Megalextoria

According to progressives like Bernie Sanders, European nations have wonderfully generous welfare states financed by high tax rates on the rich.

They’re partly right. There are very large welfare states in Europe (though I wouldn’t use “wonderfully” and “generous” to describe systems that have caused economic stagnation and high levels of unemployment).

But they’re wrong about how those welfare states are financed. Yes, tax rates on the rich are onerous, but not that much higher than in the United States. Instead, the big difference between America and Europe is that ordinary people pay much higher taxes on the other side of the Atlantic.

The US Has the Most “Progressive” Tax System

Indeed, I’ve previously cited Tax Foundation data showing that the United States arguably has the most “progressive” tax system in the developed world. Not because we tax the rich more, but simply because we impose comparatively modest burdens on everyone else.

And now we have some new evidence making the same point. Joseph Sternberg of the Wall Street Journal has some very sobering data on how the German tax system imposes a heavy weight on poor and middle-income taxpayers.

Europeans believe their tax codes are highly progressive, giving lower earners a break while levying significant proportions of the income of higher earners and corporations to fund generous social benefits. But that progressivity holds true only for direct taxes on personal and corporate income. Indirect taxes, such as the value-added tax on consumption and social-security taxes (disguised as “contributions”), are a different matter. The VAT disproportionately affects lower earners, who spend a higher proportion of their incomes. And social taxes tend to kick in at lower income levels than income taxes, and extract a higher and more uniform proportion of income. …if you look at the proportion of gross household income paid in all forms of tax, the rate varies by only 25 points. The lowest-earning 5% of households pay roughly 27% of their income in various taxes—mainly VAT—while a household in the 85th income percentile pays total taxes of around 52%, mostly in social-security taxes that amount to nearly double the income-tax bill.

Here’s a chart the WSJ included with the editorial.

As you can see, high payroll taxes and the value-added tax are a very costly combination.

And the rest of Europe is similar to Germany.

…Germany is not unique. The way German total revenues are split among income taxes, social taxes and the consumption tax is in line with the rest of Western Europe, as are its tax rates, according to OECD data. If other countries are more progressive than Germany, it’s only because Germany applies its second-highest marginal income-tax rate of 42% at a lower level of income than most.

Percent of Economic Output

Speaking of the OECD, here’s the bureaucracy’s data on the burden of government spending.

Germany is in the middle of the pack, with the public sector consuming 44 percent of economic output (Finland edges out France and Greece for the dubious honor of having the most expensive government).

The overall burden of the public sector is far too high in the United States, but we’re actually on the “low” side by OECD standards.

According to the data, total government spending “only” consumes 37.7 percent of America’s GDP. Only Ireland, Switzerland, and Latvia have better numbers (though my friend Constantin Gurdgiev explains we should be cautious about Irish economic data).

But I’m digressing. The point I want to emphasize is that punitive taxes on poor and middle-income taxpayers are unavoidable once politicians decide to impose a large welfare state.

Which is why I’m so inflexibly hostile to any tax increase, especially a value-added tax (or anything close to a VAT, such as the BAT) that would vacuum up huge amounts of money from the general population. Simply stated, politicians in Washington will have a hard time financing a bigger burden of government if they can only target the rich.

Sternberg makes the same point in his column.

Tax cuts have emerged as an issue ahead of Germany’s national election next month, with both major parties promising various timid tinkers… Not gonna happen. The VAT and social taxes are too important to the modern welfare state. The great lie is that there are a) enough “rich people,” b) who are rich enough, that c) taxing their incomes heavily enough can pay for generous health benefits and an old-age pension at 65. None of those propositions are true, and the third is especially wrong in an era of globally mobile capital and labor. That leaves the lower and middle classes, and taxes concealed in price tags or dolled up as “insurance contributions” to obscure exactly how much voters are paying for the privilege of their welfare states. …reform of the indirect taxes that impose such a drag on European economies awaits a more serious discussion about the proper role of the state overall.

Exactly.

There’s no feasible way to ease the burden on ordinary German taxpayers (or regular people in other European nations) unless there are sweeping reforms to reduce the welfare state.

And the moral of the story for Americans is that we better enact genuine entitlement reform if we don’t want to suffer the same fate.

P.S. If you don’t like German data, for whatever reason, I wrote last year about Belgium and made the same point about how a big welfare state necessarily means a bad tax system.

P.P.S. By the way, even the OECD admitted that European nations would grow faster if the burden of government was reduced.

Reprinted from International Liberty.

Daniel J. Mitchell

Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

This article was originally published on FEE.org. Read the original article.

European Welfare States Are Frantic to Breed More Taxpayers

Recently I read a very peculiar news item reporting that the Spanish government has appointed what the media are calling a “Sex Tsar.” It is officially a “commissioner for the demographic challenge,” whose job is to persuade the people of Spain to have more sex, and, by extension, more children.

 

The Spanish are not alone. In 2016, the Italian government ran a “Fertility Day” campaign to get people to have more babies. The Swedish government has initiated a study into the sex lives of its citizens, to find ways to increase the amount of sex Swedes have.

If that was all there was to the story, we could chalk it up to politicians being their usual ridiculous selves and have a good laugh about it. But this nonsense has serious economic causes and potentially far-reaching consequences.

The Ponzi Welfare State

In each of the three cases, the main reason governments wanted more children was to save the welfare state. The welfare state is the biggest Ponzi scheme on Earth, as the great economist Milton Friedman explained.

As long as there are more taxpayers (young, working people) than those who are receiving the benefits of the welfare state, the whole operation runs fine.

The problem starts when people have fewer babies, as in Europe. This will result in a larger number of old people depending on the government, which will have to tax a smaller and smaller working population to finance the benefits. Without new fools to con, the Ponzi scheme will collapse. Even Paul Krugman understands this elementary fact about welfare schemes like Social Security.

Immigrants could compensate for the shrinking population in Europe and increase the tax base for governments. But the governments have closed borders to refugees from Syria and other countries (due to political compulsions), making immigration more difficult precisely when they need more people. If they cannot get more taxpayers through migration, the only alternative is to get their citizens to have more children.

Precedent in History

In 1807, the United States Congress outlawed the import of slaves, economically akin to the immigration controls in modern Europe. Because slave masters could not get more slaves from Africa, they established “breeding farms,” as Ned and Constance Sublette describe in their book, “The American Slave Coast: A History of the Slave-Breeding Industry.”

On these breeding farms, there were far more women and children than men. Slaves were encouraged to have stable family lives. As economic historian and Nobel laureate Robert Fogel explained in his book “Time on the Cross: The Economics of American Slavery,” most slaves were sold with their entire families, or, when a slave wished to separate from his family, separately. In fact, as distinguished economists Thomas Sowell and Walter Williams have pointed out so often, more black children were raised in two-parent families during slavery than are today.

Was this because slave owners had any love for their slaves? Not by any stretch of the imagination. The slave owners simply wanted to maximize profits by encouraging their slaves to have more children. They gave rewards to women for having children, similar to the tax benefits or payments offered by a welfare state. Just as politicians can stay in the welfare business only if citizens have more and more children, the slave owners could stay in business only if slaves had more and more children. They knew that, and acted purely in their selfish interests – just like politicians.

Next, Fogel pointed out that living standards for slaves in the South were comparable to those of free workers in industry. The master ensured the welfare of his slaves, just like the modern welfare state does with its citizens.

There is yet another striking parallel between the welfare state and slavery. People such as George Washington and Thomas Jefferson believed that slavery was a terrible thing – Jefferson called it a “great political and moral evil” – yet they continued to hold slaves. They justified it by saying slaves were not capable of taking care of themselves. In the event that they set the slaves free, they argued, the slaves would fall into destitution and suffering.

This argument made by Washington and Jefferson is exactly the same as that made by proponents of a welfare state. History is bound to repeat itself if people don’t pay attention the first time around.

People in countries with a growing population, such as the US, or developing countries like India, should learn the lesson before it is too late, and take steps to roll back the welfare state while there is still time, or else end up slaves to the state.

Jairaj Devadiga

Jairaj Devadiga is an economist who illustrates the importance of property rights and freedom through some interesting real-world cases.

This article was originally published on FEE.org. Read the original article.