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Archive for the ‘Welfare State’ Category

I recently explained the evolution of taxation – and the unfortunate consequences of income taxation – to a seminar in the country of Georgia.

One of my main points was that income taxes are a relatively new source of revenue.

The first income tax was adopted in the United Kingdom in the mid-1800s and other nations followed over the next 50-plus years (the United States joined that unfortunate club in 1913).

And, as noted in the video, income tax enabled a massive expansion in the burden of government spending.

In a column for the Foundation for Economic Education, Martin Litwak explains how the U.S. and U.K. made the mistaken choice to impose income taxes.

…income tax is a rather recent “invention,”… Income Tax was first introduced by William Pitt in the United Kingdom in 1798, and it started to be charged in 1799. The aim was not to finance original expenses of the State but the Napoleonic Wars. …It was kept in force until the Battle of Waterloo. When the tax was annulled again, every document that referred to it was burnt, due to the sense of shame associated with having established and charged this tax. …Prime Minister Robert Peel reestablished it in 1841, not to finance a war but to cover the Government’s deficit. …the United States became independent from the United Kingdom in 1776…the country imposed the first income tax…to finance…the Civil War. …In 1872, the income tax was annulled, basically due to the pressure of taxpayers, who deemed it expropriatory… In 1894, the income tax was incorporated again, but the next year, …the Supreme Court declared it unconstitutional. …In 1909, the creation of this tax was proposed again… The 16th Amendment was introduced precisely to achieve this goal.

A sad column.

But it gets worse because politicians also then imposed payroll taxes.

Then they imposed value-added taxes.

Both of which helped to finance further expansions in the burden of government spending.

The bottom line is that it’s never a good idea to give politicians a new source of revenue.

Especially new taxes that are capable of generating a lot of revenue (or a medium amount or small amount of revenue).

P.S. Interestingly, many early advocates of income taxes in the U.K. and U.S. were not trying to finance a big welfare state, but rather wanted a new revenue source so they could lower or eliminate protectionist taxes on imports.

The moral of the story is to be careful of unintended consequences.

P.P.S. If you enjoyed watching a video about the history of the income tax, here’s a (much longer) history of economic policy in the 20th century.

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Joe Biden wants to dramatically expand the welfare state (more than $5 trillion of new spending over the next 10 years).

In this discussion with Ross Kaminsky of KHOW in Denver, I warn that the President’s proposal for per-child handouts is an especially bad idea.

In part, my opposition to per-child handouts is motivated by a desire to protect the welfare reform law enacted in the 1990s.

As I noted in the interview, that reform reduced dependency and it reduced poverty. And Biden’s plan, for all intents and purposes, will repeal that law since it will be possible to get big chunks of money while not working, simply by having kids.

But since I’m a public finance economist, I’m also motivated by opposition to a massive new entitlement program.

At the risk of understatement, we don’t need to spend another $1.1 trillion when we can’t even afford all the programs that already are burdening taxpayers.

Others share my concern about the impact of Biden’s plan.

Matt Weidinger dissects per-child handouts in an article for National Review.

This year, parents don’t need to have paid taxes at all to collect an annual allowance of up to $3,600 per child. …According to the New York Times, “more than 93 percent of children — 69 million” will benefit from the new federal giveaway. …No work is expected from parents collecting them. That’s reminiscent of welfare programs before bipartisan 1996 reforms that required parents to work or attend training in order to receive government checks. In fact, the biggest beneficiaries of the new child allowance will be parents who earn less than $2,500 per year — including those who don’t work or pay taxes at all. …As explained in a 2019 report proposing child allowances in the U.S., the idea comes “from other countries.” …American policy-makers could merely be following suit. But it seems more likely that they’re just searching for a palatable way to package their current explosion of new spending, a spin on a return to the failed policies of the past: bigger benefits, for more people, funded by others’ tax dollars. After all, calling such payments “welfare” just wouldn’t do, would it?

David Henderson of the Hoover Institution also explains why Biden’s scheme is misguided.

Child allowances are a bad idea. It’s wrong to forcibly take money from some and give to others simply because they have children. Moreover, child allowances would create increased dependence, are not targeted at the needy, could reduce the work effort of lower-income women, and would add to the already huge federal budget… Scott Winship, the director of poverty studies at the American Enterprise Institute…worries that child allowances will undercut the successful welfare reform of the mid-1990s and thereby cause a substantial number of unmarried low-income mothers to stop working. …in the 1990s he thought welfare reform would increase child poverty and he now admits that he was wrong. He writes that in the United States, “Poverty among the children of single parents fell from 50 percent in the early 1980s to 15 percent today, with an especially sharp decline during the 1990s.” …the urgent need is to get federal spending under control. This means slowing the growth of Medicare, Medicaid, and Social Security, the three programs most responsible for the coming federal deficits. But it also means not adding major new programs.

By the way, Henderson’s column focuses on Mitt Romney’s plan, but his criticisms apply equally (actually, even more) to Biden’s proposal.

I’ll close with some encouraging polling data that was shared by G. Elliott Morris of the Economist.

Biden’s plan has only 29 percent support (versus 43 percent opposition).

I suspect that polling data would look even better if the pollsters had been honest and asked whether people favored expanded redistribution payments based on number of kids (“refundable” tax credits are simply spending that gets laundered through the tax code).

The bottom line is that the United States already has a big problem with government dependency. Per-child handouts will make a bad situation even worse.

P.S. Some advocates of the handouts say we need to copy Europe, but they never explain why “catching up” is a good idea when Europeans have much lower living standards.

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Back in 2016, I created a 2×2 matrix to illustrate the difference between redistributionism (tax Person A and give to Person B) and state planning (politicians and bureaucrats trying to steer the economy, either through direct ownership or industrial policy).

The main point of that column was to show that countries should try to be in the top-left section, where there is less redistribution and less government control.

But I also wanted to help people understand that redistributionism and socialism are not the same thing.

For instance, Sweden (in the bottom-left box) is a capitalist economy with a big welfare state, whereas China (in the top-right box) doesn’t have much redistribution but government has substantial control over economic activity.

From an American perspective, the good news is that the U.S. currently is in the top-left box.

The bad news is that President Biden wants the country in the bottom-left box. So, if we want to be technically accurate, we should not accuse him of socialism.

Instead, as Antony Davies and James Harrigan explained in a column for the Foundation for Economic Education, the real threat to the nation is “transferism.”

Socialism is state control of the means of production. …By contrast, capitalism is simply private ownership of the means of production. …more than four in ten Americans think “some form of socialism” is a good thing. But what is “some form of socialism?” A society is either socialist or it isn’t. The state either owns the means of production or it doesn’t. There is no middle ground. …It appears that what Americans really have in mind when they think about socialism is not an economic system but particular economic outcomes. …they are advocating what we should really call “transferism.” Transferism is a system in which one group of people forces a second group to pay for things that the people believe they, or some third group, should have. Transferism isn’t about controlling the means of production. It is about the forced redistribution of what’s produced.

Davies and Harrigan are correct.

Moreover, they deserve credit for predicting the future since they wrote the column in 2019!

Now let’s consider whether redistributionism (or transferism) is a good idea.

I’ve previously explained that a big welfare state causes economic damage, even if a nation otherwise is very pro-capitalist.

Consider, for instance, the remarkable data showing how Swedish-Americans and Danish-Americans generate much more prosperity than Swedes and Danes who still live in Scandinavia.

Or consider the income data showing how average Americans enjoy much higher living standards than their European counterparts (either in Nordic nations or elsewhere).

What’s worrisome is that Biden wants a much bigger welfare state and he doesn’t seem to understand that European-sized government means anemic European-style economic performance.

This is the message that Bret Stephens shared in one of his recent columns for the New York Times.

He starts by describing Biden’s agenda.

President Biden charts a course toward the largest expansion of government since Lyndon Johnson’s Great Society. After signing a $1.9 trillion Covid-19 relief bill in March and proposing a $1.5 trillion discretionary budget in April (a 16 percent increase from this year, on top of what’s likely to be at least $3 trillion in mandatory spending on programs like Medicare and Medicaid), the president wants $2.3 trillion more for infrastructure and $1.8 trillion for new social programs. That’s $7.5 trillion in discretionary spending. To put the number in perspective, we spent $4.1 trillion in inflation-adjusted dollars over nearly four years to wage and win the Second World War. What will America get for the money?

He then points out the potential consequences.

…before the U.S. takes this leap into a full-blown American social-welfare state, moderates in Congress like Senator Joe Manchin or Representative Jim Costa ought to ask: What’s the catch? …The real catch is that massive government spending has hidden costs that are difficult to capture in numbers alone. Take another look at Europe. Why does R&D spending in the European Union persistently lag that in the U.S. …Why does Europe’s tech start-up scene…so notably lag its competitors…? Perhaps…social safety nets typically come at the expense of risk-taking and economic dynamism. And why is France, which, according to the Organization for Economic Cooperation and Development, spends more on social welfare than any other nation in the developed world, such an unhappy place, with chronically high unemployment, endless labor unrest, a decades-old brain drain, rising political extremism, a wealth tax that failed and a medical system that was on the brink of collapse long before Covid struck? …Beyond the gargantuan cost, Congress should think very hard about the real catch: transforming America into a kinder, gentler place of permanent decline.

Amen.

Biden’s agenda inevitably will erode societal capital, leading to less work (because of lavish freebies such as per-child handouts) and lower levels of entrepreneurship (because of tax penalties on investment and risk-taking).

And this can lead to a tipping point, which is illustrated by my Theorem of Societal Collapse.

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There are many things to dislike about President Biden’s budget plan to expand the burden of government.

There will be ample opportunity to write about these issues in the coming weeks. For today, however, let’s identify and highlight the biggest problem.

Simply stated, Biden wants to permanently and significantly increase the burden of government spending. Here’s a chart, based on data from Table S.1 of the President’s budget, augmented by data from Table 1.3 of the Budget’s Historical Tables.

The budget had reached $4 trillion before the pandemic. It then skyrocketed for coronavirus-related spending.

But now that the emergency is receding, Biden is not going to let the burden of government fall back to prior levels. Instead, he’s proposing a $6 trillion budget for the upcoming fiscal year.

And that’s just the starting point. He wants spending to then climb rapidly – at almost twice the rate of inflation – up to $8 trillion by 2031.

By the way, this horrifying data doesn’t tell the entire story.

Biden’s budget doesn’t include some of his new spending giveaways. Brian Riedl addressed this fiscal gimmickry in a column for today’s New York Post.

…this budget does not even include additional spending and debt proposals that are coming later. …They account only for the recently-enacted “stimulus,” a massive discretionary spending hike, and the trillions in (creatively-defined) “infrastructure” spending proposed by the President over the past two months. However, during last fall’s campaign, Biden also proposed trillions in new spending for health care, Social Security, Supplemental Security Income, climate change, college aid, and other priorities. The White House has signaled that these new spending initiatives are still in the pipeline. Including these forthcoming proposals, the President would push spending and deficits far above any levels that have ever been sustained.

And don’t forget all this spending, both proposed and in the pipeline, is in addition to all the entitlement spending that is going to burden the economy over the next several decades.

Here’s one final point to underscore and emphasize the radical nature of Biden’s budget.

I’ve taken the previous chart and added a trendline showing what spending would be if Biden has simply followed the trajectory based on the actual spending levels of every President from Carter to Trump.

In other words, we’re looking at trillions of dollars of additional money being diverted from the productive sector of the economy and being put under the control of politicians and bureaucrats.

That does not bode well for American prosperity. Even the Congressional Budget Office recognizes this means lower living standards for our nation.

The bottom line is that if you adopt European-style fiscal policy, you get anemic European-style levels of income.

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The United States has a big economic advantage over Europe in part because the burden of welfare spending is lower.

This means fewer people trapped in government dependency in America. And it means a smaller tax burden in America.

But some of our friends on the left think it is bad news that the United States isn’t more like Europe.

They want more redistribution in America and they may get their wish if Congress approves Biden’s so-called American Families Plan.

The Economist has an article about Biden’s radical proposal, which would, as they correctly note, “Europeanise the American welfare state.”

President Joe Biden is proposing an ambitious reweaving of the American safety-net, which the White House says will cost $1.8trn. The American Families Plan has bits of the European welfare state that have long been missing in the country—a child allowance, paid family leave, universal pre-school, subsidised child care and free community college—but contains no reference to work requirements. …So how did Democrats go from Clintonism—which implicitly conceded the Reaganite critique that too much governmental assistance is a very bad thing—to its present-day unconcern about (even relish for) deficit-financed expansions of the safety-net?

Here are some of the specific details from the story, including discussion of Biden’s plan for per-child handouts.

This would bring America more in line with the rest of the developed world: the average government spending on benefits such as child allowances, family leave and early education is 2.1% of GDP in the OECD club of mostly rich countries. In America, it is just 0.6%. …A generous child allowance is the main anti-poverty tool in most rich countries—and also one that America lacks. One such scheme was created this year as part of the covid-19 relief bill that the president signed in March. It will pay most families $3,000 per year per child ($3,600 for young children)… The president’s plan proposes to extend these payments until 2025. Some Democrats think they should simply be made permanent.

The Wall Street Journal opined about Biden’s plan last month.

It’s more accurate to call this the plan to make the middle class dependent on government from cradle to grave. The government will tell you sometime later, after you’re hooked to the state, how it will force you to pay for it. We’d call the price tag breathtaking, but by now what’s another $2 trillion? …But the cost, while staggering, isn’t the only or even the biggest problem. The destructive part is the way the plan seeks to insinuate government cash and the rules that go with it into all of the major decisions of family life. The goal is to expand the entitlement state to make Americans rely on government and the political class for everything they don’t already provide. …This is now about mainlining benefits to middle-class families so they become addicted to government—and to the Democratic Party that has become the promoting agent of government.

I agree with the WSJ. Biden wants to create more dependency, even if that means eviscerating Bill Clinton’s very successful welfare reform.

For my contribution to this discussion, I want to make two points about the practical implications of Biden’s plan to “Europeanise” the United States.

First, it is impossible to have a European-sized government without massive tax increases. And since there aren’t enough rich people to finance big government, that inevitably means low-income and middle-class taxpayers will have to be hit with much bigger fiscal burdens. Which is exactly what has happened in Europe (and lots of honest people on the left openly admit a bigger welfare state would require similar policies in the United States).

Second, it is impossible to have a European-sized government and still maintain a big economic advantage over Europe. Higher spending and higher taxes will combine to reduce work, saving, investment, and entrepreneurship. Simply stated, European fiscal policy will lead to European economic results, and that will be very bad news for ordinary Americans since living standards are 30 percent-40 percent lower on the other side of the Atlantic Ocean.

It’s also worth noting that the United States ranks very high in societal capital, and that presumably will erode if more people are lured into government dependency.

P.S. Biden used to oppose a government-guaranteed income, correctly realizing it would undermine the work ethic.

P.P.S. The United States already faces a huge long-run challenge because of entitlement spending, so it’s remarkable – in a bad way – that Biden wants to step on the gas rather than hit the brakes.

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I wrote two days ago about subsidized unemployment, followed later in the day by this interview.

This controversy raises a fundamental economic issue.

I explained in the interview that employers only hire people when they expect a new worker will generate at least enough revenue to cover the cost of employment.

There’s a similar calculation on the part of individuals, as shown by this satirical cartoon strip.

People decide to take jobs when they expect the additional after-tax income they earn will compensate them for the loss of leisure and/or the unpleasantness of working.

Which is why many people are now choosing not to work since the government has increased the subsidies for idleness (a bad policy that began under Trump).

The Wall Street Journal editorialized about this issue a couple of days ago.

White House economists say there’s no “measurable” evidence that the $300 federal unemployment bonus is discouraging unemployed people from seeking work. They were rebutted by Tuesday’s Bureau of Labor Statistics’ Jolts survey, which showed a record 8.1 million job openings in March. …But these jobs often pay less than what most workers could make on unemployment. That explains why the number of job openings in many industries increased more than the number of new hires in March. …The number of workers who quit their jobs also grew by 125,000. …some quitters may be leaving their jobs because they figure they can make more unemployed for the next six months after Democrats extended the bonus into September.

Dan Henninger also opined on the issue for the WSJ. Here’s some of what he wrote.

President Biden said, “People will come back to work if they’re paid a decent wage.” But what if he’s wrong? What if his $300 unemployment insurance bonus on top of the checks sent directly to millions of people (which began during the Trump presidency) turns out to be a big, long-term mistake? …Mr. Biden and the left expect these outlays effectively to raise the minimum wage by forcing employers to compete with Uncle Sam’s money. …Ideas have consequences. By making unemployment insurance competitive with market wage rates in a pandemic, the Biden Democrats may have done long-term damage to the American work ethic. …The welfare reforms of the 1990s were based on the realization that transfer payments undermined the work ethic. The Biden-Sanders Democrats are dropping that work requirement for recipients of cash payments.

Amen.

I made similar arguments about the erosion of the work ethic last year when discussing this issue.

And this concern applies to other forms of redistribution. Including, most notably, the foolish idea of big per-child handouts.

P.S. The WSJ editorial cited above mentioned the Labor Department’s JOLT data. Those numbers are also useful if you want proof that federal bureaucrats are overpaid, and you’ll also see that the same thing is true for state and local government employees.

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In Part I of this series, I explained why it’s absurd to think illegal immigration can be stopped by sending foreign aid to less-developed countries, such as many of those in Central America.

Simply stated, government-to-government handouts have never been a successful strategy for turning poor nations into rich nations. Indeed, aid actually discourages countries from following the recipe that does deliver prosperity.

In today’s column, let’s address Milton Friedman’s famous dilemma about the incompatibility of open borders and welfare.

Like most libertarians, I want to solve the problem by getting rid of the welfare state.

Immigrants are a big net plus so long as they are coming to work and be productive.

Indeed, because of their entrepreneurial skills and work ethic, immigrants from many nations wind up earning more than native-born Americans.

That’s something to celebrate. The American Dream in action!

But will that story of success continue if the welfare state is expanded?

Two advocates of increased immigration are worried. First, Jason Riley of the Wall Street Journal recently explained that Biden’s agenda is a recipe for immigrant dependency.

…it is a growing belief on the political left that people should be allowed to enter the U.S. on their terms rather than ours, and that it is our collective responsibility to take care of them if they can’t take care of themselves. Milton Friedman said that open immigration and large welfare states are incompatible, and today’s progressives in Congress and the White House are eager to test that proposition. …Another concern is the left’s determination to sever any connection between work and benefits, something all the more worrisome since it is occurring while destitute foreign nationals with little education are being lured here en masse. …Earlier this month, the Biden administration quietly announced that it would no longer enforce a policy that limited the admission of immigrants who were deemed likely to become overly dependent on government benefits. What could go wrong? …In countries like Italy and France, generous aid programs have attracted poor migrants who are more likely than natives to be heavy users of welfare and less likely to be working. It’s a mistake to think it can’t happen here.

In a column last year for Reason, Shikha Dalmia warned that welfare programs undermine support for immigration.

…economists Alberto Alesina, Armando Miano, and Stefanie Stantcheva…administered online questionnaires to 24,000 respondents in six countries: U.S., U.K., France, Germany, Italy, and Sweden. The explicit aim was to study attitudes toward legal, not illegal, immigration. …restrictionists have succeeded most spectacularly is in depicting immigrants as welfare queens. …In America, over 25 percent of respondents said the person with the  ..immigrant-sounding name would pay less in taxes than he collected in welfare… The study’s findings pose a particular dilemma for Democrats like Sen. Elizabeth Warren (D–Mass.), who wants to combine grandiose welfare schemes like free health care, pre-K, and college for everyone with generous immigration policies, because the mere mention of immigration reduces support for such schemes. Respondents who were asked about immigration became less concerned about inequality and less supportive of soak-the-rich schemes. …as long as immigrants are seen as succeeding through their own grit, natives may have no real objection to them. What is most likely to sour the public on immigration are the grandiose universal freebies… Immigrants should be wary of Democrats bearing gifts.

Both Riley and Dalmia raise good points.

My modest contribution to this discussion is to provide a practical example.

In his so-called American Rescue Plan, Joe Biden included a huge giveaway program that will shower $3,000-$3,600 to non-rich households for every kid they have.

This is a one-year, one-time handout, but many Democrats (and some Republicans!) want to make these enormous per-child payments a permanent part of America’s welfare state.

If that happens, the incentive to move to the United States almost surely will skyrocket.

Here’s a map I made, showing the annual handout for two children in the United States and the average per-capita income in some nearby nations.

At the risk of stating the obvious, there will be a huge incentive to migrate to America – but not for the right reasons. And my little example doesn’t include the value of any of the dozens of other redistribution programs in Washington.

The bottom line is that we shouldn’t have a welfare system that rewards dependency, whether for people in the country legally or illegally.

And if you like immigration in theory, you should be especially opposed to handouts that will undermine public support for newcomers in practice.

P.S. It’s much better to have immigration policies such as the ones proposed by former Congressman Jared Polis and current George Mason University Professor Tyler Cowen.

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Here are four things to understand about poverty and dependency.

Now let’s add a fifth item.

  • The United States adopted welfare reform in the mid-1990s.

Today’s column examines whether this was a bad development or good development.

We’ll start with a harsh critic.

In his column for the New York Times, Charles Blow wants Democrats to repeal Clinton’s welfare reform.

Clinton’s record, particularly with respect to Black and brown Americans and the poor, was marked by catastrophic miscalculation. …the welfare reform bill, …Clinton promised would “end welfare as we know it.” One of its central provisions was block-grant assistance to the states. …the Center for Budget and Policy Priorities pointed out in 2020, the block grant to states “has been set at $16.5 billion each year since 1996; as a result, its real value has fallen by almost 40 percent due to inflation.” …With the passage of the “American Rescue Plan,” the Democrats, alone, took another major step away from the mistakes of the Clinton legacy by increasing aid to families with children and to workers.

Reading the column, it seems like blacks must have suffered immensely because of the 40 percent reduction in the block grant.

But now let’s consider whether welfare reform was a good thing.

According to the data, the answer is yes. This chart, based on the Census Bureau’s data (specifically Table B-5), shows that the poverty rate for African Americans has declined since welfare reform was enacted.

To be sure, one could argue that the post-welfare reform decline was simply a continuation of a positive trend. But that doesn’t change the fact that there’s certainly no evidence that the 1996 legislation led to bad results.

Moreover, research from the Brookings Institution makes a persuasive case that welfare reform deserves credit for some of the post-1996 progress.

Why? Because it sent a message – both practically and rhetorically – that permanent dependence on Uncle Sam was a bad thing. As a result, more people entered the workforce and poverty dropped.

That seems like a result that should be celebrated.

Unfortunately, Biden’s so-called American Rescue Plan contains big per-child handouts that are not dependent on being in the workforce.

The only silver lining to that dark cloud is that the handouts are only for 2021.

But the pro-redistribution crowd already is clamoring to make that provision a permanent giveaway. To paraphrase Bill Clinton, they want to “restore welfare as we knew it.”

P.S. Based on what I’ve read in his columns, Charles Blow is a hard-core leftist on economic issues. But he’s semi-reasonable on gun rights, so that’s one point in his favor.

P.P.S. Welfare reform is just one example of the good policies that were enacted during the Clinton years.

P.P.P.S. We can learn lessons about welfare and dependency by looking at data from Europe and Canada.

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Two days ago, I shared data showing that people in the big nations of Western Europe only have about 75 cents of income for every $1 that Americans earn.

That’s a remarkable gap, and it’s getting larger rather than smaller, even though theory says that shouldn’t happen.

But what’s even more shocking is that a poor person in the United States would be middle class in most European nations.

And a low-income person in America is better off than the average European.

When I see numbers like this (and lots of other data I have shared over the years, all of which tells the same story), I have two reactions.

  • First, I want to laugh at anyone who thinks Europeans have a better distribution of income.
  • Second, I want to scream at anyone who things we should copy the European economic policy.

But my laughing and screaming obviously has no effect because Washington politicians are poised to enact a giant expansion of the welfare state.

And there’s plenty of support for this risky concept from both Democrats and Republicans.

On the GOP side, Senator Mitt Romney has proposed a big tax increase to pay for a big increase in redistribution spending in the form of universal handouts for families with children, an idea that I criticized early last month.

And Oren Cass, a former campaign aide for Romney, has a slightly different plan to impose higher taxes to fund handouts for families with children. I recently critiqued that plan in an article co-authored with Veronique de Rugy of the Mercatus Center. Here’s some of what we wrote.

…the proposal for a Family Income Supplemental Credit (Fisc) from Oren Cass and Wells King is misguided, mostly because it would raise tax rates and expand the burden of government spending. …the Fisc would cost $200 billion annually. …$80 billion per year, would be financed with tax increases. …this fact alone should make the Fisc a non-starter as a matter of fiscal policy. …Income tax rates already are too high, and President Biden wants to raise them further. Self-styled conservatives should not be aiding and abetting the push for class-warfare taxation by adding to the collection of proposed tax-rate increases on workers, investors, entrepreneurs, and business owners. …it would be desirable for families to have more economic opportunity and financial security. However, it doesn’t follow that conservatives should support subsidizing child-bearing and -rearing. We do not think copying Europe and imposing more redistribution is the right approach. Americans enjoy far-higher living standards than people on the other side of the Atlantic Ocean, thanks in part to our smaller fiscal burden.

As you might expect, folks on the left are very excited about expanding the welfare state.

Biden’s so-called stimulus plan also contains a big one-time handout to households with children (with proponents hoping the lure of free cash will lead those households to demand that Washington make such giveaways a permanent part of American life).

Scott Winship of the American Enterprise Institute pours cold water on all the above proposals. Except he focuses not on fiscal policy, but on the fact that these schemes will subsidize dependency and encourage out-of-wedlock births – thus undermining the very successful welfare reform of the 1990s.

A child allowance would send unconditional cash benefits to nearly all families on a per-child basis.Child allowances run a very real risk of encouraging more single parenthood and more no-worker families, both of which could worsen entrenched poverty in the long run—an overreliance on government transfers, poverty over longer stretches of childhood, intergenerational poverty, and geographically concentrated poverty. …Poverty among the children of single parents fell from 50 percent in the early 1980s to 15 percent today, with an especially sharp decline during the 1990s. This was a period in which policy reforms encouraged work, by imposing time limits and work requirements on receipt of cash welfare and expanding benefits to low-income workers. …We should strive to reduce child poverty further, but it matters how we do so. Reducing this year’s poverty while exacerbating entrenched poverty and reversing the progress we have made since welfare reform would be a hollow victory indeed. So much the worse if a child allowance leads to irresistible calls for a universal basic income, which would also increase nonwork among the childless.

Michael Barone is similarly perplexed that lawmakers are so intent on reversing the progress of welfare reform.

When public policies have produced disastrous results, and when alternative policies have resulted in immediate, seemingly miraculous improvement, why would anyone want to go back to the earlier policies? …births to unwed mothers and welfare dependency rose…from 1965 to 1975, violent crime and welfare dependency, both heavily concentrated among blacks, nearly tripled — tripled. For two more decades, crime and welfare dependency remained at the same high levels, sometimes zooming higher. …Reform, first by Thompson in Wisconsin and then by Newt Gingrich and Bill Clinton in the 1996 welfare bill, required mothers to work. Social workers’ focus was changed from handing out more checks to helping moms get and hold jobs. The results: Welfare rolls plummeted; teen births plunged; kids raised by working moms did better in school and in life. Liberals have tried to stealthily roll back the reforms. They’ve been joined by some cultural conservatives, worried about population decline… These include Sen. Mitt Romney, who supports a child allowance that is fully refundable — which is to say that government will send a check to parents, married or unmarried… A version of this, limited to one year, has been inserted in the “COVID relief” bill of President Joe Biden’s administration. A single parent with two kids, working or not, could qualify for $7,200 a year plus $6,400 in food stamps. …Mickey Kaus…argues that…”(A) large subset of recipients will go from one worker to zero workers.” That means “millions of kids growing up in fatherless homes, where nobody goes into the labor force, where the mainstream world of employment is a foreign country.” Past experience says he’s right and that…the people most hurt will be black Americans.

So is there a real danger that per-child handouts will become law?

The obvious answer is yes since they are included in Biden’s faux stimulus.

But that’s just a one-year giveaway. It’s unclear whether households will get addicted to that free cash and thus demand that the handouts get extended (based on my Second Theorem of Government, I’m pessimistic).

Robert VerBruggen has some polling data on this topic.

Here’s how he characterized the results.

So, what does the average person think…? The 2019 American Family Survey, a poll covering 3,000 adults from the Center for the Study of Elections and Democracy, tested four different child tax credit proposals… The results give us a sense of how the public—and some key segments of it—see the issue. Interestingly, none of the ideas had majority support… Nearly half of Americans can support a credit sold as tax relief that’s either broad-based (CTC1) or targeted to the lower-income (CTC3), but an across-the-board handout to parents just for being parents (CTC4) can’t even garner one-third support. …the major takeaways are these: 1) The child tax credit, in general, is not as popular as one might think — even in questions that don’t mention the taxes needed to pay for it, it never manages a majority; and 2) despite some energy on the pro-family intellectual right for flat, universal child allowances (CTC4), Republicans and even independents among the general public are really not fond of the idea.

This data is semi-encouraging. I’m definitely glad people are suspicious of big per-child handouts. And I suspect opposition will grow when people learn about the European-style taxes that would be needed to finance such a huge giveaway.

But it doesn’t help the fight for sensible policy when some self-styled conservatives advocate for big expansions of the welfare state – especially when such ideas inevitably will erode societal capital.

P.S. As indicated by the above excerpt, Scott Winship’s article concludes with a warning that universal per-child handouts could be the camel’s nose under the tent for a “basic income,” which is the crazy notion that government should give everyone money. That’s an additional reason to reject the idea, as even Joe Biden once realized.

P.P.S. Some proponents use the term “child tax credit” to describe per-child handouts, but that’s disingenuous at best. A handout doesn’t magically become a tax cut just because the recipient happens to pay tax. Moreover, the handouts in these proposals generally are “refundable,” which is simply fiscal jargon for handouts that also go to people who don’t pay any tax.

P.P.P.S. The real-world evidence casts considerable doubt on the notion that per-child handouts will increase birthrates.

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There are many compelling economic arguments against entitlement programs.

Since I’m a libertarian, I also have moral concerns about tax-and-transfer programs.

Today, though, let’s address the big problem of entitlements and demographics, especially with regards to social insurance programs that transfer money from young people to old people (most notably Social Security and Medicare).

But I’ll start by acknowledging that demographics doesn’t have to be a problem. When nations first created such programs, they generally had “population pyramids” featuring a few old people, lots of working-age people (i.e., taxpayers), and then an even greater number of children (future workers and taxpayers).

As illustrated by this image, entitlement programs can be sustainable with that type of demographic profile.

But there’s been a big shift in demographics in developed nations.

Simply stated, we’re living longer and having fewer kids. In some sense, population pyramids are becoming population cylinders.

And this creates major challenges for entitlement programs because instead of there being many workers supporting just a few retirees, you wind up with “old-age dependency ratios” that require very onerous tax burdens (or very high levels of government borrowing).

I’ve already written how this is a big problem for the United States.

Indeed, I periodically cite long-run forecasts from the Congressional Budget Office to warn about the worrisome fiscal implications.

And I’ve also noted that Japan is in serious trouble.

Today, let’s look at some recent data to show that Europe is another part of the world where this problem is acute.

The European Commission published its 2021 Ageing Report late last year and there are three visuals that deserve attention.

First, here’s a look at the European Union’s population cylinder (or maybe an upside-down pyramid).

And here’s a table that compares the number of old people with the working-age population in 2019, 2045, and 2070.

At the bottom of the table, I’ve circled in red the averages for the eurozone (nations using the single currency) and the entire European Union. From the perspective of fiscal policy, these are horrific numbers.

But there are numbers that are even worse.

Our final visual is a table showing the economic dependency ratio, which the European Commission defines as “… the ratio between the total inactive population and employment. It gives a measure of the average number of individuals that each employed person ‘supports’ economically.”

Once again, I’ve circled the averages at the bottom of the table.

The bottom line is that most European nations already have a stifling fiscal burden, yet it’s all but certain that there will be even higher taxes and more government spending in the near future.

Which means more economic stagnation for Europe (and those of us in America face that possibility as well).

At the risk of stating the obvious, there is a solution to both Europe’s woes and America’s woes. Simply stated, there needs to be genuine entitlement reform.

That means “pre-funding,” which is the jargon for mandatory private savings, presumably augmented by some form of safety net.

Singapore is probably the world’s leading example for mandatory savings, while AustraliaDenmarkChileSwitzerlandHong KongNetherlandsFaroe Islands, and Sweden are a few of the many other jurisdictions that have fully or partially shifted to systems based on real savings.

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I’m a voracious consumer of publications that rank economic liberty and national competitiveness. Simply stated, these apples-to-apples rankings tell us which countries have policies that are friendly to growth (and thus the places that will enjoy rising living standards).

I’m also very interested in “societal capital,” which is the degree to which the people of a nation believe in values such as self reliance, work, individual initiative, and personal responsibility.

In some sense, societal capital may be more important for a nation’s long-run prosperity than how it scores in any particular index.

That’s because it’s probably just a matter of time before a country with low levels of societal capital winds up adopting bad policy.

That being said, other than occasional examples of cross-country polling data, I’ve never seen a good way of ranking nations based on societal capital.

But that’s now changed, thanks to a new report called the Global Index of Economic Mentality.

In an article for National Review, Professor Steve Hanke of Johns Hopkins University summarizes the key findings.

GIEM scores measure the public’s embrace of the idea of economic freedom. A high GIEM score indicates that citizens in a particular country support the idea that their government should not play a major role in directing or regulating economic activity or in redistributing income. Citizens of high-scoring countries typically back an institutional framework that prioritizes private initiative, free competition, and personal responsibility — in short, a system of free enterprise. …The GIEM study found that countries that embrace a free-market mentality have more efficient economic institutions and higher per capita GDP than those who support socialist, interventionist mentalities.

New Zealand is in first place and United States is in fourth place.

New Zealand comes out on top with the highest score on the inaugural Global Index of Economic Mentality, followed by the Czech Republic, Sweden, the United States, and Denmark. This year’s lowest scorer is Bosnia, preceded by Bangladesh, Myanmar, Montenegro, and Azerbaijan.

There’s some very bad news for Chile, which may explain why people in that nation just voted to potentially replace the constitution which has delivered unimaginable prosperity.

Rather surprisingly, Chile is the lowest GIEM scorer in Latin America, even a notch below Argentina, and 64th overall. These data suggest that while the Chicago Boys…accomplished innumerable free-market reforms — reforms that have led to a great improvement in prosperity and the second-highest GDP per capita of any country in South America — they have failed to convince the Chilean public of the benefits of the free-market system that has lifted them out of poverty.

And there’s bad news for the United States because young people have very worrisome views.

If we look at country-by-country demographics, there is not much difference between the economic mentality of those over 40 years old and under 40 years old for most countries. But there are notable exceptions. The countries with the most significant difference in economic mentality between the two age groups are the United States, New Zealand, and Australia. In these countries, the younger generations possess a significantly weaker attachment to free-market ideas than do older generations, with the U.S. as the most extreme case. It makes one wonder what brand of economics is being peddled in high schools and universities in the United States.

For what it’s worth, if only young people were counted, America would rank #14 rather than #4. Not horrible, but definitely a shift in the wrong direction.

Let’s close by looking at some data from a PowerPoint presentation about this new index.

First we have the methodology.

Second, here are the scores for the 74 nations.

Last but not least, here’s the U.S. score compared to the average score in other regions.

As you can see, Americans have very good attitudes about preferring markets and disliking redistribution, but we score quite poorly on the issue of personal responsibility.

P.S. I’m not surprised to see good scores for the Nordic nations, and it’s also good to see high scores for Georgia and Estonia, though I’m somewhat shocked that Switzerland is in the middle of the pack. But I’m not surprised to see poor scores for China and Italy.

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Bernie Sanders was considered a hard-core leftist because his platform was based on higher taxes and higher spending.

Elizabeth Warren also was considered a hard-core leftist because she advocated a similar agenda of higher taxes and higher spending.

And Joe Biden, even though he is considered to be a moderate, is currently running on a platform of higher taxes and higher spending.

Want to know who else is climbing on the economically suicidal bandwagon of higher taxes and higher spending? You probably won’t be surprised to learn that the pro-tax International Monetary Fund just published its World Economic Outlook and parts of it read like the Democratic Party’s platform.

Here are some of the ways the IMF wants to expand the burden of government spending.

Investments in health, education, and high-return infrastructure projects that also help move the economy to lower carbon dependence… Moreover, safeguarding critical social spending can ensure that the most vulnerable are protected while also supporting near-term activity, given that the outlays will go to groups with a higher propensity to spend their disposable income… Some fiscal resources…should be redeployed to public investment—including in renewable energy, improving the efficiency of power transmission, and retrofitting buildings to reduce their carbon footprint. …social spending should be expanded to protect the most vulnerable where gaps exist in the safety net. In those cases, authorities could enhance paid family and sick leave, expand eligibility for unemployment insurance, and strengthen health care benefit coverage…social spending measures…strengthening social assistance (for example, conditional cash transfers, food stamps and in-kind nutrition, medical payments for low-income households), expanding social insurance (relaxing eligibility criteria for unemployment insurance…), and investments in retraining and reskilling programs.

And here’s a partial list of the various class-warfare taxes that the IMF is promoting.

Although adopting new revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis (including increasing tax rates on higher income brackets, high-end property, capital gains, and wealth) as well as changes to corporate taxation that ensure firms pay taxes commensurate with profitability. …Efforts to expand the tax base can include reducing corporate tax breaks, applying tighter caps on personal income tax deductions, instituting value-added taxes.

Oh, by the way, if nations have any rules that protect the interests of taxpayers, the IMF wants “temporary” suspensions.

Where fiscal rules may constrain action, their temporary suspension would be warranted

Needless to say, any time politicians have a chance to expand their power, temporary becomes permanent.

When I discuss IMF malfeasance in my speeches, I’m frequently asked why the bureaucrats propose policies that don’t work – especially when the organization’s supposed purpose is to promote growth and stability.

The answer is “public choice.” Top IMF officials are selected by politicians and are given very generous salaries, and they know that the best way to stay on the gravy train is to support policies that will please those politicians.

And because their lavish salaries are tax free, they have an extra incentive to curry favor with politicians.

P.S. I wish there was a reporter smart enough and brave enough to ask the head of the IMF to identify a single nation – at any point in history – that became rich by expanding the size and cost of government.

P.P.S. There are plenty of good economists who work for the IMF and they often write papers pointing out the economic benefits of lower taxes and smaller government (and spending caps as well!). But the senior people at the bureaucracy (the ones selected by politicians) make all the important decisions.

 

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There are many reasons to be depressed about Italy.

Bad policy is part of the problem, of course, but this chart shows that the country also is facing a demographic crisis. The blue lines show that there are now more deaths than births.

The chart comes from a Bloomberg column by Flavia Rotondi and Giovanni Salzano, and they explain some of the adverse consequences of this demographic change.

Italy isn’t just in an economic slump, its population is also sagging, pushing the country into its biggest demographic crisis in more than a century. The number of people in the country fell for a fifth year in 2019, and deaths exceeded births by almost 212,000, the biggest gap since 1918. …Italy already has huge long-term economic challenges, and the population trends, if they continue, are going to make surmounting them even harder. Italy won’t have enough young workers, and funding a rapidly aging population will strain an already stretched fiscal situation. Pension costs now amount to almost 17% off the economy. …“With an aging population and a consistent decrease of workers who pay taxes, our retirement system may go haywire” said Pietro Reichlin, a professor of economics.

Politicians naturally will want to compensate for these changes by raising the tax burden.

But Italy already is at a breaking point because of punitive taxation. Writing for the Foundation for Economic Education, Daniel Di Martino discusses that nation’s dirigiste system.

Italy’s problem, similar to many of its southern European neighbors, is an oppressively high tax burden, irresponsible welfare programs that encourage high measured unemployment and increase the debt, and high levels of regulation. …the share of average wages collected by the Italian government via income and social security taxes is 48 percent, among the highest in the Organization for Economic Co-operation and Development (OECD). In addition, Italy imposes a value-added tax of 22 percent on most goods and services, one of the highest in Europe. Plus, Italy’s corporate, capital gains, gift, and myriad other taxes are passed on to individuals and borne directly by workers. …At the same time, Italy’s complex regulations are a barrier to starting or continuing productive activities. A study by economist Raffaela Giordano of the Bank of Italy concluded that the main reason behind Italy’s underperformance was burdensome regulations and corrupt and inefficient government structure.

Adam O’Neal makes similar points about bad policy in a column for the Wall Street Journal.

Even before the pandemic, Italy hadn’t recovered fully from the 2008-09 financial crisis. Unemployment hovered around 10% in 2019. Adjusting for inflation, the average Italian worker earned the same as he did 20 years ago. Italian banks were Europe’s weakest. …What ails Italy? …Italy’s greatest challenge is a gargantuan government that destroys wealth as efficiently as the private economy creates it. …In 2018 government revenue was 42% of GDP, nearly 8 points above the Organization for Economic Cooperation and Development average. Yet profligate outlays—Rome spent 16.2% of GDP on public pensions in 2015—brought debt to about 135% of GDP last year.

The net effect of all this misguided policy is that Italy’s economy is moribund.

In his column for Bloomberg, Professor Tyler Cowen summarizes the problem.

One striking fact about Italy is that, over the last 20 years, growth in per capita income has been close to zero. …a zero-growth environment cannot be stable forever. …If the pie doesn’t grow, eventually it becomes harder to sustain productive activity… Aging is another reason economic growth is necessary. …many countries (including Italy) have expensive pension systems. Someone has to pay the bill, and without innovation and economic growth, taxes will have to rise. That in turn discourages work, pushing people into untaxed black-market activity, necessitating higher tax rates, and the vicious cycle starts again.

And when you combine bad demographics and bad policy, that not only means stagnation in the short run, it also could mean fiscal crisis in the long run.

Except “long run” may be just around the corner.

Desmond Lachman of the American Enterprise Institute warns that an Italian fiscal crisis will make the mess in Greece seem trivial by comparison.

…markets are displaying remarkable complacency toward a rapidly deteriorating Italian political and economic situation. They are doing so in a manner that is painfully reminiscent of how complacent they were in 2009 on the eve of the Greek sovereign debt crisis. This could have major consequences for global financial markets considering that the Italian economy…has around 10 times as much public debt as Greece had at the time of its crisis. …One has to hope that while markets might be turning a blind eye to Italy’s deteriorating economic and political fundamentals, global economic policymakers are not. As experience with the Greek sovereign debt crisis reaffirmed, crises often take a lot longer than one would have thought to occur, but when they do occur they do so at a very much faster rate than one would have expected.

Some people argue that a fiscal crisis can be avoided if the European Central Bank buys up Italy’s government debt.

That certainly can avert a panic, at least for a while, but this approach can cause a different set of problems.

Joseph Sternberg opines for the Wall Street Journal that the European Central Bank’s easy-money policy has backfired by giving politicians in Rome the leeway to postpone desperately needed reforms.

If the ECB had not stepped in as a buyer of government debt, Rome long since would have faced fiscal catastrophe. Only a miracle—or €365 billion in ECB purchases of Italian sovereign debt since 2015—can explain how in recent years a country whose debt has ballooned to 130% of gross domestic product paid nearly the same interest rate as Germany… Even after selling so many sovereign bonds to the central bank, Italy’s banks continue to be large holders of their government’s debt. Such bonds constitute around 10% of Italian bank assets, nearly three times the eurozone average. …Mr. Draghi hoped his interventions would give wayward governments such as in Rome breathing room to overhaul the supply side of their economies—deregulating markets, privatizing state assets, trimming welfare programs and the like. But Rome has mainly slid backward.

While intervention by the European Central Bank isn’t the solution to Italy’s problems (and may actually make problems worse), this is also a good opportunity to make the related point that the euro currency also shouldn’t be blamed for the nation’s stagnation.

I’m not a big fan of the European Union and the crowd in Brussels, but Italy’s challenges overwhelmingly are the fault of policies adopted by Italian politicians.

Indeed, if you look at the data from the most-recent edition of the Fraser Institute’s Economic Freedom of the World, you can see monetary policy isn’t a problem. Instead, the nation’s big impediment to prosperity (highlighted in red) is terrible fiscal policy.

To put this data in perspective, Italy has the next-to-lowest-ranked economy in Western Europe, with only Greece having less economic liberty.

The numbers from the Heritage Foundation’s Index of Economic Freedom tell a very similar story.

If you peruse the data from the most-recent edition of that publication, you’ll see that Italy gets weak scores for its approach to labor issues, the judiciary, and taxes.

But it gets an utterly dismal score (highlighted in red) for government spending.

Sadly, there’s no political party in Italy that wants to solve the problem of excessive spending – even though I explained how it could be done while in Milan many years ago. And without spending restraint, that means it’s almost impossible to adopt pro-growth tax reform.

P.S. No wonder some people in Sardinia want to secede from Italy and instead become part of Switzerland.

P.P.S. Amazingly, a New York Times’ columnist actually argued that the United States should be more like Italy.

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Before our depressing discussion today about the fiscal impact of entitlement programs (Social Security, Medicare, Medicaid, EITC, Food Stamps, welfare, and Obamacare, etc), here’s a video of how it all began.

I think this is a great introduction to the issue, particularly since you learn how “public choice” (i.e., politicians engaging in self-serving behavior) played a key role in the development of today’s welfare state.

But if you don’t have the time to watch a long video, here are four key things to understand.

  1. Entitlements (budget geeks sometimes use the term “mandatory spending”) are programs that automatically give people money if they meet certain requirements (such as reaching a certain age or having income below a certain level).
  2. Since these programs automatically give people money, they are not part of the annual appropriations process (the “discretionary spending” parts of the budget that are determined on a yearly basis).
  3. Some entitlement programs are “means tested” and designed to funnel money to low-income individuals. This type of spending is sometimes referred to as “unearned benefits.”
  4. Some entitlement programs are “social insurance” since people pay specific tax in exchange for specific benefits. This type of spending is sometimes referred to as “earned benefits” (though in many cases recipient receive much more than they paid).

By the way, there’s one additional thing to understand.

Indeed, it may be the most important thing to understand if you care about America’s fiscal and economic future.

5.  Entitlement programs are a slow-motion fiscal train wreck.

Let’s look at a new study authored by James Capretta of the America Enterprise Institute. He also has some sobering observations on the history of entitlement programs.

The growing expense of entitlement programs has occurred steadily for more than a half century and is reflected in the shifting distribution of federal spending activity. …by the early 1960s, two-thirds of all spending continued to require approval by the House and Senate appropriations committees each year, and less than a third was spent on entitlement programs. … By 2019, nearly two-thirds of all spending in the budget was for entitlement programs, and less than a third went to annually appropriated accounts.

If you prefer this information visually, here are a couple of pie charts from the study.

While there are dozens of entitlement programs, the big three are Social Security, Medicare, and Medicaid.

The largest entitlement programs are Social Security, Medicare, and Medicaid. Together, they now make up nearly half of all federal spending. Their combined growth over the past half century is the primary source of intensifying fiscal pressure. …In 2019, combined federal spending on them was 9.8 percent of GDP, up from 3.7 percent in 1970. CBO expects them to cost 17.2 percent of GDP in 2050, which is almost equal to the average annual revenue collected by the federal government from 1970 to 2019.

And here’s how they’ve been consuming ever-larger shares of America’s economic output.

What’s driving this ever-increasing fiscal burden?

In part, it’s because we have more and more old people and they are living longer.

So what does all this mean?

Capretta points out that uncontrolled entitlement spending may lead to a debt crisis.

I don’t disagree, but I think that’s a secondary concern. The real problem is that government spending will become an ever-larger economic burden. And that will hinder growth whether it’s financed by borrowing or taxes.

Speaking of taxes, here’s the chart from the study that deserves our close attention. It shows the relationship between demographics, benefit generosity, and tax burdens.

Here’s how Capretta describes the relationship.

…for each of the stipulated replacement rates (25, 50, and 75 percent), the tax rate necessary to keep the program solvent rises with increases in the aged dependency ratio. This explains why social insurance taxes in many aging societies have been increased to high levels in recent decades.

I’ve taken the liberty of augmenting the chart to show how these factors interact (though the order of #1 and #2 doesn’t matter).

The bottom line is that the United States is on track to become a high-tax, European-style welfare state if fiscal policy is left on autopilot.

In other words, unless there’s genuine entitlement reform, future Americans will be condemned to lower living standards.

P.S. Here’s some more history. In a column for the American Institute for Economic Research, Richard Ebeling looked at British history to explain how the private sector played a role in social insurance before being displaced by government.

Throughout the 19th century, a primary means for the provision of what today we call the “social safety nets” was by the private sector outside of government. The British Friendly Societies were mutual assistance associations that emerged to provide death benefits for the wives and children of the breadwinner who had passed away. But they soon offered a wide array of other mutual insurance services, including health care coverage, retirement pension programs, unemployment insurance, savings clubs to purchase a family house, and a variety of others. …by the end of the 19th century around two-thirds to three-quarters of the entire British population was covered by one or more of their programs and insurances. The research also discovered that a large majority of the subscribers were in the lower income brackets of the time… What stands out is that these were all private and voluntary associations and exchanges, in which the government paid little or no role.

On a related note, here’s an excellent short video on the English “poor laws” from the 1800s.

P.P.S. In addition to the fiscal burden of entitlement programs, there’s also a major problem in the way these programs discourage work.

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As indicated by one of my columns last week, I’m a big believer in federalism.

Indeed, I’ve even proposed that Washington shouldn’t operate any social programs. No food stamps. No Medicaid. No redistribution programs of any kind.

Such programs, to the extent they should exist, should be handled by state and local governments.

The welfare reform legislation under Bill Clinton is an example of how to move in the right direction. A top-down program from Washington was turned into a block grant, and then state and local governments got the freedom to choose policies that might actually help the poor become self-sufficient instead of being trapped in dependency.

Not pure libertarianism, of course, but still an example of progress. And we got good results.

Given this track record, I was very interested to see a column in today’s New York Times by Ezekial Emanuel and Rahm Emanuel on the topic of federal-state fiscal relations.

Medicaid and unemployment insurance…need permanent institutional reform and modernization. …the next stimulus package…should then be…a…federal-state Grand Bargain would solve festering problems in health care and unemployment assistance Years of political experience show that no matter how imperative and sensible, a policy’s chances of success are diminished unless it delivers political benefits. This bargain would create a victory for both parties.

This sounds intriguing. And potentially even desirable.

There’s no question, after all, that the current Medicaid system desperately needs reform. And the unemployment program also is a mess, luring people into joblessness.

So what exactly are the Emanuel brothers proposing? What is the “Grand Bargain” that offers benefits for both sides?

Sadly, it turns out that their bipartisan rhetoric is just an excuse for bigger government.

The bargain, which we call American Modernization Initiative…the federal government to assume the costs and administration of Medicaid and unemployment insurance, the states would have to agree to use freed up resources — a quarter of a trillion dollars per year — to invest in education and infrastructure. …The Grand Bargain is not only good policy, but good politics. …Governors would no longer be responsible for large programs… With the American Modernization Initiative, the constant, bitter battles over cutting state programs to fund growing Medicaid costs will disappear.

Yes, you read correctly. Their idea of a “bargain” is that the federal government agrees to spend more money so that that state governments will then have the ability to spend more money.

Even Republicans aren’t stupid enough to go along with that kind of deal.

So I’ll propose an alternative.

According to Chris Edwards, there are now nearly 1,400 programs involving some sort of link or overlap between the federal government and state governments.

The biggest of these programs is Medicaid, accounting for 56 percent of the overall spending.

So why not give the states a choice: They either take full responsibility for Medicaid – including the financing after some transition period. Or they take responsibility for the other 1,385 programs (probably more by now) programs – assuming, again, they are responsible for the financing after a transition period.

Regardless of their choice, the end result would be a system where there’s a reasonably significant shift toward federalism. And perhaps we would add a bit of clarity to the blurry line that currently sets the boundary between what’s Washington’s job and what’s the role of state governments.

And maybe, just maybe, there wouldn’t be as much wasteful leakage as we have now.

P.S. For what it’s worth, there’s strong academic evidence that decentralized governments produce better outcomes.

P.P.S. Federalism doesn’t only apply to income-redistribution programs. We also should eliminate any role for Washington in areas like education and transportation.

P.P.P.S. Here’s the data on the history of redistribution spending in developed nations.

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Back in 2016, I shared an image that showed how the welfare state punishes both the poor and rich.

Rich people are hurt for the obvious reason. They get hit with the highest statutory tax rates, and also bear the brunt of the double taxation (the extra layers of tax on saving and investment resulting from capital gains taxes, double taxes on dividends, death taxes, etc).

But I also pointed out that the poor are penalized because they get trapped in dependency.

In large part, this is because they face bad incentives when they work and try to become self sufficient. Not only do they get hit by federal and state taxes, but they also can lose access to various redistribution programs. And the combination of those two factors can produce very high implicit marginal tax rates.

I cited an astounding example of this phenomenon in 2012, showing that a single mother in Pennsylvania would be better off earning $29,000 rather than $57,000. In other words, her implicit marginal tax rate on an extra $28,000 would be 100 percent (thus fulfilling FDR’s odious dream, albeit against a different set of victims).

How pervasive is this problem?

A new study published by the National Bureau of Economic Research gives us the answer. Authored by David Altig, Alan J. Auerbach, Laurence J. Kotlikoff, Elias Ilin, and Victor Ye, it estimates implicit marginal tax rates for various segments of the population.

A plethora of federal and state tax and benefit policies jointly determine Americans’ incentives to work. …complex and often arcane provisions that condition tax payments and benefit receipts on labor income, asset income, total income, and the level of assets. …The myriad features of our fiscal system raise this paper’s central questions: What are the typical levels of marginal net tax rates facing Americans of different ages and resource levels, taking the entire federal and state fiscal system into account? …How much does one’s choice of the state in which to live impact one’s incentive to work? …We address these questions by running 2016 Survey-of-Consumer-Finances (SCF) data through The Fiscal Analyzer (TFA).

The five economists discovered that lower-income people are often hit by very high marginal tax rates on work (τL).

Our main findings, which focus on the fiscal consequences of SCF household heads earning $1,000 more in our base year – 2018, are striking. One in four low-wage workers face lifetime marginal net tax rates above 70 percent, effectively locking them into poverty. Over half face remaining lifetime marginal net tax rates above 45 percent. …marginal net lifetime tax rates are generally higher for those in the lowest quintile than for those in the middle three quintiles… The potential poverty trap arising under our fiscal system is highlighted by the 75th τL-percentile values for the bottom quintiles. Moving from the youngest to the oldest cohorts, these values are 67.4 percent, 75.9 percent, 69.3 percent, 76.5 percent, 74.4 percent, and 73.9 percent. Hence, one in four of our poorest households, regardless of age, make between two and three times as much for the government than they make for themselves in earning an extra $1,000.

This graph from the study shows how poor people can even face marginal tax rates of more than 100 percent (which I’ve highlighted in red). The vertical axis is the tax rate and the horizontal axis is household prosperity.

Subjecting poor people to very high implicit tax rates is horrible economic policy, just like it’s horrible policy to hit any other group of people with high marginal tax rates.

Simply stated, when people are punished for engaging in productive economic behavior, they respond by reducing their work, their saving, their investment, and their entrepreneurship.

Interestingly, some states are better (or less worse) than others.

One’s choice of state in which to live can dramatically affect marginal net tax rates. Across all cohorts, the typical bottom-quintile household can lower its remaining lifetime marginal net tax rate by 99.7 percentage points by switching states! …The typical household can raise its total remaining lifetime spending by 8.1 percent by moving from a high-tax to a low-tax state, holding its human wealth, housing expenses, and other characteristics fixed. …To illustrate how τL varies from state to state, we calculate the median τL for households in the 30-39 age cohort in the lowest resource quintile in each state. …Figure 11 shows the cross-state variation in median lifetime marginal tax rates. …median rates varies between a low of 38.8 percent in South Carolina and a high of 55.0 percent in Connecticut. Clearly, where people live can matter a lot for their incentives to work.

Here’s a map showing the marginal tax rate on people in the bottom 20 percent. The obvious takeaway is that you don’t want to be a poor person in Connecticut, Minnesota, or Illinois.

For what it’s worth, tax rates are still too high in the best states (South Carolina, Texas, Indiana, and South Dakota).

The bottom line is that the welfare state is bad news for both taxpayers and recipients. All of which may help to explain why the poverty rate stopped falling once the government declared a “War on Poverty.”

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Assuming he was able to impose his policy agenda, I think Bernie Sanders – at best – would turn America into Greece. In more pessimistic moments, I fear he would turn the U.S. into Venezuela.

The Vermont Senator and his supporters say that’s wrong and that the real goal is to make America into a Nordic-style welfare state.

Since those nations mitigate the damage of their large public sectors with very pro-market policies on regulation, trade, and property rights, that wouldn’t be the worst outcome.

Though “Crazy Bernie” is still wrong to view Denmark and Sweden as role models. Why adopt the policies of nations that have less income, lower living standards, and slower growth?

Is Finland a better alternative?

The answer is yes, according to Ishaan Tharoor’s WorldView column in the Washington Post.

Sanders and some of his Democratic competitors are clear about what they want to change in the United States. They call for the building of a robust social democratic state, including programs such as universal healthcare, funded in large part by new taxation on the ultrarich and Wall Street. …Sanders is particularly fond of the “Nordic model” — the social plans that exist in countries such as Denmark, Sweden, Norway and Finland, which deploy higher taxation to provide quality public services and keep inequality at rates lower than the United States. …Across the Atlantic, at least one leading proponent of the Nordic model welcomed its embrace by U.S. politicians. “We feel that the Nordic Model is a success story,” said Finnish Prime Minister Sanna Marin… “I feel that the American Dream can be achieved best in the Nordic countries, where every child no matter their background or the background of their families can become anything, because we have a very good education system,” she said.

I prefer the analysis of a previous Prime Minister, though it’s hard to fault Ms. Marin for extolling the virtues of her nation.

But is Bernie Sanders really talking about turning America into Finland?

Tharoor correctly notes that the Nordic nation tell a very mixed story.

Sanders’s ascent in the past five years has spurred considerable debate over what lessons should be learned from the Nordic countries he celebrates. A cast of centrist and conservative critics note, first, that these Nordic countries are more capitalist than Sanders concedes, with generous pro-business policies and their own crop of billionaires; and, second, that the welfare states in Nordic countries are largely financed by extensive taxes on middle-class wages and consumption.

The last excerpt is key.

The big welfare states in Europe – and specifically in Nordic nations such as Finland – are financed with big burdens on lower-income and middle-class taxpayers.

According to data from the Tax Foundation and OECD, middle-income Finnish taxpayers are forced to surrender about 15 percent more of their income to government.

Why such a big difference?

Because Finland has an onerous value-added tax, punitive payroll taxes, and their income tax imposes high rates on people with modest incomes.

In other words, it’s not the rich who are financing the welfare state. Yet Bernie Sanders never mentions that point.

I’ll close by simply noting that Finland (like other Nordic nations) is not a statist hellhole. As I wrote just two months ago, the nation has some very attractive policies.

Indeed, the country is almost as market-oriented as the United States according to Economic Freedom of the World (and actually ranked above America as recently as 2011).

Bernie Sanders, though, wants to copy the bad features of Finland.

He wants America to have a big welfare state, but doesn’t want Finland’s very strong rule of law or robust property rights for people in the private sector. Nor does he want Finland’s 20 percent corporate tax rate.

And I suspect he doesn’t realize that Finland just learned an important lesson about the downsides of giving people money for nothing.

Most important of all, I’m very confident he doesn’t understand why Americans of Finnish descent generate 47 percent more national income than Finns who stayed home.

P.S.S. Researchers at Finland’s central bank seem to agree with my concern about excessive government spending.

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As part of my collection of honest leftists, I have a bunch of columns highlighting how some advocates of big government (including, to their credit, Bernie Sanders and Andrew Yang) don’t hide from reality.

I’m unalterably opposed to their policies, but at least they openly admit that huge tax increases on ordinary people are needed in order to finance a European-style welfare state.

Now we have two more honest statists to add to our list.

In a column for the Washington Post, Eric Harris Bernstein and Ben Spielberg openly embrace huge tax increases on Americans with modest incomes.

They start by complaining that the tax burden is lower in the United States compared to other western nations.

A no-new-middle-class-taxes pledge…is seriously misguided. Middle-class taxes are a necessary and desirable part of a comprehensive, progressive policy framework… Democratic presidential candidates should make the case for middle-class taxes, not run from them. Here is a basic fact: The United States is a low-tax country. In 2018, the most recent year for which data is available, the United States ranked fourth-lowest in the Organization for Economic Cooperation and Development (a consortium of 36 economically developed countries) in terms of tax revenue collected as a percentage of the economy — behind nations like Germany, Israel, Latvia and Canada. The gap between U.S. and average OECD revenue has widened over time, from 1.3 percentage points of gross domestic product in 1965 to 10 percentage points more recently. That’s nearly $2 trillion per year in forgone revenue from lower tax rates.

Interestingly (though not surprisingly), they don’t acknowledge that Americans are far richer than people in other advanced nations.

So maybe, just maybe, there’s a relationship between tax policy and economic outcomes.

The authors then complain that Reagan triggered an era of lower taxes for the non-rich. Oh, the horror!

In 1979, the year before Ronald Reagan was elected president, the average household in the middle quintile of the income distribution paid 19.1 percent of its income in federal taxes, according to data from the Congressional Budget Office. By 2016, that rate had dropped 5.2 percentage points, more than a quarter, to 13.9 percent. The story is similar for the second and fourth quintiles, which saw their rates decline by 5.6 and 3.8 percentage points respectively over the same period.

Here’s a graphic that accompanied the column.

As you can see, readers are supposed to conclude that the United States is “below average” compared to other developed nations.

What would it mean if politicians reversed all the tax cuts that started under Reagan?

The most revealing factoid from the column is their calculation that middle-income families should be paying $3800 more to the IRS every year.

In 2016, middle-quintile families paid $3,800 less in taxes than they would have at 1979 rates… Low middle-class taxes in the United States stand in stark contrast to the approach in other developed countries, which raise more revenue from the middle class through some combination of taxes on goods and services, payroll taxes, and income taxes.

And don’t forget that the authors don’t just want to go back to 1979 tax rates.

They want America to become another France.

Somehow, I suspect America’s middle-class does not want to be pillaged like their European counterparts.

Amazingly, it gets even worse. The authors want more debt-financed spending and they even endorse the perpetual motion machine of “modern monetary theory.”

Of course, middle-class tax increases are not the only means of providing these public goods. Trillions of dollars can be raised through various taxes on the rich… And funding public investments with government debt, which modern monetary theory’s adherents recommend, is a far better approach than requiring every program to have a designated “payfor.” The government is uniquely positioned to borrow money, and we shouldn’t let unsubstantiated, theoretical concerns about debt levels prevent us from addressing the concrete and urgent needs of today.

I could end the column at this point and simply observe that it’s good to find honest folks on the left, even if they’re wildly wrong.

But the authors of the column unintentionally have given me an excuse to make a key point about taxes, growth, the economy, and the Laffer Curve.

Their graphic inserted above reveals that the overall tax burden in France consumes 46.1 percent of GDP in France, nearly twice as high as the United States.

But high tax rates don’t necessarily produce high tax revenues.

Indeed, I crunched data from the International Monetary Fund and found that per-capita revenues in France are only about 10 percent higher than they are in the United States.

I’m sure Art Laffer won’t be surprised by these results. Neither would Ibn Khaldun.

The bottom line is that most people in Europe are subject to much higher tax rates, which leads to lower living standards and weaker economies, which means there’s not even a lot of tax revenue to spend.

Would your family be willing to give up $10,000, $15,000, or $20,000 of income just so politicians could spend an extra $2,000 per household?

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I’m currently in London for discussions about public policy, particularly the potential for the right kind of free-trade pact between the United States and United Kingdom.

I deliberately picked this week for my visit so I also could be here for the British election. As a big fan of Brexit, I’m very interested in seeing whether the U.K. ultimately will escape the slowly sinking ship otherwise known as the European Union.

But the election also is an interesting test case of whether people are willing to vote for socialism. The Brits actually made this mistake already, voting for Clement Attlee back in 1945. That led to decades of relative decline, culminating in a bailout from the International Monetary Fund.

Margaret Thatcher then was elected in 1979 to reverse Attlee’s mistakes and she did a remarkable job of restoring the British economy.

But do voters understand this history?

We’ll find out on Thursday because they’ll have the opportunity to vote for the Labour Party, led by Jeremy Corbyn, who is the British version of Bernie Sanders.

And he doesn’t hide his radical vision for state control of economic life. Here’s how the Economist describes Corbyn’s agenda.

…the clear outlines of a Corbyn-led government emerged in the manifesto. Under Labour, Britain would have a larger, deeper state… Its frontiers would expand to cover everything from water supply to broadband to how much a landlord may charge a tenant. Where the state already rules, such as in education or health, the government would go deeper, with the introduction of free child-care for pre-schoolers and a “National Care Service” for the elderly. …The government would spend £75bn on building 100,000 council homes per year, paid for from a £150bn “transformation fund”, a pot of money for capital spending on public services. Rent increases would be capped at inflation. The most eye-catching proposal, a plan to nationalise BT’s broadband operations and then offer the service free of charge… Surviving policies from 2017 include a plan to nationalise utilities, alongside Royal Mail and the rail network, and a range of new rights for workers, from a higher minimum wage to restored collective-bargaining rights. All told, government spending would hit 45.1% of GDP, the highest ratio in the post-war era outside of a recession and more than in Germany… To pay for it all, very rich people and businesses would be clobbered. Corporation tax would rise to 26% (from 19% now), which Labour believes, somewhat optimistically, would raise another £24bn by 2024.

As reported by City A.M., the tax increases target a small slice of the population.

Jeremy Corbyn…is planning to introduce a new 45 per cent income tax rate for those earning more than £80,000 and 50 per cent on those with incomes of £125,000 or more. The IFS…estimates that would affect 1.6m people from the outset, rising to 1.9m people by 2023-24. Labour’s policy would add further burden to the country’s biggest tax contributors, with the top five per cent of income tax payers currently contributing half of all income tax revenues, up from 43 per cent just before the financial crisis.  But the IFS warned the amount this policy would raise was “highly uncertain”, with estimates ranging from a high of £6bn to an actual cost of around £1bn, if the policy resulted in a flight of capital from the UK. Lawyers have previously warned that high net worth individuals are poised to shift billions out of the country in the event of a Corbyn government.

Is that a smart idea?

We could debate the degree to which upper-income taxpayers will have less incentive to be productive.

But the biggest impact is probably that the geese with the golden eggs will simply fly away.

Even the left-leaning Guardian seems aware of this possibility.

The super-rich are preparing to immediately leave the UK if Jeremy Corbyn becomes prime minister, fearing they will lose billions of pounds if the Labour leader does “go after” the wealthy elite with new taxes, possible capital controls and a clampdown on private schools. Lawyers and accountants for the UK’s richest families said they had been deluged with calls from millionaire and billionaire clients asking for help and advice on moving countries, shifting their fortunes offshore and making early gifts to their children to avoid the Labour leader’s threat to tax all inheritances above £125,000. …Geoffrey Todd, a partner at the law firm Boodle Hatfield, said many of his clients had already put plans in place to transfer their wealth out of the country within minutes if Corbyn is elected. …“There will be plenty of people on the phone to their lawyers in the early hours of 13 December if Labour wins. Movements of capital to new owners and different locations are already prepared, and they are just awaiting final approval.” …On Thursday, Corbyn singled out five members of “the elite” that a Labour government would go after in order to rebalance the country. …The shadow Treasury minister Clive Lewis went further than the Labour leader, telling the BBC’s Newsnight programme: “Billionaires shouldn’t exist. It’s a travesty that there are people on this planet living on less than a dollar a day.

Some companies also are taking steps to protect shareholders.

National Grid (NG.) and SSE (SSE) are certainly not adopting a wait-and-see approach to the general election. Both companies have moved ownership of large parts of their UK operations overseas in a bid to soften the blow of potential nationalisation. With the Labour manifesto reiterating the party’s intention to bring Britain’s electricity and gas infrastructure back into public ownership, energy companies (and their shareholders) face the threat of their assets being transferred to the state at a price below market value.

The Corbyn agenda violates the laws of economics.

It also violates the laws of math. The Labour Party, for all intents and purposes, wants a big expansion of the welfare state financed by a tiny slice of the population.

That simply doesn’t work. The numbers don’t add up when Elizabeth Warren tries to do that in the United States. And an expert for the Institute for Fiscal Studies notes that it doesn’t work in the United Kingdom.

The bottom line is that Corbyn and his team are terrible.

That being said, Boris Johnson and the current crop of Tories are not exactly paragons of prudence and responsibility.

They’re proposing lots of additional spending. And, as City A.M. reports, Johnson also is being criticized for promising company-specific handouts and protectionist rules for public procurement.

In a press conference today, Johnson promised to expand Britain’s state aid regime once the UK leaves the EU. “We will back British businesses by introducing a new state aid regime which makes it faster and easier for the government to intervene to protect jobs when an industry is in trouble,” a briefing document said. Head of regulatory affairs at the Institute of Economic Affairs (IEA) Victoria Hewson said support for state aid was “veiled support for cronyism.” …A spokesperson for the Institute of Directors said: “It’s not clear how these proposals will fit with ambitions of a ‘Global Britain’. The Conservatives must be wary of opening a can of worms on state aid, it’s important to have consistent rules in place to resist the impulse of unwarranted protectionism.” Johnson also promised to introduce a buy British rule for public procurement. …IEA economics fellow Julian Jessop said: “A ‘Buy British’ policy is pure protectionism, and it comes with heavy costs.

Perhaps this is why John O’Connell of the Taxpayers Alliance has a rather pessimistic view about future tax policy. Here are excerpts of a column he wrote for CapX.

Theresa May’s government implemented a series of big state, high tax policies. Promises of no strings attached cash for the NHS; new regulations on net zero; tax cuts shelved and the creation of more quangos. After his surprise non-loss in the election, Corbyn shifted even further to the political left, doubling down on his nationalisation plans. All in all, the 2017 election result was terrible for people who believe in a small state. …A report from the Resolution Foundation found that government spending is rising once again, and likely to head back towards the heights of the 1970s over the coming years. The Conservatives’ recent spending review suggests state spending could be 41.3% of GDP by 2023, while Labour’s spending plans could take it to 43.3%. This compares to the 37.4% average throughout the noughties. Based on the manifestos, Labour are working towards a German-sized state, while the Tories’ plan looks more Dutch. Unsurprisingly we see this mirrored by the tax burden, which at 34.6% of GDP has already reached a fifty-year high. It is likely to increase further. …British taxpayers are presented with something of a Hobson’s choice: Boris Johnson will see taxes increase and spending shoot up, while Jeremy Corbyn has £1.2 trillion worth of unfunded spending rises just waiting to become unimaginable tax hikes for everyone. Whoever you vote for, you’ll get higher taxes, the question is just about how high.

Let’s close by looking at the big picture.

Here’s a chart showing the burden of government spending in the United Kingdom since 1900. I’ve augmented the chart to show the awful trend started by Attlee (in red) and then the positive impact of Thatcher (in green).

You can also see that Tony Blair and Gordon Brown did a bad job early this century, followed by a surprisingly good performance by David Cameron.

Now it appears that British voters have to choose between a slow drift in the wrong direction under Boris Johnson or a rapid leap in the wrong direction under Jeremy Corbyn.

Normally I would be rather depressed by such a choice. I’m hoping, however, that Brexit (assuming it actually happens!) will cause Boris Johnson to make smart choices even if he is otherwise tempted to make bad choices.

P.S. Unsurprisingly, Corbyn has been an apologist for thugs and dictators.

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I’ve written many columns about Sweden and Denmark over the past 10-plus years, and I’ve also written several times about Norway and Iceland.

But I’ve mostly neglected Finland, other than some analysis of the country’s experiment with “basic income” in 2017 and 2018.

Now, thanks to a very interesting column in the New York Times, it’s time to rectify that oversight. According to the authors, Anu Partanen and , Finland is a great place with lots of goodies provided by taxpayers.

Finland, of course, is one of those Nordic countries that we hear some Americans, including President Trump, describe as unsustainable and oppressive — “socialist nanny states.”…We’ve now been living in Finland for more than a year. The difference between our lives here and in the States has been tremendous… What we’ve experienced is an increase in personal freedom. …in Finland, we are automatically covered, no matter what, by taxpayer-funded universal health care… Our child attends a fabulous, highly professional and ethnically diverse public day-care center that amazes us with its enrichment activities and professionalism. The price? About $300 a month — the maximum for public day care, because in Finland day-care fees are subsidized for all families. …if we stay here, …College would also be tuition free. If we have another child, we will automatically get paid parental leave, funded largely through taxes, for nearly a year… Compared with our life in the United States, this is fantastic.

Interestingly, the authors are not clueless Bernie Sanders-style leftists.

They fully understand and appreciate that Finland (like all Nordic nations) is not a socialist country.

…surely, many in the United States will conclude, Finnish citizens and businesses must be paying a steep price in lost freedoms, opportunity and wealth. …In fact, a recent report by the chairman of market and investment strategy for J.P. Morgan Asset Management came to a surprising conclusion: The Nordic region is not only “just as business-friendly as the U.S.” but also better on key free-market indexes, including greater protection of private property, less impact on competition from government controls and more openness to trade and capital flows. …What to make of all this? For starters, politicians in the United States might want to think twice about calling the Nordics “socialist.” …in Finland, you don’t really see the kind of socialist movement…, especially around goals such as curtailing free markets and even nationalizing the means of production. The irony is that if you championed socialism like this in Finland, you’d get few takers. …a 2006 study by the Finnish researchers Markus Jantti, Juho Saari and Juhana Vartiainen demonstrates…throughout the 20th century Finland remained — and remains to this day — a country and an economy committed to markets, private businesses and capitalism.

This is a very accurate assessment. Finland is more market-oriented than the United States in many categories.

Moreover, the country is ranked #21 for economic freedom out of 162 nations in Economic Freedom of the World, with a score of 7.80. That’s just .05 behind Taiwan and .09 behind Chile.

That being said, the burden of taxes and spending is rather onerous.

…after World War II, …Finnish capitalists also realized that it would be in their own long-term interests to accept steep progressive tax hikes. …the nation’s commitment to providing generous and universal public services…buffered and absorbed the risks and dislocations caused by capitalist innovation. …Visit Finland today and it’s obvious that the much-heralded quality of life is taking place within a bustling economy of upscale shopping malls, fancy cars and internationally competitive private companies. …Yes, this requires capitalists and corporations to pay fairer wages and more taxes than their American counterparts currently do.

The column concludes by suggesting that American capitalists follow the same model.

Right now might be an opportune moment for American capitalists to pause and ask themselves what kind of long-term cost-benefit calculation makes the most sense.

So should the United States copy Finland, as the authors suggest?

People would get lots of taxpayer-financed freebies, but there would be a heavy price. Taxes consume nearly 50 percent of an average family’s income (even higher according to some measures).

That’s compared to about 30 percent in the United States.

And there’s a very Orwellian aspect of the Finnish tax system. As the New York Times reported last year, everyone in the country has the right to know how much income you earn.

Pamplona can boast of the running of the bulls, Rio de Janeiro has Carnival, but Helsinki is alone in observing “National Jealousy Day,” when every Finnish citizen’s taxable income is made public at 8 a.m. sharp. The annual Nov. 1 data dump is the starting gun for a countrywide game of who’s up and who’s down. …Finland is unusual, even among the Nordic states, in turning its release of personal tax data — to comply with government transparency laws — into a public ritual of comparison. …A large dosage of Thursday’s reporting concerned the income of minor celebrities… The country’s best-known porn star, Anssi “Mr. Lothar” Viskari, was reported to have earned 23,826 euros (about $27,000).

Given the onerous level of Finnish taxes, it’s probably safe to say that “Mr. Lothar” is getting screwed more than he’s…um….well, you get the point.

So what’s the bottom line? Should America be more like Finland? Is the country reasonably successful because of high taxes, or in spite of high taxes?

The U.S. should not mimic Finland, at least if the goal is higher living standards. Finland has some advantages over the United States (including better business taxation), but the United States has more overall economic liberty.

And that presumably helps to explain why, based on data from the Organization for economic Cooperation and Development, the average American enjoys 40 percent higher living standards than the average Finn.

But the most compelling piece of data, for those who prefer apples-to-apples comparison, is that Americans of Finnish descent produce 47 percent more than Finns in Finland.

Is Finland a relatively rich nation? Yes.

Is Finland a relatively free nation? Definitely.

Is Finland a good example of western civilization? Unquestionably.

The bottom line is that Finland seems like a great country (I’ve never visited). All I’m saying is that Americans would not be as prosperous if we had Finnish-style taxation and Finnish-style spending.

P.S. Researchers at Finland’s central bank seem to agree with my concern.

P.P.S. And Finland’s former Prime Minister understood the downside of an excessive public sector.

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I give Bernie Sanders and Andrew Yang credit for a bit of honesty. Both of them have proposals to significantly – indeed, dramatically – expand the burden of government spending, and they actually admit their plans will require big tax increases on lower-income and middle-class voters.

Their numbers are still wrong, but at least they recognize you can’t have French-sized government financed by just a tiny sliver of rich people.

This makes them far more honest than other candidates such as Elizabeth Warren and Kamala Harris.

In the past, I’ve pointed out that there’s no nation in the world that finances a big welfare state without high tax burdens on ordinary people – generally steep value-added taxes, along with onerous payroll taxes and high income tax rates on middle-income earners (see, for instanced, this horrifying story from Spain).

And I’ve also periodically shared analysis from honest leftists who admit major tax hikes on the broader population will be inevitable if politicians in the U.S. create European-sized redistribution programs.

Today, we’re going to add to this collection of honest leftists.

There’s an explicitly pro-socialist magazine called Jacobin, in which Doug Henwood has a lengthy article explaining – from his statist perspective – that it’s necessary to have higher taxes on everybody.

We should be clear about what it will take to fund a decent welfare state: not just soaking the rich, but raising taxes across the board… I’m defining social democracy as a large and robust welfare state that socializes a lot of consumption through taxation and spending, compressing the income distribution, …insulating people from the risks of sickness and unemployment, and…it’s a lot bigger than Medicare for All and free college.

He compares the U.S. to other nations, especially the Nordic nations.

For those who want bigger government, America doesn’t spend nearly enough.

In 2017 (the vintage of most of these stats), the US government at all levels (aka general government in fiscal jargon) took in 34 percent of GDP in taxes and spent 38 percent. …Denmark, Norway, and Sweden — spend an average of 50 percent of GDP and take in 53 percent. None is very far from those averages, which are twelve and nineteen points above US levels, respectively. …The fourth graph is where American exceptionalism really comes in — the share of GDP spent on “social protection,” that is, classic welfare state programs. In the OECD’s words, these include “sickness and disability; old age (i.e. pensions); survivors; family and children; unemployment; housing; social exclusion n.e.c. [not elsewhere classified]; [and] R&D social protection.” The United States spends under 8 percent of GDP on these things, less than half the OECD average and a third what the Scandinavians spend.

Here’s a chart from the article showing how the U.S. doesn’t keep pace.

And how do the northern Europeans finance their big welfare states?

Henwood is very honest about the implications. You can tax the rich, but the rest of us need to have our wallets lightened.

How do the Scandinavian states — and others that are more generous social spenders than the United States — finance that spending? Not…by borrowing. Countries with more generous welfare states than ours borrow far less. Instead, they tax. …On some things, like Social Security and personal and corporate income taxes, the United States isn’t an outlier. On others, we are. …At 5 percent of GDP, our taxes on goods and services — mostly value-added taxes (VATs) in other countries… — are less than a third the Scandinavian share of GDP (16 percent)… The difference between the United States and the Scandinavians is over 10 percent of GDP.

In other words, big government means a punitive value-added tax.

That means higher taxes on the poor, as well as the middle class.

But he argues that’s okay because government will take care of everybody.

Yes, VATs are regressive. They’re taxes on consumption that hit the poor harder than the rich because the further down the income scale you go, the larger a portion of your income you consume. But their regressivity is more than compensated for in the Scandinavian countries by spending, which not only takes from the rich and gives to the poor, but takes from the masses and gives it back… It’s a way of socializing consumption to some degree, of taking things out of competitive markets.

Here’s another chart from the article, this one showing that the United States ostensibly doesn’t collect enough taxes from consumption (“goods and services”).

Now let’s take a closer look at the budgetary numbers.

Henwood points out that the usual class-warfare taxes would only finance a portion of the statism wish list.

Peter Diamond and Emmanuel Saez published a widely cited paper arguing that the optimal top tax rate for soaking the rich is 73 percent — optimal in the sense of pulling in the most revenue. …Bernie Sanders’s freshly released wealth tax plan would raise $435 billion a year, according to its designers, Saez and his Berkeley colleague Gabriel Zucman… Combine those two and you get a revenue increase of $520–755 billion, or 2.4–3.5 percent of GDP. Scandinavian revenues are 19 percentage points higher as a share of GDP than the United States’. …these taxes, which are probably what lots of contemporary American leftists have in mind, come only an eighth to a fifth of the way toward closing the gap with the Scandinavians.

His conclusion is very frank and honest.

Some might find it impolitic of me to say all this, but you have to be honest with people, otherwise they’ll turn on you for selling a bill of goods. …if we want a seriously better society of the sort outlined in the Green New Deal, then it’s going to take a lot more — and it won’t “pay for itself.”

My conclusion is that Henwood has profoundly awful policy preferences (Europeans have much lower living standards, for instance), but doesn’t believe in make-believe budgeting.

P.S. The Democrat presidential candidates have embraced one big levy – the carbon tax – that would grab lots of money from lower-income and middle-class people. But they seem to have successful convinced themselves (and maybe voters) that it doesn’t lead to higher tax burdens (even though proponents of such levies, such as the International Monetary Fund, openly acknowledge that consumers will bear the cost).

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When non-libertarian audiences ask my opinion about immigration, I generally point out that it is a very good sign that so many people want to come to the United States.

Almost everyone agrees with that statement, but that doesn’t put them in the pro-immigration camp. Instead, I find that many people have a “what’s in it for us” attitude.

  1. They like the underlying concept of programs such as the EB-5 visa that attract immigrants with money, and they are broadly sympathetic to immigrants with skills and education. At the risk of over-simplifying, they want immigrants who won’t rely on handouts and they like immigrants who presumably will increase the nation’s per-capita GDP (and there certainly is strong evidence that this happens).
  2. They’re skeptical of mass immigration by people with low incomes. This is mostly because they fear such migrants will impose higher costs on taxpayers, though Republican types also seem motivated by concerns about future voting patterns. The notable exception to this pattern is that business audiences are somewhat sympathetic to mass migration because they believe labor costs will fall.

When I deal with people in category #2, I sometimes ask them about Tyler Cowen’s idea of allowing limitless migration from nations with bigger welfare states. After all, I doubt people such as “Lazy Robert” will move from Denmark to the United States.

But what about poor people from poor nations? Would they like to migrate to rich nations to get handouts, rather than for economic opportunity?

Taxpayers in many nations are worried about that possibility and are not very welcoming to immigrants who will collect benefits.

Indeed, that’s motivated the Trump Administration to consider tightening rules for who gets in the country.

The Trump administration announced long-awaited “public charge” immigration regulations this week, and the furor immediately kicked up to derangement level. …But immigration regulation of this sort has been a part of our laws for more than a century…the 1882 act declared that “any convict, lunatic, idiot, or any person unable to take care of himself or herself without becoming a public charge…shall not be permitted to land.” …The 1952 revisions to immigration law maintained the idea that the government may exclude “paupers, professional beggars, or vagrants” and those who are “are likely at any time to become public charges.” …In 1996, Congress strengthened the public charge provisions…why would anyone call the Trump administration’s interpretation “un-American?” …the regulations—which do not apply to refugees, asylum-seekers, and various other groups—propose guidance to determine if an immigrant would be likely to use the welfare system for more than 12 months during a three-year period.

But it’s not just a controversy in the United States.

Taxpayers in the Netherlands, for instance, are becoming less tolerant of immigrants who want handouts rather than work.

Non-Western immigrants and their descendants also depend on welfare to a much greater extent than the native Dutch. They are half of all welfare recipients but only 11% of the total population. Among recent Somali refugees granted asylum, 80% are on welfare. Holland is truly a welfare state, and the Dutch are proud of it. …This type of open and yet highly regulated society can function only if it is carried by a disciplined and well-educated citizenry… That is what the fuss is about. To put it in abstract terms: Can a welfare state become an immigration state? You know the answer: A welfare state with open borders will one day run out of money.

I can’t imagine that stories like this make German taxpayers happy.

As early as 2016, German newspapers have been reporting on migrants with recognized refugee status having holidays in countries that they “fled,” such as Afghanistan, Lebanon, and Syria. Because Hartz IV, the welfare system that certain migrants granted refugee status receive, permits 21 days per year of “local absence,” those who have recognized refugee status and have no income or assets simply leave Germany for vacation and continue to receive money from German taxpayers.

There are also concerns that welfare spending hinders economic integration and independence in Sweden.

…only 20 percent of the Somali immigrants in Sweden have jobs, according to a report released on Monday by the government’s Commission… In an opinion article published in the Expressen newspaper, the author of the report, Benny Carlsson of Lund University, explained that Sweden would be well served to let community-based organizations do more…rather than relying on public agencies… Carlsson explained that…Sweden’s rigid labour market and labour protection laws also create “higher risks” for employees which amount to “higher thresholds” for Somali jobseekers. …Carlsson also cited Sweden’s social safety net which “lets people live at a decent level even if they don’t work, while the same can’t be said of the United States”.

Speaking of Sweden, stories of welfare dependency help to explain this report in the New York Times.

…four years after the influx, growing numbers of native-born Swedes have come to see the refugees as a drain on public finances. …Antipathy for immigrants now threatens to erode support for Sweden’s social welfare state. “People don’t want to pay taxes to support people who don’t work,” says Urban Pettersson, 62, a member of the local council here in Filipstad, a town set in lake country west of Stockholm. “Ninety percent of the refugees don’t contribute to society. These people are going to have a lifelong dependence on social welfare. This is a huge problem.” …Under the Nordic model, governments typically furnish health care, education and pensions to everyone. The state delivers subsidized housing and child care. When people lose jobs, they gain unemployment benefits… But the endurance of the Nordic model has long depended on two crucial elements — the public’s willingness to pay some of the highest taxes on earth, and the understanding that everyone is supposed to work. …Sweden’s sharp influx of immigrants — the largest of any European nation, as a share of the overall population — directly tests this proposition. …The unemployment rate was only 3.8 percent among the Swedish-born populace last year, but 15 percent among foreign-born… Roughly half of all jobless people in Sweden were foreign-born. …these sorts of numbers are cited as evidence that refugees have flocked here to enjoy lives of state-financed sloth. …The average refugee in Sweden receives about 74,000 Swedish kronor (about $7,800) more in government services than they pay into the system, Joakim Ruist, an economist at the University of Gothenburg, concluded in a report released last year and commissioned by the Ministry of Finance. Over all, the cost of social programs for refugees runs about 1 percent of Sweden’s annual national economic output

But is it true that migrants are looking for handouts? Are the afore-cited stories just random anecdotes, or do they suggest some countries are “welfare magnets”?

I’ve already shared some evidence that welfare recipients inside the United States gravitate to places that provide bigger benefits.

And this seems to be the case for migrants that cross national borders. Here are some findings from some new academic research showing that the generosity of Denmark’s welfare state has a significant impact on migration choices.

We study the effects of welfare generosity on international migration using a series of large changes in welfare benefits for immigrants in Denmark. The first change, implemented in 2002,lowered benefits for immigrants from outside the EU by about 50%, with no changes for natives or immigrants from inside the EU. The policy was later repealed and re-introduced. The differential treatment of immigrants from inside and outside the EU, and of different types of non-EU immigrants, allows for a quasi-experimental research design. We find sizeable effects:the benefit reduction reduced the net flow of immigrants by about 5,000 people per year, or 3.7percent of the stock of treated immigrants, and the subsequent repeal of the policy reversed the effect almost exactly. Our study provides some of the first causal evidence on the widely debated “welfare magnet” hypothesis. …our evidence implies that, conditional on moving, the generosity of the welfare system is important for destination choices.

Here’s the relevant graph from the study, based on two different ways of slicing the data.

As you can see from the red lines, migration fell when benefits were reduced, then immediately jumped when benefits were increased, and then immediately fell again when they were again lowered.

For what it’s worth, scholars believe that support for the welfare state in Europe is declining for these reasons. Taxpayers are tolerant of subsidizing their long-time neighbors, but are much less sympathetic when giving away money to newcomers.

From my perspective, the solution is obvious. I generally like immigration and generally don’t like redistribution.

So why not reduce benefits, ideally for everyone, but just to migrants if that’s the only possible outcome. That way nations are more likely to attract people (especially from low-income societies) who are seeking economic opportunity.

P.S. If you want to enjoy some immigration-related humor, we have a video about Americans migrating to Peru and a story about American leftists escaping to Canada.

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In a recent interview, I was asked whether all the new spending schemes proposed by Democratic candidates would lead (as has been the case in Europe) to enormous tax increases on the middle class.

The answer is yes, of course.

But most of the candidates are not honest on this issues (with the partial exception of Crazy Bernie). They’re promising – literally – trillions of dollars in added handouts, but their proposed tax increases only cover a tiny fraction of the cost.

Elizabeth Warren may be the most extreme example of this phenomenon.

She’s embraced every possible tax on higher-income taxpayers, including a sure-to-backfire wealth tax. But all of those tax increases wouldn’t come close to financing her spending agenda – even if one makes the heroic assumption that there’s no adverse economic impact and negative revenue feedback.

The Wall Street Journal opined on her absurd approach.

Tuesday’s Democratic debate…most important news was Senator Elizabeth Warren’s determined refusal to say if her plans would require taxes to increase on the middle class. …South Bend mayor Pete Buttigieg…added, accurately, that “no plan has been laid out to explain how a multi-trillion-dollar hole in this Medicare for All plan that Senator Warren is putting forward is supposed to get filled in.” …Senator Klobuchar…said “at least Bernie’s being honest here and saying how he’s going to pay for this and that taxes are going to go up. And I’m sorry, Elizabeth, but you have not said that, and I think we owe it to the American people to tell them where we’re going to send the invoice.” …this illuminates a problem with Ms. Warren’s agenda and her political character. On Medicare for All, everyone agrees that the cost will be at least $32 trillion over 10 years. Ms. Warren could impose her wealth tax, her higher taxes on capital gains, her higher income taxes on the affluent, and she still wouldn’t come close to paying for Medicare for All. And that’s before her plans for new spending entitlements on child care, pre-K education, free college and so much more. The only way to pay for this is to raise taxes on the middle class, which is where the real money is. That’s how government health care is financed in Europe.

But it’s not just the pro-market crowd at the Wall Street Journal that is raising the issue.

Even writers at Vox find it difficult to rationalize Sen. Warren’s evasive math.

Bernie Sanders…acknowledged that…middle-class taxes would have to go up… It was a rare moment when someone running for the Democratic presidential nomination admitted that their spending ambitions would have to be paid for by taxes that touch not just the wealthiest Americans but taxpayers further down the bracket. …Trying to sell a big progessive agenda on the backs of the rich may be popular. But the admission that middle-class taxes may have to go up is an admission that there may not be enough rich people in America to pay for it all. …Warren…indicated last week that she supports…Medicare-for-All… Such a plan would overhaul the entirety of the US health care system with a single-payer system funded through general revenue and debt. Here the promise of a vast welfare state solely funded by new taxes on the rich runs aground.

It’s gotten to the point that some left-leaning economists are scrambling to help square Warren’s circle.

Here are some excerpts from a report in today’s Washington Post, including some of the horrifying tax increases that her advisers are contemplating.

Internal and external economic policy advisers are trying to help Sen. Elizabeth Warren (D-Mass.) design a way to finance a single-payer Medicare-for-all health-care system…her team faces a challenge in crafting a plan that would bring in large amounts of revenue while not scaring off voters with big middle-class tax increases. The proposal could cost more than $30 trillion over 10 years. Complicating matters, she has already committed all of the money she would raise from a new wealth tax, close to $3 trillion over 10 years, to several other ideas… Robert Pollin, a left-leaning economist at the University of Massachusetts at Amherst who has worked with the Warren and Sen. Bernie Sanders (I-Vt.) teams, …suggests…a $600 billion annual “gross receipts” tax on businesses, …a 3.75 percent sales tax on “nonnecessities” that exempts low-income households, to raise an additional $200 billion; and a 0.38 percent tax on wealth above $1 million, which he says would raise the remaining $200 billion. Robert C. Hockett, a Cornell University professor who has also advised Warren and Sanders, said he has urged Warren’s team to propose financing Medicare-for-all in part with a “public premium” that would function similarly to a tax. …Warren’s team has also received recommendations to adopt a “progressive consumption tax”… This plan would raise trillions of dollars.

Wow, a smorgasbord of French-style tax ideas.

Let’s close with a chart from Brian Riedl of the Manhattan Institute.

As you can see, even if you combine all of the class-warfare taxes, they don’t come close to paying the $30 trillion price tag of Medicare for All.

The only good news, so to speak, is that Sen. Warren is a politician. She’s first and foremost interested in winning office and probably isn’t totally serious about actually creating all sorts of new entitlement schemes (just like I don’t particularly believe Republicans who put forth election-year plans for tax reform).

But that’s hardly a comforting observation since there would be “public choice” pressures to adopt at least some bad policy if she got to the White House.

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Social Security is projected to consume an ever-larger share of America’s national income, mostly thanks to an aging population.

Indeed, demographic change is why the program is bankrupt, with an inflation-adjusted cash-flow deficit of more than $42 trillion.

Yet Senator Elizabeth Warren wants to make a bad situation even worse.

In a blatant effort to buy votes, she is proposing a radical expansion in the old-age entitlement program. Here’s how USA Today describes her proposal.

Warren’s strategy would make major changes to Social Security, boosting benefits for all and imposing new taxes on high-income earners to finance them. …Under the proposal, everyone would get a $200 increase in monthly payments from Social Security, including both retirement and disability benefits. …Certain groups would see even larger increases. …In order to cover these benefits and shore up Social Security’s future finances, Warren would impose two new taxes. First, a new payroll tax would apply to wages above $250,000, with employees paying 7.4% and employers matching with 7.4% of their own. This is above the 6.2% employee rate that applies to current wages up to $132,900 in 2019, …Second, individual filers making more than $250,000 or joint filers above $400,000 would owe a heightened net investment income tax at a rate of 14.8%. …The Warren proposal breaks new ground by largely disconnecting the benefits that Social Security pays from the wages on which the program collects taxes.

In a column for the Wall Street Journal, John Cogan of the Hoover Institution explains why the proposal is so irresponsible.

It’s a strange campaign season, loaded with fantastical promises of government handouts for health care, college and even a guaranteed national income. But Sen. Elizabeth Warren ’s Social Security plan takes the cake. With trillion-dollar federal budget deficits and Social Security heading for bankruptcy, Ms. Warren proposes to give every current and future Social Security recipient an additional $2,400 a year. She plans to finance her proposal, which would cost more than $150 billion annually, with a 14.8% tax on high-income individuals. …the majority of Ms. Warren’s proposed Social Security bonanza would go to middle- and upper-income seniors. …The plan would cost taxpayers about $70,000 for each senior citizen lifted out of poverty.

Cogan also explains that Warren’s scheme upends FDR’s notion that Social Security should be an “earned benefit.”

The cornerstone of FDR’s Social Security program is its “earned right” principle, under which benefits are earned through payroll-tax contributions. …in a major break from one of FDR’s main Social Security principles, the plan provides no additional benefits in return for the new taxes. …Such a large revenue stream to fund unearned benefits, aptly called “gratuities” in FDR’s era, would put Social Security on a road to becoming a welfare program. …Ms. Warren’s proposal returns the country to an era when elected officials regularly used Social Security as a vote-buying scheme.

For all intents and purposes, Warren has put forth a more radical version of the plan introduced by Congressman John Larson, along with most of his colleagues in the House Democratic Caucus.

And that plan is plenty bad.

Andrew Biggs of the American Enterprise Institute wrote about the economic damage it would cause.

…the Social Security 2100 Act consists of more than 100% tax increases – because it not only raises payroll taxes to fund currently promised benefits, but increases benefits for all current and future retirees. …Social Security’s 12.4% payroll tax rate would rise to 14.8% while the $132,900 salary ceiling on which Social Security taxes apply would be phased out. Combined with federal income taxes, Medicare taxes and state income taxes, high-earning taxpayers could face marginal tax rates topping 60%. …Economists agree that tax increases reduce labor supply, the only disagreement being whether it’s by a little or a lot. Likewise, various research concludes that middle- and upper-income households factor Social Security into how much they’ll save for retirement on their own. If they expect higher Social Security benefits their personal saving will fall. Since higher labor supply and more saving are the most reliable routes to economic growth, the Social Security 2100 Act’s risk to the economy is obvious. …an economic model created by a team based at the University of Pennsylvania’s Wharton School…projects GDP in 2049 would be 2.0% lower than a hypothetical baseline in which the government borrowed to fund full promised Social Security benefits. The logic is straightforward: when taxes go up people work less; when Social Security benefits go up, people save less. If people work less and save less, the economy grows more slowly.

And the Wall Street Journal opined about the adverse impact of the proposal.

Among the many tax increases Democrats are now pushing is the Social Security 2100 Act sponsored by John Larson of House Ways and Means. The plan would raise average benefits by 2% and ties cost-of-living raises to a highly generous and experimental measure of inflation for the elderly known as CPI-E. The payroll tax rate for Social Security would rise steadily over two decades to 14.8% from 12.4% for all workers, and Democrats would also apply the tax to income above $400,000. …The proposal would also further tilt government spending to the elderly, who in general are doing well. …Democrats are also sneaky in the way they lift the income cap on Social Security taxes. The Social Security tax currently applies only on income up to $132,900, an amount that rises each year with inflation. But the new payroll tax on income above $400,000 isn’t indexed to inflation, which means the tax would ensnare ever more taxpayers over time. …The new 14.8% Social Security payroll-tax rate would come on top of the 37% federal income-tax rate, plus 2.9% for Medicare today (split between employer and employee), plus the 0.9% ObamaCare surcharge on income above $200,000 and 3.8% surcharge on investment income. …As lifespans increase, the U.S. needs more working seniors contributing to the economy. Yet higher Social Security benefits can induce earlier retirement if people think they don’t have to save as much. Higher marginal tax rates on Social Security benefits and income also discourage healthy seniors from working.

Now imagine those bad results and add in the economic damage from a 14.8 percentage point increase in the tax burden on saving and investment, which is the main wrinkle that Senator Warren has added.

Last but not least, using Social Security as an excuse to push higher taxes is not a new strategy. Back in 2008 when he was in the Senate and running for the White House, Barack Obama proposed a Warren-style increase in the payroll tax.

Here’s a video I narrated that year, which discusses the adverse economic effect of that type of class-warfare tax hike.

By the way, Hillary Clinton supported a similar tax increase in 2016.

Though it’s worth noting that neither Obama nor Clinton were as radical as Warren since they didn’t propose to exacerbate the tax code’s bias against saving and investment.

And don’t forget she also wants higher capital gains taxes and a punitive wealth tax.

Her overall tax agenda is unquestionably going to be very bad news for job creation and American competitiveness.

The “rich” are the primary targets of her tax hikes, but the rest of us will suffer the collateral damage.

P.S. Instead of huge tax increases, personal retirement accounts are a far better way of addressing Social Security’s long-run problem. I’ve written favorably about the Australian system, the Chilean system, the Hong Kong system, the Swiss system, the Dutch system, the Swedish system. Heck, I even like the system in the Faroe Islands.

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When “basic income” became an issue a few years ago, I was instinctively opposed because I don’t want Uncle Sam sending big checks to everyone in the country.

But I admitted that there were a few reasonable arguments for the idea. Most notably, plans for a basic income usually assumed that these checks would be a substitute for the existing social welfare state.

Since that system has been bad news for both taxpayers and poor people, a swap sounds very tempting.

But I’ve repeatedly warned (over and over again) that any theoretical attributes don’t matter because politicians almost certainly would pull a bait-and-switch by adding a basic income on top of all current redistribution programs.

Andrew Yang is now proving my point. When asked about potential budgetary savings to accompany his proposal for basic income, the candidate for the Democratic Party’s presidential nomination asserted that the new handouts would be in addition to the existing welfare state.

At the risk of understatement, Yang has turned his proposal into an expensive joke.

America’s social welfare state already is unaffordable and he wants to make it a larger burden with a big new entitlement.

But fiscal policy isn’t the focus of today’s column.

Instead, I want Yang’s announcement to be a teachable moment about the “slippery slope.”

Simply stated, we should always be wary about the potential downsides of any possible reform. Especially if the wrong people are in charge.

Indeed, this wariness shall be enshrined as our “Fifth Theorem of Government.”

This Theorem is rather useful when contemplating certain issues.

And now we know it applies to discussions of basic income.

P.S. Here are the other four theorems.

The “First Theorem” explains how Washington really operates.

The “Second Theorem” explains why it is so important to block the creation of new programs.

The “Third Theorem” explains why centralized programs inevitably waste money.

The “Fourth Theorem” explains that good policy can be good politics.

P.P.S. All these theorems are actually just elements of “public choice,” which is the common-sense economic theory that people in the public sector largely are seeking to benefit themselves.

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I periodically explain that a European-sized welfare state can only be financed by huge taxes on lower-income and middle-class taxpayers.

Simply stated, there aren’t enough rich people to prop up big government. Moreover, at the risk of mixing my animal metaphors, those golden geese also have a tendency to fly away if they’re being treated like fatted calves.

I have some additional evidence to share on this issue, thanks to a new report from the Tax Foundation. The research specifically looks at the tax burden on the average worker in developed nations

The tax burden on labor is referred to as a “tax wedge,” which simply refers to the difference between an employer’s cost of an employee and the employee’s net disposable income. …The OECD calculates the tax burden by adding together the income tax payment, employee-side payroll tax payment, and employer-side payroll tax payment of a worker earning the average wage in a country. …Although payroll taxes are typically split between workers and their employers, economists generally agree that both sides of the payroll tax ultimately fall on workers.

The bad news for workers (and the good news for politicians) is that average workers in the advanced world loses more than one-third of their income to government.

In some cases, such as the unfortunate Spanish household I wrote about back in February, the government steals two-thirds of a worker’s income.

So which country is best for workers and which is worst?

Here’s a look at a map showing the tax burden for selected European nations.

Suffice to say, it’s not good to be dark red.

But that map doesn’t provide a complete answer.

To really determine the best and worst countries, the Tax Foundation made an important correction to the OECD data by including the burden of the value-added tax. Here’s why it matters.

The tax burden on labor is broader than personal income taxes and payroll taxes. In many countries individuals also pay a value-added tax (VAT) on their consumption. Because a VAT diminishes the purchasing power of individual earnings, a more complete picture of the tax burden should include the VAT. Although the United States does not have a VAT, state sales taxes also work to diminish the purchasing power of earnings. Accounting for VAT rates and bases in OECD countries increased the tax burden on labor by 5 percentage-points on average in 2018.

And with that important fix, we can confidently state that the worst country for ordinary workers is Belgium, followed by Germany, Austria, France, and Italy.

The best country, assuming we’re limiting the conversation to rich countries, is Switzerland, followed by New Zealand, South Korea, Israel, and the United States.

By the way, this report just looks at the tax burden on average workers. We would also need estimates of the tax burden on things such as investment, business, and entrepreneurship to judge the overall merit (or lack thereof) of various tax regimes.

Let’s close by looking at the nations that have moved the most in the right direction and wrong direction this century.

Congratulations to Hungary, Israel, and Sweden.

I’m not surprised to see Mexico galloping in the wrong direction, though I’m disappointed that South Korea and Iceland are also deteriorating.

P.S. The bottom line is that global evidence confirms that ordinary people will be the ones paying the tab if Crazy Bernie and AOC succeed in expanding the burden of government spending in America. Though they’re not honest enough to admit it.

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I’m a big fan of many of the economic reforms that have been implemented in Estonia, Latvia, and Lithuania.

All three of the Baltic nations rank highly according to Economic Freedom of the World. Estonia and Lithuania are tied for #13, and Latvia isn’t far behind at #23.

Rather impressive for nations that suffered decades of communist enslavement.

But this doesn’t mean I’m optimistic for the future of these countries.

Simply stated, they need a lot more reform to prepare themselves for demographic decline.

And demographic decline is a huge issue, in large part because young people are moving away. Here are some excerpts from a Bloomberg report.

According to the UN’s Department of Economic and Social Affairs, nine of the world’s countries most at risk of losing citizens over the next few decades are former East bloc nations. Porous borders and greater opportunity in the west have lured people away. …The trend is hitting especially hard in the Baltics. Latvia, with a current population of 1.96 million, has lost about 25 percent of its residents since throwing off Soviet control in 1991. The U.N. predicts that by 2050, it will have lost an additional 22 percent of its current population…and by 2100, 41 percent. In Estonia, with a population of 1.32 million, the U.N. foresees a 13 percent decline by 2050 and a 32 percent drop by 2100. And in Lithuania, the current population of 2.87 million is expected to drop by 17 percent by 2050. By 2100, it will have lost 34 percent. …Latvian demographer Mihails Hazans said that, as of 2014, one in three ethnic Latvians age 25 to 34 — and a quarter of all Latvians with higher education — lived abroad.

Part of the issue is also fertility.

Here’s a chart from the World Bank showing that all three Baltic nations are way below the replacement rate.

The combination of these two factors helps to explain this map.

As you can see, the Baltics don’t quite face the same challenges as Moldova.

But that’s the only silver lining in these grim numbers.

By the way, people should be free to emigrate.

And women should be free to choose how many children to have.

But when a country also has a welfare state and – over time – there are more and more old people and fewer and fewer young taxpayers, that’s a recipe for some sort of Greek-style fiscal crisis.

Fortunately, there is a solution to this problem.

The Baltic nations need to copy Hong Kong. Fertility rates are even lower there, but the jurisdiction doesn’t face a big long-run fiscal challenge since people mostly rely on private savings rather than tax-and-transfer welfare states.

P.S. One of the reasons I like the Baltic nations is that they cut spending (actual spending cuts, not fake DC-style reductions in planned increases) when they were hit by the global financial crisis last decade.

P.P.S. Even better, Paul Krugman wound up beclowning himself by trying to blame Estonia’s 2008 recession on spending cuts that occurred in 2009.

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I’ve repeatedly dealt with the argument over Denmark’s supposed socialism.

My core argument is that Denmark is very bad on fiscal policy, but very laissez-faire on other issues such as regulation. The net effect is that Danes have about the same amount of economic liberty as Americans.

The bottom line is that Denmark isn’t socialist. At least not if we use the technical definition. There’s plenty of bad policy, but no government ownership, no central planning, and no price controls.

Which is basically the message in this Prager University video by Otto Brøns-Petersen from the CEPOS think tank in Denmark.

This is a great video.

Basically everything you need to know about Danish economic policy.

To augment Otto’s video, let’s review a report from some of his CEPOS colleagues.

The entire report is worth reading, but I want to focus on one excerpt and some key visuals.

First, notice that Denmark and the United States have similar levels of economic freedom.

Since I’m a public finance economist, I was very interested in some observations in the report about fiscal policy.

This excerpt notes that Denmark has a much more onerous tax burden, and it points out that the value-added tax is the main reason for the gap.

…the tax burden (taxes to GDP) is the second-highest in the OECD and 70 percent higher than in the US (46 vs. 27 per cent of GDP). …The biggest difference between the Danish and the American tax systems is that consumption taxes are much higher in Denmark. VAT is 25 per cent in Denmark while the average sales tax is 6 per cent in the US. …Including the effect of consumption taxes, the top marginal tax rate on labor income is 67 per cent in Denmark. For low and middle-income workers, it is 55 per cent. This is significantly higher than in the USA. It’s important to include consumption taxes when you calculate the effective marginal tax rate. High consumption taxes means that you can buy fewer goods for one extra working hour.

My first takeaway is that this explains why blocking the VAT is absolutely necessary for advocates of limited government in the United States.

And the second takeaway is that big government means big burdens on lower-income and middle-class taxpayers, which is what we seen in this next chart.

Last but not least, here are two charts comparing taxes and labor supply in the United States and Denmark.

In the tax chart, you can see that the two countries were very similar from the 1930s to the 1960s. But then the tax burden in Denmark got much worse (coinciding with the imposition of the VAT).

Now take a look at hours worked in both nations.

We were very similar back in 1970. But as the Danish tax burden grew, people responded by working less and less.

In other words, more evidence to support the core insight of supply-side economics. The more you tax of something, the less you get of it.

The Philoso-raptor surely would agree.

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When I think about social welfare spending, I mostly worry about recipients getting trapped in dependency.

But I also feel sorry for taxpayers, who are bearing ever-higher costs to finance redistribution programs.

Today’s column won’t focus on those issues. Instead, we’re going to utilize new OECD data to compare the size of the welfare states in developed nations.

We’ll start with the big picture. Here it total redistribution spending, measured as a share of economic output, for selected countries that are members of the Organization for Economic Cooperation and Development.

Nobody will be surprised, I assume, to see that France, Finland, Belgium, Denmark, and Italy have the biggest welfare states.

The United States is in the middle of the pack. American taxpayers might be surprised to learn, though, that they finance a bigger welfare state than the ones that exist in Canada, Iceland, and the Netherlands.

The overall numbers are important, but it’s also educational to consider the various components.

And the largest chunk of social spending in most nations is for their old-age programs. The biggest burdens are found in Greece, Italy, France, Portugal, and Austria. The United States, once again, is in the middle of the pack.

By the way, keep in mind that there are many factors that determine why some nations spend more than others.

  • How generous are benefits? – This is often measured as the “replacement rate,” which compares retirement benefits to income during working years.
  • When can people retire? – Some countries allow people, or some classes of people, to get benefits while relatively young. Others are more stringent.
  • Does a country have an aging population? – Demographic changes already are beginning to have a large effect on the finances of some systems.
  • Is there a private savings system? – Nations such as Switzerland, Australia, Chile, and the Netherlands have significant private retirement savings.

Now let’s look at government spending on health.

Here’s the area where the United States is more extravagant than almost every other nation. Only France spends more money.

Actually, since per-capita GDP is significantly larger in the United States than in France, American taxpayers spend more on a per-person basis.

Some people will observe, with great justification, that the data for the United States may be a measure of the inefficiency of the American system rather than taxpayer generosity. This is a topic for another day.

Last but not least, let’s look at traditional welfare. In other words, cash assistance to the working-age population.

The fiscal burden of this spending is highest in Belgium, Finland, the Netherlands, Norway, and Luxembourg. The United States, meanwhile, is comparatively frugal.

P.S. Here are a couple of caveats for number crunchers and policy wonks.

First, there are methodological challenges when comparing OECD nations. Eastern European nations tend to be significantly less prosperous than Western European nations, thanks to decades of communist enslavement. So looking at this data does not really allow for apples-to-apples comparisons. Moreover, there are a handful of developing nations that belong to the OECD, such as Mexico and Turkey, so comparison are effectively meaningless. And Chile is on the cusp of becoming a fully developed nation so it’s in its own category.

Second, as I briefly mentioned above, nations have different levels of per-capita GDP. If we look at the last chart, Austria and Spain spend a similar share of GDP on welfare, but since Austria is a richer nation, its taxpayers actually finance a lot more per-capita welfare spending. The same is true if you compare Canada and Estonia, Sweden and Slovenia, and Germany and Greece.

P.P.S. There was virtually no welfare state in OECD nations prior to the 1930s and very small welfare states until the 1960s. For what it’s worth, the huge reduction in poverty in those nations occurred before the welfare state.

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If nothing else, Alexandria Ocasio-Cortez gives me a lot to write about…and to laugh about.

I recently pontificated about her crazy idea to impose a top tax rate of 70 percent, which would reverse the very successful experiment we had in the 1980s (and presumably have a reverse effect on revenue as well).

Today, let’s look at the spending side of the fiscal equation.

AOC, as she is known, wants a dramatic increase in the burden of federal spending for her so-called “green new deal.”

Let’s examine the implications.

We’ll start with a supporter. Thomas Friedman of the New York Times has a giant carbon footprint compared to the average person, but that naturally doesn’t stop him from endorsing policies that would put AOC’s onerous burdens on the less fortunate.

Barack Obama picked up the theme and made a Green New Deal part of his 2008 platform, but the idea just never took off. So I’m excited that the new Democratic Congresswoman Alexandria Ocasio-Cortez and others have put forward their own takes on a Green New Deal… The goal is a ‘detailed national, industrial, economic mobilization plan’ to rapidly transition the country away from fossil fuels and toward clean energy, such as a solar, wind, and electric cars.” The Green New Deal that Ocasio-Cortez has laid out aspires to power the U.S. economy with 100 percent renewable energy within 12 years and calls for “a job guarantee program to assure a living wage job to every person who wants one,” “basic income programs” and “universal health care,” financed, at least in part, by higher taxes on the wealthy. …it is time for the green movement to think big and make big demands…a portion of every dollar raised by a carbon tax in a Green New Deal would be invested in two new community colleges and high-speed broadband in rural areas of every state.

Now let’s look at the implications of such policies.

But before looking at fiscal and economic considerations, let’s briefly detour to ideology.

Jonah Goldberg of National Review has some fun examining the philosophical forerunners of Ocasio-Cortez’s plan.

…the Green New Deal…is a triumph of recycling. Not of plastic bags or soda cans, but of ideas. Specifically, Franklin D. Roosevelt’s New Deal and the impulses behind it. To her credit, Ocasio-Cortez (D., N.Y.) is fairly honest about her ideological recycling. …the New Deal itself was largely about war mobilization — without war. Roosevelt campaigned for president promising to adapt Woodrow Wilson’s wartime industrial policies to fight the Great Depression. …Nearly the entire structure of the New Deal was copied from Wilson’s “war socialism.” The National Recovery Administration was modeled on the War Industries Board. The Reconstruction Finance Corporation was an update of Wilson’s War Finance Corporation. …breaking discipline was a punishable offense, which is why a tailor, Jacob Maged, was sentenced to 30 days in jail for charging too little to press a suit. …American liberalism has been recycling the same basic idea: The country needs to be unified and organized as if we are at war… The attraction stems from what John Dewey called “the social possibilities of war” — the ability to reorganize and unify society according to the schemes of planners and experts.

Gee, another New Deal. What could possibly go wrong?

Now let’s contemplate the practical implications.

We’ll start with Warren Henry’s article in the Federalist.

…the darling of democratic socialism proposed eliminating carbon emissions within 12 years. …The “Frequently Asked Questions” section accompanying her draft resolution claims it could be funded in the “same ways that we paid for the 2008 bank bailout and extended quantitative easing programs, the same ways we paid for World War II and many other wars. The Federal Reserve can extend credit to power these projects and investments, new public banks can be created (as in WWII) to extend credit and a combination of various taxation tools (including taxes on carbon and other emissions and progressive wealth taxes) can be employed.” …Ocasio-Cortez now falls back on the comforting myth that everything is affordable by soaking the rich with higher income taxes. …Ocasio-Cortez half-concedes her plan is a fantasy… For an idea of how detached Ocasio-Cortez is from reality, consider that we get only 17 percent of our energy from renewables. …even if the golden geese of capitalism were to continue laying eggs in Ocasio-Cortez’s command-and-control economy, there will not be enough to make her statist omelet. Even if Ocasio-Cortez’s fever dream were technologically feasible, the burden of funding it would land on the middle class as well as the uber-wealthy. …This is not the first time Ocasio-Cortez has tried to pass off a fairy tale as a white paper. She recently claimed the $32 trillion cost of a Medicare-for-all plan could be funded by curbing fraud at the Pentagon. Not even PolitiFact could make that math work, given that our nation has not spent $32 trillion on defense since its founding.

In an article for FEE, Jarrett Stepman looks at the economics of AOC’s plan.

It shouldn’t be a surprise that the avowed “democratic socialist” went with the predictable “tax the rich” formula in order to pay for a massive government program to combat climate change. …such a scheme would mean that her constituents in New York City would pay a max income tax rate of 82.6 percent… Perhaps New Yorkers deserve what they voted for, but does the country? …the tax hikes on the rich would be one of the least radical parts of the agenda. …moving the economy away from fossil fuels to 100 percent renewable energy will come “at a cost of about $5.2 trillion over 20 years.” …this deal would instead rely on the ruthless bludgeoning of private industry and citizens through the levers of the state. …the plan calls for direct government intervention to be its “prime driver.” …The Green New Deal doesn’t just include environmentalist proposals… Among the liberal wish list items included, the Green New Deal contains a proposal for universal health care and a basic minimum income program to make up for all the jobs lost…this will all come with an immense cost. …How do Green New Deal proponents propose to pay for this extreme growth in government? …by massively hiking taxes and then borrowing and ultimately printing money. Then it would use public banks run by unaccountable bureaucrats to carry the whole thing out. …an American version of a Soviet-style five-year plan focused on command-and-control economic solutions that have proven to fail the world over. …The agony of a collapsing Venezuela…is a stark example of how badly this can end.

Milton Ezrati’s column in the City Journal further debunks AOC’s numbers.

…specific goals…include, among other things, expanding renewable-energy sources until they provide 100 percent of the nation’s power…upgrading every residence and industrial building in the U.S. for energy efficiency…eliminating greenhouse-gas emissions for industry and agriculture; funding “massive” investments… Ocasio-Cortez adds a long list of social objectives: providing training and education for the energy transition, including “job guarantees at a living wage for everyone who wants one”; …mitigating racial, regional, and gender-based inequalities; developing universal health-care and income-support programs… there were some 136 million housing units in the United States. Upgrading each unit to high standards of energy efficiency would cost, conservatively, at least $10,000 per home, adding up to a total cost of $1.3 trillion. Doing the same for industrial structures would easily exceed that amount. The single-payer health-care part would cost another $3 trillion or more, annually. Stabilizing carbon dioxide in the atmosphere would add another $1 trillion to $2 trillion to the price tag—and all these still only account for three items on AOC’s list. …she would rely on debt, “printing money,” and government willingness to take an equity stake in some of the enterprises involved.

The bottom line is Ocasio-Cortez wants to dramatically expand the size and scope of government.

Some of her ideas would involve big increases in red tape, especially for the green parts of the Green New Deal (thus underscoring why it is rather naive for anyone to think the left would accept less regulation in exchange for a carbon tax).

But since I’m a fiscal policy person, I’m naturally concerned about what her grandiose plan would mean for the tax and spending burden.

Brian Riedl of the Manhattan Institute has used public sources to estimate the price tag. Here’s the new spending that AOC and her fellow travelers want to impose on the economy.

And below we have a menu of potential tax increases.

There are two things to realize.

  • First, even if every single one of the tax increases is adopted, it doesn’t come close to paying for AOC’s wish list for new spending.
  • Second, the big revenue sources (payroll taxes, VAT, income tax) are largely taxes on lower-income and middle-class taxpayers.

In other words, politicians talk big about screwing the rich, but the rest of us will be picking up the tab.

By the way, I can’t resist commenting on this second table. I realize Brian is merely following the tradition of budget scorekeepers at the JCT and CBO, but new revenues should not be categorized as “savings.” I would go with “grabbings” or “takings” instead.

Brian’s rhetorical sin doesn’t qualify him for the Bob Dole Award or the Charlie Brown Award, but surely there should be some consequences. Maybe we’ll create a Libertarian Re-education Camp and miscreants will be forced to listen to lectures from Dork 1, Dork 2, and Dork 3?

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