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Posts Tagged ‘Welfare State’

Back in 2014, I shared a report that looked at the growth of redistribution spending in developed nations.

That bad news in the story was that the welfare state was expanding at a rapid pace in the United States. The good news is that the overall fiscal burden of those programs was still comparatively low. At least compared to other industrialized countries (though depressingly high by historical standards).

I specifically noted that Switzerland deserved a lot of praise because redistribution spending was not only relatively modest, but that it also was growing at a slow rate. Yet another sign it truly is the “sensible country.”

But I also expressed admiration for Canada.

Canada deserves honorable mention. It has the second-lowest overall burden of welfare spending, and it had the sixth-best performance in controlling spending since 2000. Welfare outlays in our northern neighbor grew by 10 percent since 2000, barely one-fourth as fast as the American increase during the reckless Bush-Obama years.

But I didn’t try to explain why Canada had good numbers.

Now it’s time to rectify that oversight. I went to the University of Texas-Arlington last week to give a speech and had the pleasure of meeting Professor Todd Gabel. Originally from Canada, Professor Gabel has written extensively on Canadian welfare policy and he gave me a basic explanation of what happened in his home country.

I asked him to share some of his academic research and he sent me several publications, including two academic studies he co-authored with Nathan Berg from the University of Otago.

Here are some excerpts from their 2015 study published in the Canadian Journal of Economics. Gabel and Berg explain welfare reform in Canada and look at which policies were most successful.

During the 1990s and 2000s, Canada’s social assistance (SA) system transitioned from a relatively centralized program with federal administrative controls to a decentralized mix of programs in which provinces had considerable discretion to undertake new policies. This transition led to substantially different SA programs across provinces and years… Some provincial governments experimented aggressively with new policy tools aimed at reducing SA participation. Others did not. In different years and by different amounts, nearly all provinces reduced SA benefit levels and tightened eligibility requirements.

By the way, the SA program in Canada is basically a more generous version of the Temporary Assistance to Needy Families (TANF) program in America, in part because there are not separate programs for food and housing.

The study includes this remarkable chart showing a significant drop in Canadian welfare dependency, along with specific data for three provinces.

The authors wanted to know why welfare dependency declined in Canada. Was is simply a result of a better macroeconomic environment? Or did specific reforms in welfare policy play a role?

…what role, if any, did new reform strategies undertaken by provinces play in observed declines in SA participation. This paper attempts to address this question by measuring disaggregated effects of new reform strategies on provinces’ SA participation rates, while controlling for changes in benefit levels, eligibility requirements, labour market conditions, GDP growth and demographic composition.

Their conclusion is that welfare reform helped reduce dependency.

…our econometric models let the data decide on a ranking of which mechanisms—reductions in benefit levels, tightened eligibility requirements, improved macro-economic conditions or adoption of new reform strategies—had the largest statistical associations with declines in participation. The data suggest that new reforms were the second most important policy reform after reductions in employment insurance benefits. … In the empirical models that disaggregate the effects of different new reform strategies, it appears that work requirements with strong sanctions for non-compliance had the largest effects. The presence of strong work requirements is associated with a 27% reduction in SA participation.

Here’s their table showing the drop in various provinces between 1994 and 2009.

The same authors unveiled a new scholarly study published in 2017 in Applied Economics, which is based on individual-level data rather than province-level data.

Here are the key portions.

A heterogeneous mix of aggressive welfare reforms took effect in different provinces and years starting in the 1990s. Welfare participation rates subsequently declined. Previous investigations of these declines focused on cuts in benefits and stricter eligibility requirements. This article focuses instead on work requirements, diversion, earning exemptions and time limits – referred to jointly as new welfare reform strategies.

Here’s their breakdown of the types of reforms in the various provinces.

And here are the results of their statistical investigation.

The empirical models suggest that new reform strategies significantly reduced the probability of welfare participation by a minimum of 13% overall…the mean person in the sample faces a reduced risk of welfare participation of 1.1–1.3 percentage points when new reform strategies are present… the participation rates of the disabled, immigrants, aboriginals and single parents, appear to have responded to the presence of new reform strategies significantly more than the average Canadian in our sample. The expected rate of welfare participation for these groups fell by two to four times the mean rate of decline associated with new reform policies.

The bottom line is that welfare reform was very beneficial for Canada. Taxpayers benefited because the fiscal burden decreased. And poor people benefited because of a transition from dependency to work.

Let’s close by looking at data measuring redistribution spending in Canada compared to other developed nations. These OECD numbers include social insurance outlays as well as social welfare outlays, so this is a broad measure of redistribution spending, not just the money being spent on welfare. But it’s nonetheless worth noting the huge improvement in Canada’s numbers starting about 1994.

Canada now has the world’s 5th-freest economy. Welfare reform is just one piece of a very good policy puzzle. There also have been relatively sensible policies involving spending restraint, corporate tax reform, bank bailoutsregulatory budgeting, the tax treatment of saving, and privatization of air traffic control.

P.S. If it wasn’t so cold in Canada, that might be my escape option instead of Australia.

P.P.S. Given the mentality of the current Prime Minister, it’s unclear whether Canada will remain an economic success story.

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Inequality is now a major dividing line in the world of public policy.

Supporters of limited government think it’s not a big issue and instead focus on the policies that are most likely to generate growth. Simply stated, they tend not to care if some people get richer faster than other people get richer (assuming, of course, that income is honestly earned and not the result of cronyism).

Folks on the left, by contrast, think inequality is inherently bad. It’s almost as if they think that the economy is a fixed pie and that a big slice for the “rich” necessarily means smaller slices for the rest of us. They favor lots of redistribution via punitive taxes and an expansive welfare state.

When talking to such people, my first priority is getting them to understand that it’s possible for an economy to grow and for all income groups to benefit. I explain how even small differences in long-run growth make a big difference over just a few decades and that it is very misguided to impose policies that will discourage growth by penalizing the rich and discouraging the poor.

I sometimes wonder how vigorously to present my argument. Is it actually true, as Thatcher and Churchill argued, that leftists are willing to hurt poor people if that’s what is necessary to hurt rich people by a greater amount?

Seems implausible, so when I recently noticed this amusing humor on Reddit‘s libertarian page, I was not going to share it. After all, it presumes that our friends on the left genuinely would prefer equal levels of poverty rather than unequal levels of prosperity.

But, after reading a new study from the International Monetary Fund, I’m wondering if I’m underestimating the left’s fixation with inequality and the amount of economic damage they’re willing to inflict to achiever greater equality of outcomes.

Here are some introductory passages to explain the goal of the research.

…it is worth reemphasizing some lessons from the “old masters” in economics who addressed this topic a few decades ago—including Arthur M. Okun and Anthony B. Atkinson in the 1970s. Their lessons—on how to elicit people’s views on inequality and how to summarize societal welfare using a monetary indicator encompassing both average incomes and their distribution—remain relevant for fiscal policymakers today. …a satisfactory theory of welfare must recognize that welfare depends on both the size and the distribution of national income. …This primer seeks to encourage more widespread use by policymakers of the tools developed by welfare theory. …the primer provides an in-depth, step-by-step refresher on two specific tools chosen because of their simplicity and intuitive appeal: Okun’s “leaky bucket” and Atkinson’s “equally-distributed-equivalent income.”

Please note that the IMF explicitly is saying that it wants policymakers to change laws based on what’s in the study.

And, as you continue reading, it should become obvious that the bureaucrats are pushing a very radical agenda (not that we should be surprised given the IMF’s track record).

Here’s the bureaucracy’s take on Okun and his pro-redistribution agenda.

Okun (1975) proposed a thought experiment capable of eliciting people’s attitudes toward the trade -off between equality and efficiency: Okun asked the reader to consider five families: a richer one making $45,000 (in 1975) and four poorer ones making $5,000. Would the reader favor a scheme that taxed the rich family $4,000 and transferred the proceeds to the poorer families? In principle, each poorer family would receive $1,000. But what if 10 percent leaked out, with only $900 reaching the recipients? What would the maximum acceptable leak be? The leak represented not only the administrative costs of tax-and-transfer programs (and, one might add, potential losses due to corruption), but also the fact that such programs reduce the economic incentives to work. …Okun reported his own answers to the specific exercise he proposed (his personal preference was for a leakage of no more than 60 percent). ….Okun was willing to accept that a $4,000 tax on the rich household [would] translate, with a 60 percent leakage, into a $400 transfer to each of the four poor households.

The only good part about Okun’s equity-efficiency tradeoff is that he acknowledges that redistribution harms the economy. The disturbing part is that he was willing to accept 60 percent leakage in order to take money from some and give it to others.

It gets worse. When the IMF mixes Okun with Atkinson, that’s when things head in the wrong direction even faster. As I noted last month, Atkinson has a theory designed to justify big declines in national income if what’s left is distributed more equally. I’m not joking.

And that IMF wants to impose this crazy theory on the world.

Atkinson (1970) showed that under the assumptions above and having identified a coefficient of aversion to inequality, it becomes easy to summarize the well-being of all households in an economy with a single, intuitive measure: the equally-distributed-equivalent income (EDEI), i.e., the income that an external observer would consider just as desirable as the existing income distribution. …The percentage loss in mean income—compared with the initial situation—that an observer would find acceptable to have a perfectly equal distribution of incomes was introduced by Atkinson (1970) as a measure of inequality.

The study then purports to measure “aversion to inequality” in order to calculate equally-distributed-equivalent income (EDEI).

The greater the observers’ aversion to inequality, the lower the EDEI. Table (2) reports for a few alternative ε coefficients, for the example above.

Here’s a table from the study, which is based on a theoretical rich person with $45,000 and a theoretical poor person with $5,000 of income. A society that isn’t very worried about inequality (ε = 0.2) is willing to sacrifice about $4,000 on overall income to achieve the desired EDEI. But a nation fixated on equality of outcomes might be willing to sacrifice $32,000 (more than 60 percent of overall income!).

I’ve augmented the table with a few of the aggregate income losses in red.

In other words, nations that have a higher aversion to inequality are the ones that prefer lots of misery and deprivation so long as everyone suffers equally.

Another use of this data is that it allows the IMF to create dodgy data on income (sort of like what the OECD does with poverty numbers).

It appears the bureaucrats want to use EDEI to claim that poorer nations have more income than richer nations.

…the ranking of countries based on the EDEI often differs significantly from that based on mean income alone. For instance, South Africa’s mean income is more than double that of the Kyrgyz Republic, and substantially above that of Albania. However, those countries’ lower inequality implies that their EDEI is significantly higher than South Africa’s. …Similarly, the United States’ mean income is considerably above that of the United Kingdom or Sweden. However, for an inequality aversion coefficient of ε=1.5, Sweden’s EDEI is above that of the United States, and for ε=2.0 also the United Kingdom’s EDEI is above that of the United States.

Here’s a table from the study and you can see how the United States becomes a comparatively poor nation (highlighted in red) when there’s an “aversion” to inequality.

In other word, even though the United States has much higher living standards than European nations, the IMF is peddling dodgy numbers implying just the opposite.

But the real tragedy is that low-income people will be much more likely to remain poor with the policies that the IMF advocates.

P.S. Fans of satire may appreciate this “modest proposal” to reduce inequality. I imagine the IMF would approve so long as certain rich people are excluded.

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I’ve written several times that the left wants big tax hikes on poor and middle-class taxpayers. Simply stated, that’s the only way they can finance a European-sized welfare state.

Some of them even admit they want to pillage ordinary taxpayers.

Now we have another addition to our list. Writing in today’s Washington Post, two law professors from UCLA openly argue in favor of tightening the belts of average Americans to enable a bigger federal government.

…we need more tax revenue from the middle class, not less.

They start by complaining that middle-income taxpayers have benefited from big tax cuts over the past 35 years.

Middle-class tax burdens are at historic lows. The Congressional Budget Office reported in 2016 that the average federal income tax rate for the middle class — here meaning the middle 60 percent of the income distribution — declined from 7.8 percent in 1979 to 3.4 percent in 2013. Focusing on all federal taxes (not just income taxes), the average tax rate dropped from 19.2 to 13.8 percent over the same period. With these lower tax rates, the share of taxes paid by the middle class has also declined. The middle class paid 35 percent of income taxes in 1979 but only 16 percent in 2013, while its share of all federal taxes fell from 43 to 30 percent.

As far as I’m concerned, this is good news, not something to bemoan. Indeed, my goal is to have similar reductions in tax burdens for all taxpayers.

But the authors raise a very valid point. We will have giant tax increases in the future and people at all income levels will be adversely impacted. Though there is one way of avoiding that grim European future.

Unless Congress is willing to dramatically cut major entitlement programs.

Incidentally, we don’t need to “dramatically cut” those programs. The authors are relying on dishonest Washington budget math.

In reality, the problem is solved and tax increases are averted so long as reforms are adopted to ensure that entitlement programs no longer grow faster than the private sector.

But that’s not what the authors want. They actually look forward to big tax increases.

What the middle class needs is not meager tax cuts but a muscular commitment to robust public institutions designed to benefit middle-income individuals. The higher taxes could come from our current income tax (from tax increases on the middle class and the wealthy) or a broad-based consumption tax (such as a VAT or carbon tax).

I’m greatly amused by the language they use. They want readers to believe that bloated European-style welfare states are “robust public institutions” and that politicians grabbing more money to buy more votes is a way of showing “muscular commitment.”

I’m also not surprised that they embraced a carbon tax or value-added tax.

By the way, the column compares the United States with other industrialized nations. Simply stated, we win (at least from my perspective).

Data from the Organization for Economic Cooperation and Development reveal that American families with children face substantially lower average income-tax rates (in some cases, less than half) than similar families in other developed countries. And this is before factoring in consumption taxes, which represent a large share of middle-class tax burdens in most countries, but not in the United States.

Those are remarkable numbers. Income taxes grab a much bigger share of family income in Europe. And then governments take an even bigger slice thanks to onerous value-added taxes.

The authors would argue that Europeans get “robust public institutions” in exchange for all that money, but what they really get is less growth and lower living standards.

Indeed, it’s worth noting that the richest European nations are on the same level (or below) the poorest American states.

That’s not exactly a ringing endorsement for higher tax burdens.

The bottom line is that left-wing politicians usually pontificate about raising taxes on the rich, but the truly honest folks on the left openly admit that the real targets are lower-income and middle-class households.

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Imagine that we’re in a parallel universe and that you’re the lookout on the Titanic. But in this make-believe world, you have all sorts of fancy radar that allows you to detect icebergs with lots of advance notice. Furthermore, imagine that you detect danger and give lots of warning to the Captain and other officers.

How would you feel if they then decided to ignore your warnings and continued on their course to disaster? You’d probably tear your hair out in frustration.

And that’s a pretty good description of how I feel about the easy-to-predict, visible-to-the-naked-eye, baked-in-the-cake, bound-to-happen fiscal crisis that will occur because of the combination of demographic change and poorly designed entitlement programs.

It’s happening in the United States. It’s happening in Europe. It’s happening in Asia. Heck, this is a worldwide problem.

Simply stated, welfare states were created back when everyone assumed that there would always be a “population pyramid,” which means relatively few old people (who collect a lot of money from entitlement programs) at the top, plenty of workers (also known as taxpayers) in the middle, and lots of children (i.e., future taxpayers) at the bottom.

In that world, a modest-sized welfare state isn’t a good idea, but at least it is mathematically sustainable.

Today, by contrast, such a welfare state is a problem because we’re living longer and having fewer children.

And in the future, that kind of welfare state is a recipe for a Greek-style fiscal crisis because demographic trends will be even less favorable. To be blunt, there won’t be enough people pulling the wagon compared to the mass of people riding in the wagon.

At the risk of beating a dead horse, here’s some additional data on this global problem. We’ll start with this look at how the population pyramid is becoming a population cylinder. The key thing to notice is the growth of the over-65 cohort.

And here’s a different way of looking at the same data, but stretching out to 2100.

I didn’t add a red line at age 65, but it’s easy to see that the number of older people will dramatically increase without a concomitant increase in the number of working-age people who are expected to pay the taxes to finance pensions and health care.

So what’s all this mean? Here’s a sobering thought from Prospect.

The ageing populations of the advanced economies and the larger emerging ones combines with past falls in the birth rate to mean that the share of total world population who are of prime working age has been falling since 2012. After a four-decade rise, the trend has reversed with that fall projected to last throughout the 2020s, 2030s and 2040s. A slower-growing global workforce will be a big challenge for the global economy.

A “big challenge” may win the prize for understatement.

Bloomberg has a column on the implications of this massive demographic shift. Notice the data on the number of workers per retiree in various nations.

Rising dependency ratios — or the number of retirees per employed worker — provide one useful metric. In 1970, in the U.S., there were 5.3 workers for every retired person. By 2010 this had fallen to 4.5, and it’s expected to decline to 2.6 by 2050. In Germany, the number of workers per retiree will decrease to 1.6 in 2050, down from 4.1 in 1970. In Japan, the oldest society to have ever existed, the ratio will decrease to 1.2 in 2050, from 8.5 in 1970. Even as spending commitments grow, in other words, there will be fewer and fewer productive adults around to fund them.

The bottom line is that there are enormous unfunded liabilities.

Arnaud Mares of Morgan Stanley analyzed national solvency, or the difference between actual and potential government revenue, on one hand, and existing debt levels and future commitments on the other. The study found that by this measure the net worth of the U.S. was negative 800 percent of its GDP; that is, its future tax revenue was less than committed obligations by an amount equivalent to eight times the value of all goods and services America produces in a year. The net worth of European countries ranged from about negative 250 percent (Italy) to negative 1,800 percent (Greece). For Germany, France and the U.K., the approximate figures were negative 500 percent, negative 600 percent and negative 1,000 percent of GDP.

Wow, it’s depressing that the long-run outlook for the United States is worse than it is for some of Europe’s most infamous welfare states. Though I guess we shouldn’t be totally surprised since I’ve already shared similarly grim estimates from the IMF, BIS, and OECD.

I’ll close with some (sort of) good news.

Notwithstanding some of the estimates I’ve shared, America actually is in better shape than these other nations. If we enact genuine entitlement reform, ideally sooner rather than later, the long-run numbers dramatically improve because spending and debt no longer would be projected to rise so dramatically (whereas government already is an enormous burden in Europe).

This isn’t idle theory. Policymakers don’t have much control over demographics, but they can reduce the fiscal impact of demographic change by adopting better policy.

To cite the most prominent examples, jurisdictions such as Hong Kong and Singapore have very long lifespans and very low birthrates, yet their public finances don’t face nearly as much long-run pressure because they never made the mistake of setting up western-style welfare states.

The solution, therefore, is for America and other nations to copy these successful jurisdictions by replacing tax-and-transfer entitlements with systems based on private savings.

P.S. For what it’s worth, I’m not overflowing with optimism that we’ll get the reforms that are needed with Trump in the White House.

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The world’s best welfare state arguably is Finland.

Yes, the burden of government spending is enormous and the tax system is stifling, but the nation gets extremely high scores for rule of law and human liberty. Moreover, it is one of the world’s most laissez-faire economies when looking at areas other than fiscal policy.

Indeed, depending on who is doing the measuring, Finland ranks either slightly above or slightly below the United States when grading overall policy.

Yet even the best welfare state faces a grim future because of demographic change. Simply stated, redistribution programs only work if there is a sufficiently large supply of new taxpayers to finance promised handouts.

And that supply is running dry in Finland. Bloomberg reports that policymakers in that nation are waking up to the fact that there won’t be enough future taxpayers to finance the country’s extravagant welfare state.

Demographics are a concern across the developed world, of course. But they are particularly problematic for countries with a generous welfare state, since they endanger its long-term survival. …the Aktia Bank chief economist said in a telephone interview in Helsinki. “We have a large public sector and the system needs taxpayers in the future.” …According to the OECD, Finland already has the lowest ratio of youths to the working-age population in the Nordics. …And it also has the highest rate of old-age dependency in the region. …The situation is only likely to get worse, according to OECD projections.

Here are a couple of charts showing dramatic demographic changes in Nordic nations. The first chart shows the ratio of children to working-age adults.

And the second charts shows the population of old people (i.e., those most likely to receive money from the government) compared to the number of working-age adults.

As you can see, the numbers are grim now (green bar) but will get far worse by the middle of the century (the red and black bars) because the small number of children today translates into a small number of working-age adults in the future.

To be blunt, these numbers suggest that it’s just a matter of time before the fiscal crisis in Southern Europe spreads to Scandinavia.

Heck, it’s going to spread everywhere: Western Europe, Eastern Europe, Asia, the developing world, Japan and the United States.

Though it’s important to understand that demographic changes don’t necessarily trigger fiscal and economic problems. Hong Kong and Singapore have extremely low fertility rates, yet they don’t face big problems since they are not burdened by western-style welfare states.

By the way, the article also reveals that Finland’s government isn’t very effective at boosting birthrates, something that we already knew based on the failure of pro-natalist government schemes in nations such as Italy, Spain, Denmark, and Japan.

Though I’m amused that the reporter apparently thinks government handouts are a pro-parent policy and believes that more of the same will somehow have a positive effect.

Finland, a first-rate place in which to be a mother, has registered the lowest number of newborns in nearly 150 years. …the fertility rate should equal two per woman, Schauman says. It was projected at 1.57 in 2016, according to Statistics Finland. That’s a surprisingly low level, given the efforts made by the state to support parenthood. …Finland’s famous baby-boxes. Introduced in 1937, containers full of baby clothes and care products are delivered to expectant mothers, with the cardboard boxes doubling up as a makeshift cot. …Offering generous parental leave…doesn’t seem to be working either. …The government has been working with employers and trade unions to boost gender equality by making parental leave more flexible and the benefits system simpler.

Sigh, a bit of research would have shown that welfare states actually have a negative impact on fertility.

The bottom line is that entitlement reform is the only plausible way for Finland to solve this major economic threat.

P.S. Since the nation’s central bank has published research on the negative impact of excessive government spending, there are some Finns who understand what should be done.

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I argued last year that leftists should be nice to rich people because upper-income taxpayers finance the vast majority of the American welfare state according to government data.

Needless to say, my comment about being “nice” was somewhat sarcastic. But I was making a serious point about the United States having a very “progressive” fiscal system. The top-20 percent basically pay for government and those in the bottom half are net recipients of that involuntary largesse.

I also pointed out a huge difference between the United States and Europe. Governments on the other side of the Atlantic impose much higher burdens on lower-income and middle-class taxpayers.

Here’s some of what I wrote.

…the big difference between the United States and Europe is not taxes on the rich. We both impose similar tax burden on high-income taxpayers, though Europeans are more likely to collect revenue from the rich with higher income tax rates and the U.S. gets a greater share of revenue from upper-income taxpayers with double taxation on interest, dividends, and capital gains (we also have a very punitive corporate tax system, though it doesn’t collect that much revenue). The real difference between America and Europe is that America has a far lower tax burden on lower- and middle-income taxpayers. Tax rates in Europe, particularly the top rate, tend to take effect at much lower levels of income. European governments all levy onerous value-added taxes that raise costs for all consumers. Payroll tax burdens in many European nations are significantly higher than in the United States.

So do this mean European politician don’t like ordinary people?

I could make a snarky comment about the attitudes of the political elite, but I’ll resist that temptation and instead point out that taxes in Europe are much higher for the simple reason that government is much bigger and that means some segment of the population has to surrender more of its income.

But here’s the $64,000 question that we want to investigate today: Why are European governments pillaging lower-income and middle-class taxpayers instead of going after the “evil rich” and “greedy corporations”?

Part of the answer is that there aren’t enough rich people to finance big government. But the most important factor is the Laffer Curve. Politicians can impose higher tax rates on upper-income taxpayers and companies, but that doesn’t necessarily translate into higher revenue. Simply stated, well-to-do taxpayers have considerable ability to earn less income and/or report less income when tax burdens increase, and they do the opposite when tax burdens decrease.

That’s true in the United States, and it’s true in European countries such as Sweden, France, Russia, Denmark, and the United Kingdom.

So even if politicians want to fleece upper-income taxpayers, that’s not a successful method of generating a lot of revenue.

Which is why a shift from a medium-sized welfare state (such as what exists in the United States) to a large-sized welfare state (common in Europe) means huge tax increases on ordinary taxpayers.

I’ve made this point before, but now I have some additional evidence thanks to a new report from the Organization for Economic Cooperation and Development. The Paris-based bureaucracy is probably my least-favorite international organization because of its advocacy for statism, but it collects and publishes lots of useful statistics about fiscal policy in the industrialized world.

And here are three charts from the new study that tell a very persuasive story (and a depressing story for ordinary taxpayers).

First, we can see how the average tax burden has increased substantially over the past 50 years.

And who is paying all that additional money to politicians?

As you can see from this second chart, income tax revenues have become a less-important source of revenue over time while social insurance taxes (mostly paid by lower-income and middle-class taxpayers) have become a more-important source of revenue.

The third chart shows the evolution of the value-added tax burden. This levy takes a big bite out of the paychecks of ordinary people and the rate keeps climbing over time (and if we looked just at European governments that are part of the OECD, the numbers are even more depressing).

Now let’s put this data in context.

The United States now has a medium-sized welfare state financed mostly by upper-income taxpayers.

But because of dramatic demographic changes, we are doomed to have a large-sized welfare state. At least that’s what will happen if we don’t reform entitlement programs.

And if we leave policy on auto-pilot and there’s a substantial increase in the burden of government spending, it’s simply a matter of time before politicians figure out new ways of taking more money from lower-income and middle-class taxpayers.

Yes, they may also impose higher rates on “rich” taxpayers, but that will be mostly for symbolic purposes since those levies won’t generate substantial revenue.

Last but not least, don’t forget that European fiscal burdens will mean anemic European economic performance.

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Most economic policy debates are predictable. Folks on the left urge higher taxes and bigger government while folks on the right advocate lower taxes and smaller government (thanks to “public choice” incentives, many supposedly pro-market politicians don’t follow through on those principles once they’re in office, but that’s a separate issue).

The normal dividing line between right and left disappears, however, when looking at whether the welfare state should be replaced by a “universal basic income” that would provide money to every legal resident of a nation.

There are some compelling arguments in favor of such an idea. Some leftists like the notion of income security for everybody. Some on the right like the fact that there would be no need for massive bureaucracies to oversee the dozens of income redistribution programs that currently exist. And since everyone automatically would get a check, regardless of income, lower-income people seeking a better life no longer would face very high implicit tax rates as they replaced handouts with income.

But there are plenty of libertarians and small-government conservatives who are skeptical. I’m in this group because of my concern that the net result would be bigger government and I don’t trust that the rest of the welfare state would be abolished. Moreover, I worry that universal handouts would erode the work ethic and exacerbate the dependency problem.

And I have an ally of the other side of the ideological spectrum.

Former Vice President Joe Biden…will push back against “Universal Basic Income,”… UBI is a check to every American adult, but Biden thinks that it’s the job that is important, not just the income. In a blog post…timed to the launch of the Joe Biden Institute at the University of Delaware, Biden will quote his father telling him how a job is “about your dignity. It’s about your self-respect. It’s about your place in your community.”

I often don’t agree with Biden, but he’s right on this issue.

Having a job, earning a paycheck, and being self-sufficient are valuable forms of societal or cultural capital.

By contrast, a nation that trades the work ethic for universal handouts is taking a very risky gamble.

Let’s look at what’s been written on this topic.

In an article for the Week, Damon Linker explores the importance of work and the downside of dependency.

…a UBI would not address (and would actually intensify) the worst consequences of joblessness, which are not economic but rather psychological or spiritual. …a person who falls out of the workforce permanently will be prone to depression and other forms of psychological and spiritual degradation. When we say that an employee “earns a living,” it’s not merely a synonym for “receives a regular lump sum of money.” The element of deserving (“earns”) is crucial. …a job can be and often is a significant (even the primary) source of a person’s sense of self-worth. …A job gives a person purpose, a reason to get up in the morning, to engage with the world and interact with fellow citizens in a common endeavor, however modest. And at the end of the week or the month, there’s the satisfaction of having earned, through one’s own efforts, the income that will enable oneself and one’s family to continue to survive and hopefully even thrive.

Dan Nidess, in a column for the Wall Street Journal, opines about the downsides of universal handouts.

At the heart of a functioning democratic society is a social contract built on the independence and equality of individuals. Casually accepting the mass unemployment of a large part of the country and viewing those people as burdens would undermine this social contract, as millions of Americans become dependent on the government and the taxpaying elite. It would also create a structural division of society that would destroy any pretense of equality. …UBI would also weaken American democracy. How long before the well-educated, technocratic elites come to believe the unemployed underclass should no longer have the right to vote? Will the “useless class” react with gratitude for the handout and admiration for the increasingly divergent culture and values of the “productive class”? If Donald Trump’s election, and the elites’ reactions, are any indication, the opposite is likelier. …In the same Harvard commencement speech in which Mr. Zuckerberg called for a basic income, he also spent significant time talking about the need for purpose. But purpose can’t be manufactured, nor can it be given out alongside a government subsidy. It comes from having deep-seated responsibility—to yourself, your family and society as a whole.

An article in the American Interest echoes this point.

…work, for most people, isn’t just a means of making money—it is a source of dignity and meaning and a central part of the social compact. Simply opting for accelerated creative destruction while deliberately warehousing the part of the population that cannot participate might work as a theoretical exercise, but it does not mesh with the wants and desires and aspirations of human beings. Communities subsisting on UBIs will not be happy or healthy; the spectacle of free public redistribution without any work requirement will breed resentment and distrust.

Writing for National Review, Oren Cass discusses some negative implications of a basic income.

…even if it could work, it should be rejected on principle. A UBI would redefine the relationship between individuals, families, communities, and the state by giving government the role of provider. It would make work optional and render self-reliance moot. An underclass dependent on government handouts would no longer be one of society’s greatest challenges but instead would be recast as one of its proudest achievements. Universal basic income is a logical successor to the worst public policies and social movements of the past 50 years. These have taken hold not just through massive government spending but through fundamental cultural changes that have absolved people of responsibility for themselves and one another, supported destructive conduct while discouraging work, and thereby eroded the foundational institutions of family and community that give shape to society. …Those who work to provide for themselves and their families know they are playing a critical and worthwhile role, which imbues the work with meaning no matter how unfulfilling the particular task may be. As the term “breadwinner” suggests, the abstractions of a market economy do not obscure the way essentials are earned. A UBI would undermine all this: Work by definition would become optional, and consumption would become an entitlement disconnected from production. Stripped of its essential role as the way to earn a living, work would instead be an activity one engaged in by choice, for enjoyment, or to afford nicer things. …Work gives not only meaning but also structure and stability to life. It provides both socialization and a source of social capital. It helps establish for the next generation virtues such as responsibility, perseverance, and industriousness. …there is simply no substitute for stepping onto the first rung. A UBI might provide the same income as such a job, but it can offer none of the experience, skills, or socialization.

Tyler Cowen expresses reservations in his Bloomberg column.

I used to think that it might be a good idea for the federal government to guarantee everyone a universal basic income, to combat income inequality, slow wage growth, advancing automation and fragmented welfare programs. Now I’m more skeptical. …I see merit in tying welfare to work as a symbolic commitment to certain American ideals. It’s as if we are putting up a big sign saying, “America is about coming here to work and get ahead!” Over time, that changes the mix of immigrants the U.S. attracts and shapes the culture for the better. I wonder whether this cultural and symbolic commitment to work might do greater humanitarian good than a transfer policy that is on the surface more generous. …It’s fair to ask whether a universal income guarantee would be affordable, but my doubts run deeper than that. If two able-bodied people live next door to each other, and one works and the other chooses to live off universal basic income checks, albeit at a lower standard of living, I wonder if this disparity can last. One neighbor feels like she is paying for the other, and indeed she is.

In a piece for the City Journal, Aaron Renn also comments on the impact of a basic income on national character. He starts by observing that guaranteed incomes haven’t produced good outcomes for Indian tribes.

…consider the poor results from annual per-capita payments of casino revenues to American Indian tribes (not discussed in the book). Some tribes enjoy a very high “basic income”—sometimes as high as $100,000 per year— in the form of these payments. But as the Economist reports, “as payment grows more Native Americans have stopped working and fallen into a drug and alcohol abuse lifestyle that has carried them back into poverty.”

And he fears the results would be equally bad for the overall population.

Another major problem with the basic-income thesis is that its intrinsic vision of society is morally problematic, even perverse: individuals are entitled to a share of social prosperity but have no obligation to contribute anything to it. In the authors’ vision, it is perfectly acceptable for able-bodied young men to collect a perpetual income while living in mom’s basement or a small apartment and doing nothing but play video games and watch Internet porn.

Jared Dillian also looks at the issue of idleness in a column for Bloomberg.

I do not like the idea of a universal basic income. Its advocates fundamentally misunderstand human nature. What they do not realize about human beings is that for the vast majority of them, a subsistence level of income is enough — and those advocates are blind to the corrosive effects that widespread idleness would have on society. If you give people money for doing nothing, they will probably do nothing. …A huge controlled experiment on basic income has already been run — in Saudi Arabia, where most of the population enjoys the dividends of the country’s oil wealth. Saudi Arabia has found that idleness leads to more political extremism, not less. We have a smaller version of that controlled experiment here in the U.S. — for example, the able-bodied workers who have obtained Social Security Disability Insurance payments and are willing to stay at home for a piddling amount of money. …the overarching principle is that people need work that is worthwhile, for practical and psychological reasons. If we hand out cash to anyone who can fog a mirror, I figure we are about two generations away from revolution.

By the way, it’s not just American Indians and Saudi Arabians that are getting bad results with universal handouts.

Finland has been conducting an experiment and the early results don’t look promising.

The bottom line is that our current welfare system is a dysfunctional mess. It’s bad for taxpayers and recipients.

Replacing it with a basic income probably would make the system simpler, but at a potentially very high cost in terms of cultural capital.

That’s why I view federalism as a much better approach. Get Washington out of the redistribution racket and allow states to compete and innovate as they find ways to help the less fortunate without trapping them in dependency.

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