distortions in the local economy because when what would otherwise be traded or produced by Haitians is given away, it drives entrepreneurs out of business.

Mary shares a couple of concrete examples.

The country was once self-sufficient in rice thanks to the work of rural peasants. That changed, according to the testimony of one development expert in the film, in the early 1980s. That’s when Haiti opened its rice market and the U.S. began dumping subsidized grain in the country with the goal of ending hunger—and helping Arkansas rice growers with U.S. taxpayer money. Most Haitian farmers could not compete with Uncle Sam’s generosity, and they lost their customers. …Donations of bottled water, clothing, shoes and even solar panels destroy local businesses in the same way. Just ask Jean-Ronel Noel, who co-founded the solar-panel company Enersa in his garage in the mid-2000s and expanded it to more than 60 employees. He is proud of his workforce…comes mainly from Port-au-Prince’s notorious slums. …The company was doing a robust business until the 2010 earthquake. “After the earthquake we were competing mostly against NGOs . . . coming with their solar panels . . . and giving them away for free. So what about local businessmen?” As Alex Georges, Mr. Noel’s partner puts it, “The demand stopped because it’s hard to compete with free.”

And here is the problem from a national and cultural perspective.

Mr. Noel zeroes in on another related problem: “Those NGOs are changing the mentality of the people. Now you have a generation with a dependency mentality.”

In other words, handouts from rich nations are destroying the social capital of Haiti.

Let’s go back to 2009 and see what Dambisa Moyo wrote about foreign aid to her home continent.

Kibera, the largest slum in Africa…is…just a few yards from…the headquarters of the United Nations’ agency for human settlements… Kibera festers in Kenya, a country that has one of the highest ratios of development workers per capita. …Giving alms to Africa remains one of the biggest ideas of our time — millions march for it, governments are judged by it, celebrities proselytize the need for it. Calls for more aid to Africa are growing louder, with advocates pushing for doubling the roughly $50 billion of international assistance that already goes to Africa each year. Yet evidence overwhelmingly demonstrates that aid to Africa has made the poor poorer, and the growth slower. The insidious aid culture has left African countries more debt-laden, more inflation-prone, more vulnerable to the vagaries of the currency markets and more unattractive to higher-quality investment. It’s increased the risk of civil conflict and unrest… Aid is an unmitigated political, economic and humanitarian disaster.

She has some very grim numbers.

…aid can provide band-aid solutions to alleviate immediate suffering, but by its very nature cannot be the platform for long-term sustainable growth. …Over the past 60 years at least $1 trillion of development-related aid has been transferred from rich countries to Africa. Yet real per-capita income today is lower than it was in the 1970s, and more than 50% of the population — over 350 million people — live on less than a dollar a day, a figure that has nearly doubled in two decades. …The most obvious criticism of aid is its links to rampant corruption. Aid flows destined to help the average African end up supporting bloated bureaucracies in the form of the poor-country governments and donor-funded non-governmental organizations. …A constant stream of “free” money is a perfect way to keep an inefficient or simply bad government in power.

If foreign aid money was “merely” wasted, that would be a bad outcome.

But that’s the optimistic version of the story.

In reality, the evidence suggests that these handouts actually subsidize bad policy in the developing world.

None of this would surprise the late Peter Bauer.

Lord Bauer was famous for observing that “government-to-government transfers . . . are an excellent method for transferring money from poor people in rich countries to rich people in poor countries.”

That’s good, if you happen to be a third world kleptocrat and you have a nice bank account filled with stolen funds in New York.

But if you’re a poor person in a poor country, you’re the one victimized by a bigger government that’s riddled with more corruption.

Amazingly, many western politicians accept corruption as the price of giving away money.

But this brings me back to where we started. If foreign aid achieved good results, then there would be a utilitarian case for accepting a degree of waste and corruption.

But since the evidence shows that these programs lead to slower growth and less prosperity, it’s a lose-lose-lose situation.

Here’s a video trailer for a great documentary on how foreign aid is helpful, but only for the people in charge of the programs.

Let’s close with something that probably should be called Bauer’s Paradox since I’m almost sure he said something making this point.

But until I find proof (maybe it was Easterly or some other scholar), we won’t attribute this sentiment to anyone in particular. We’ll simply go with a rather anodyne title.

But even if the title is boring, this Paradox makes a critical point. The poor nations that have become rich nations in recent decades did not rely on handouts and redistribution.

Instead, they generated growth by limiting the size and scope of government while allowing markets to function.

The nations that got the most aid, however, have stayed relatively poor.

P.S. The foreign aid bureaucrats and contractors have been the only real beneficiaries, much as the “poverty pimps” are the only real beneficiaries of the failed War on Poverty.

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Over the years, I’ve shared some clever images, jokes, and cartoons to expose the flawed mindset of those who hope to achieve coerced equality of outcomes with redistribution and high tax rates.

The size of a pizza vs the share of a slice.

The modern version of the Little Red Hen.

Washington’s Byzantine welfare state.

Chuck Asay’s overburdened tractor.

A left-wing nursery rhyme.

The Wizard-of-Id parody.

Two pictures showing how the welfare state begins and ends.

A socialist classroom experiment (including a video version).

The economics of redistribution in one image.

As you can see, this is a common-sense issue. When you give people money on the condition that they don’t earn much money, you create a perverse incentive for them to be unproductive.

Especially since, when people work more and earn more, they get hit by a combination of fewer handouts and more taxes. The net result is very high implicit marginal tax rates, in some cases rising above 100 percent.

Needless to say, it’s very foolish to have a welfare state that puts people in this untenable situation where the welfare state becomes a form of economic quicksand.

And it’s also foolish to punish the people who are pulling the wagon with high tax rates and pervasive double taxation of income that is saved and invested.

Russell Jaffe, one of our Cato interns, helpfully cranked out a clever little image showing how redistribution is bad for both those who receive and those who pay.

No wonder the welfare state and War on Poverty have been bad news for both taxpayers and poor people.

And the problem is getting worse, not better.

Let’s begin to wrap up. I shared a Thomas Sowell quote at the beginning to today’s column.

Now let’s read some of his analysis.

He aptly and succinctly summarized why redistribution is a no-win proposition (h/t: Mark Perry).

The history of the 20th century is full of examples of countries that set out to redistribute wealth and ended up redistributing poverty. …It is not complicated. You can only confiscate the wealth that exists at a given moment. You cannot confiscate future wealth — and that future wealth is less likely to be produced when people see that it is going to be confiscated. …Those who are targeted for confiscation can see the handwriting on the wall, and act accordingly. …We have all heard the old saying that giving a man a fish feeds him only for a day, while teaching him to fish feeds him for a lifetime. Redistributionists give him a fish and leave him dependent on the government for more fish in the future.

So what’s the bottom line?

The simple (and correct) answer is to dismantle the welfare state. State and local governments should be in charge of “means-tested” programs, ideally with much less overall redistribution (a goal even some Scandinavian nations are trying to achieve).

In effect, the goal should be to replicate the success of the Clinton-era welfare reform, but extending the principle to all redistribution programs (Medicaid, food stamps, EITC, etc).

P.S. Some honest leftists admit that the welfare state cripples independence and self reliance.

P.P.S. For those who like comparisons, you can peruse which states provide the biggest handouts and also which nations have the most dependency.

P.P.P.S. To end on a sour note, our tax dollars are being used by the Paris-based OECD to produce junk research that argues more tax-financed redistribution somehow is good for growth.

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I’m like a broken record when it comes to entitlement spending. I’ve explained, ad nauseam, that programs such as Medicare, Medicaid, Obamacare, and Social Security must be reformed.

In part, genuine entitlement reform is a good idea because you get better economic performance when you replace tax-and-transfer schemes with private savings and competitive markets.

Demographic 2030But reform also is desperately needed because of changing demographics. Simply stated, leaving all the entitlement programs on autopilot is a recipe for a Greek-style fiscal crisis.

If you want a rigorous explanation of the issue, my colleague Jeff Miron has a must-read monograph on the topic. You should peruse the entire study, but here’s the key conclusion if you’re pressed for time.

…this paper projects fiscal imbalance as of every year between 1965 and 2014, using data-supported assumptions about gross domestic product (GDP) growth, revenue, and trends in mandatory spending on Social Security, Medicare, Medicaid, and other programs. The projections reveal that the United States has faced a growing fiscal imbalance since the early 1970s, largely as a consequence of continuous growth in mandatory spending. As of 2014, the fiscal imbalance stands at $117.9 trillion, with few signs of future improvement even if GDP growth accelerates or tax revenues increase relative to historic norms. Thus the only viable way to restore fiscal balance is to scale back mandatory spending policies, particularly on large health care programs such as Medicare, Medicaid, and the Affordable Care Act (ACA).

Jeff’s report is filled with sobering charts. I’ve picked out three that deserve special attention.

First, here’s a look back in history at the growing fiscal burden of entitlement programs.

Second, here’s a look forward at how the fiscal burden of entitlement programs will get even worse in coming decades.

Keep in mind, by the way, that the two above charts only show the fiscal burden of entitlement programs (sometimes referred to as “mandatory spending” since the laws “mandate” that money be given to anyone who is “entitled” based on various criteria).

When you add discretionary (annually appropriated) spending to the mix, as well as interest that is paid on the national debt, the numbers get even more grim.

Jeff adds everything together and shows, for each year between 1965 and 2014, the “present value” of the gap between what the government is promising to spend and how much revenue it is projected to collect.

These numbers are especially horrific because “present value” is a measure of how much money the government would have to somehow obtain and set aside in order to have a nest egg capable of offsetting future deficits.

Needless to say, the federal government did not have access to $118 trillion (yes, trillion with a “t”) in 2014. And if there were updated numbers for 2015 and 2016 (which would probably be even higher than $118 trillion), the federal government still wouldn’t have access to that amount of money either.

Especially since the total annual output of the American economy is about $18 trillion.

So now you can understand why international bureaucracies like the IMF, BIS, and OECD estimate that the fiscal challenge in the United States may be even bigger than the problems in decrepit welfare states such as France and Italy.

Let’s get another perspective on the issue. James Capretta of the Ethics and Public Policy Center warns about the scope of the problem.

Despite what presidential candidates Donald Trump and Hillary Clinton have been saying on the campaign trail, the need to reform the nation’s major entitlement programs cannot be wished away. The primary cause of the nation’s fiscal problems, now and in the future, is the rapid rise in entitlement spending. In 1970, spending on Social Security and the major health care entitlement programs was 3.6 percent of GDP. In 2015, spending on these programs was 10.3 percent of GDP. By 2040, CBO expects spending on these programs to reach 14.2 percent of GDP. …entitlement reform is needed to put the federal government’s finances on a more stable foundation.

He outlines his preferred reforms, some of which I heartily embrace and some of what I think are too timid, but the key point is that he succinctly explains the need to act soon to avoid a giant long-term problem.

…reforms are not intended to create budgetary balance in the short-run. Large-scale change cannot be implemented in the major programs without significant transition periods, which means the reforms need to be enacted soon to reduce costs in fifteen, twenty, and twenty-five years. Skeptics may say it’s pointless to worry about fiscal problems that are more than twenty years off. They’re wrong. …The result is a misallocation of resources that undermines long-term economic growth. …Entitlement reform is an absolute necessity, as will soon become evident to everyone, one way or another.

The recent testimony by Nicholas Eberstadt of the American Enterprise Institute also is must reading.

In just two generations, the government…has effectively become an entitlements machine. …transfers have become a major component in the family budget of the average American household-and our dependence on these government transfers continues to rise. …Fifty years into our great social experiment of massive expansion of entitlement programs, there is ample evidence to indicate that the unintended consequences of this reconfigutation of American political and economic life have been major and adverse.

You should read the entire testimony, which is a comprehensive explanation of how entitlements are eroding American exceptionalism.

And I’ve previously shared some of Eberstadt’s work on the growing dependency crisis in America.

In effect, our “social capital” of self reliance and the work ethic is being replaced by an entitlement mentality.

At the risk of understatement, that won’t end well. Heck, I don’t know which part is more depressing, the ever-growing burden of spending or the fact that more and more Americans think it’s okay to live off the labor of others.

All I can say for sure is that this combination never was, is not now, and never will be a recipe for national success.

Let’s conclude with some sage observations by George Melloan of the Wall Street Journal. He summarizes the problem as being a combination of too much spending and too little political courage. Here’s the too-much-spending part.

…we seem richer than we actually are because we have borrowed so heavily from future generations. …the nation’s slow growth and rising debt are already reducing the opportunities for upward mobility. …Recent projections of the future cost of current government obligations certainly won’t relieve…people’s worries. Those promises have expanded far beyond any reasonable projection of the government’s ability to extract enough revenue to cover them. …The Congressional Budget Office projects a steady rise in “mandatory” (i.e., entitlement) costs as a share of GDP out into the distant future. …The upshot: Americans are deep in debt, mainly thanks to government excesses.

And here’s the too-little-political-courage part.

The only real answer is that the entitlement programs will have to be reformed, and sooner better than later, because the longer reform is postponed the greater the fiscal imbalance will become and the greater its drain will be… Donald Trump is out to lunch on this issue, as he is on most questions that require more than a fatuous sound-bite answer. As for Hillary…, forget about it.

Sigh, how depressing. It seems like America will be “Europeanized.”

For additional background on the issue of debt, unfunded liabilities, and present value, this video is a great tutorial.

P.S. I must have taken LSD or crack earlier this year. That’s the only logical explanation for saying I was optimistic about entitlement reform.

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Exactly five years, I created a Declaration of Dependence for my statist readers.

It was supposed to be satire, but after looking at some new estimates of dependency, I now wonder whether I accidentally foretold America’s future.

Anyhow, here’s how my attempt to be funny began.

We hold these truths to be self-evident, that all people should be made equal, that they are endowed by their government with certain unalienable Rights, that among these are jobs, healthcare and housing.–That to secure these rights, Governments must rule over the people, deriving their just powers from the consent of the elite.

While I like to think I came up with a few clever lines, it’s hard to laugh when you think about what’s happened ever since America’s real Declaration of Independence.

Here’s what the Tax Foundation tells us about the evolution of taxation.

Since our country’s founding, we have witnessed…federal revenues taking up less than 5 percent of our economy to more than 20 percent. …Taxation in the United States in 1776 was incredibly different than what it is today. There were no income taxes, no corporate taxes, and no payroll taxes.

Instead, the government relied on a relatively modest set of tariffs and excise taxes.

…taxes primarily existed on imports of goods and services to the colonies, as well as on the sale of particular products. What sort of items were these tariffs imposed on? Primarily, they were levied on ships on a per-tonnage basis, slaves, tobacco, and alcoholic beverages. In all, the average tariff worked out to about 10 percent of the value of imports.

Amazingly, this very modest form of taxation lasted for more than 100 years. It wasn’t until that wretched day when the 16th Amendment was approved that the stage was set for the oppressive tax system that now exists.

By the way, when there was no income tax, there also was very little government spending.

For much of our nation’s history, federal outlays consumed less than 3 percent of economic output. The burden of Washington spending today, by contrast, amounts to more than 20 percent of GDP. And I hate to even think about the long-run projections since I become suicidal.

Oh, and let’s not forget the regulatory burden. We’ve gone from a system that had virtually no red tape to a nation that is now suffocating from a blizzard of bureaucratic edicts.

All of which makes today more costly, as the Washington Examiner reports.

Hundreds of federal regulations on beer, fireworks, hamburgers and even corn-on-the-cob cost families an additional $40, according to a new report on the July 4th tax. American Action Forum regulatory policy director Sam Batkins researched the regulations on the holiday treats to determine the costs. And they are huge.

Here’s the infographic he created.

Red tape adding $40 to our costs today? That will leave a bad taste in your mouth.

Let’s close on an upbeat and inspirational note by reading Professor Randy Barnett on the drafting of the Declaration of Independence.

The Committee of Five consisted of the senior Pennsylvanian Benjamin Franklin, Roger Sherman of Connecticut, New York’s Robert Livingston, the Massachusetts stalwart champion of independence John Adams, and a rather quiet thirty-three year old Virginian named Thomas Jefferson. After a series of meetings to decide on the outline of the declaration, the committee assigned Jefferson to write the first draft. …Jefferson did not have three leisurely weeks to write. He had merely a few days. Needing to work fast, Jefferson had to borrow, and he had two sources in front of him from which to crib. The first was his draft preamble for the Virginia constitution that contained a list of grievances, which was strikingly similar to the first group of charges against the King that ended up on the Declaration. The second was a preliminary version of the Virginia Declaration of Rights that had been drafted by George Mason in his room at the Raleigh Tavern in Williamsburg where the provincial convention was being held. …Mason’s May 27th draft proved handy indeed in composing the Declaration’s famous preamble. Its first two articles present two fundamental ideas that lie at the core of a Republican Constitution. The first idea is that first come rights, and then comes government.

To be sure, the Founders’ view of rights was grossly imperfect. Blacks and Indians were grossly mistreated and women were not full citizens.

But by the standards that existed then, the America’s Founders did a remarkable job of curtailing the power of the state and enhancing the rights of individuals.

The good news is that there have been some significant expansions of liberty ever since the Declaration of Independence. A bloody war was fought in part to end the scourge of slavery. The toxic combination of racism and statism embodied by the Jim Crow laws has been abolished. And women now have full political and economic rights.

The bad news is that there also have been significant contractions of liberty in the economic sphere. It started with the so-called Progressive Era, particularly the disastrous tenure of Woodrow Wilson. It then accelerated during FDR’s economy-stifling New Deal. Government’s size and power further expanded during the grim LBJ-Nixon years. And, more recently, we witnessed the debacle of a Supreme Court ruling that the very limited enumerated powers in the Constitution somehow give the federal government the right to coerce individuals to buy products from private companies.

Notwithstanding all this bad news, I’m not quite ready to pack my bags for Australia.

The United States was the only nation founded on a set of philosophical principles and I’m very patriotic – in the proper sense of the word – about being an American.

I hope all American readers enjoy Independence Day. And in the spirit of the Founding Fathers, break a few rules. Dodge a tax, set off some illegal fireworks, and drive over the speed limit!

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As I’ve pointed out before, the big difference between the United States and Europe is not taxes on the rich. We both impose similar tax burden on high-income taxpayers, though Europeans are more likely to collect revenue from the rich with higher income tax rates and the U.S. gets a greater share of revenue from upper-income taxpayers with double taxation on interest, dividends, and capital gains (we also have a very punitive corporate tax system, though it doesn’t collect that much revenue).

The real difference between America and Europe is that America has a far lower tax burden on lower- and middle-income taxpayers.

  • Tax rates in Europe, particularly the top rate, tend to take effect at much lower levels of income.
  • European governments all levy onerous value-added taxes that raise costs for all consumers.
  • Payroll tax burdens in many European nations are significantly higher than in the United States.

This makes for interesting cross-border comparisons, but it also raises an overlooked point about political attitudes. Why are leftists so hostile to successful people?

Think about it this way. If a farmer has five cows but one of the cows produces most of his milk, at the very least he would treat that cow with great care and concern.

Left-wing politicians in the United States, by contrast, express contempt and disdain for the upper-income taxpayers who finance our welfare state.

Let’s look at some of the numbers

The invaluable Mark Perry of the American Enterprise Institute points out that the top-20 percent bear the lion’s share of the fiscal burden in the United States.

CBO provides detailed data on American households for each income quintile in 2013 for: a) average household “market income”(includes labor income, business income, income from capital gains, and retirement/pension income), b)average household transfer payments (payments and benefits from federal, state and local governments including Social Security, Medicare, Medicaid, unemployment insurance, and Supplemental Nutrition Assistance Program (SNAP)), and c) average federal taxes paid by households (including income, payroll, corporate, and excise taxes).

Mark presents that data in an easy-to-understand format and highlights the relevant numbers in red. The key takeaway is that the top-20 percent basically finance our Leviathan.

To make the issue even clearer, Mark created a chart showing the data from the sixth line in the above table.

Again, the only possible conclusion to reach is that higher-income households are the net financiers of big government.

Now let’s augment Mark’s analysis by examining some research from Scott Greenberg and John Olson of the Tax Foundation.

They also review the new CBO numbers and their focus in the tax burden on the top-1 percent (i.e., people who actually are rich).

One of the main takeaways from this year’s report is that the richest Americans pay a lot in taxes. In 2013, the top 1 percent of households paid an average of 34.0 percent of their income in federal taxes. To compare, the middle 20 percent of households paid only 12.8 percent of their income in taxes. Moreover, taxes on the rich are much higher than they’ve been in recent years. …in 2013, the top 1 percent of taxpayers paid a higher tax rate (34.0 percent) than in the year President Reagan took office (33.2 percent).

And here’s the chart accompanying their analysis.

There are all sorts of interesting stories inside this graph, such as the interaction of capital gains taxes and stock market performance (the top-1 percent tend to be significant investors).

There are also interesting stories that aren’t captured by this graph, such as the fact that rich people have great ability to adjust their taxable income when tax rates climb and fall (which was one of the reasons rich people paid a lot more tax when Reagan dropped the top tax rate from 70 percent to 28 percent). Also, the average tax rate is less important than marginal tax rates if you want to understand how much damage the tax code imposes on the economy.

But for our purposes today, all that matters is that rich people over the past several decades have coughed up, on average, about 31 percent of their income to Uncle Sam.

That’s a lot of money. In effect, the federal government gets a dividend when successful taxpayers earn money.

Which brings us back to the perplexing fact that leftists have nothing but scorn for the folks who finance the welfare state.

Indeed, some statists have so much contempt for successful people that they want to push tax rates to high that the rich no longer would want to earn additional money. Which means, of course, that the IRS wouldn’t be collecting any money.

I don’t know whether the right metaphor is a farmer abusing the cow that produces most of the milk or a shareholder who sabotages the company paying good dividends, but the only possible conclusion is that leftists hate rich people more than they like big government.

If you think I’m exaggerating and such people don’t exist, watch this video – especially beginning about the 4:30 mark.

P.S. To be fair, leftists don’t hate all rich people. They’re willing to shower bailouts, subsidies, and handouts on wealthy people who give them lots of campaign contributions.

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