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Posts Tagged ‘welfare state’

Sooner or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax revenue is needed to turn the United States into a European-style social welfare state. But that’s exactly why the VAT is a terrible idea.

I explain why in a column for Reuters. The entire thing is worth reading, but here’s an excerpt of some key points.

Many Washington insiders are claiming that America needs a value-added tax (VAT) to get rid of red ink. …And President Obama says that a VAT is “something that has worked for other countries.”

Every single one of these assertions is demonstrably false.

…One of the many problems with a VAT is that it is a hidden levy. …VATs are imposed at each stage of the production process and thus get embedded in the price of goods. And because the VAT is hidden from consumers, politicians find they are an easy source of new revenue – which is one reason why the average VAT rate in Europe is now more than 20 percent!

…Western European nations first began imposing VATs about 40 years ago, and the result has been bigger government, permanent deficits and more debt. According to the Economist Intelligence Unit, public debt is equal to 74 percent of GDP in Western Europe, compared to 64 percent of GDP in the United States (and the gap was much bigger before the Bush-Obama spending spree doubled America’s debt burden).

The most important comparison is not debt, but rather the burden of government spending. …you don’t cure an alcoholic by giving him keys to a liquor store, you don’t promote fiscal responsibility by giving government a new source of revenue.

…To be sure, we would have a better tax system if proponents got rid of the income tax and replaced it with a VAT. But that’s not what’s being discussed. At best, some proponents claim we could reduce other taxes in exchange for a VAT. Once again, though, the evidence from Europe shows this is a naive hope. The tax burden on personal and corporate income is much higher today than it was in the pre-VAT era.

…When President Obama said the VAT is “something that has worked for other countries,” he should have specified that the tax is good for the politicians of those nations, but not for the people. The political elite got more money that they use to buy votes, and they got a new tax code, enabling them to auction off loopholes to special interest groups.

You can see some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

For further information on why the VAT is a horrible proposal, including lots of specific numbers and comparisons between the United States and Western Europe, here’s a video from the Center for Freedom and Prosperity.

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This story from the Manhattan Institute’s City Journal makes the point, excerpted below, that the welfare state subsidizes dysfunctional behavior. But read the story to understand how big government destroys lives, ruins families, and creates inter-generational poverty. A very powerful, albeit very depressing article. It’s basically the American version of this grim news report from England.

Connecticut is among the most generous of the states to out-of-wedlock mothers. Teenage girls like Nicole qualify for a vast array of welfare benefits from the state and federal governments: medical coverage when they become pregnant (called “Healthy Start”); later, medical insurance for the family (“Husky”); child care (“Care 4 Kids”); Section 8 housing subsidies; the Supplemental Nutrition Assistance Program; cash assistance. If you need to get to an appointment, state-sponsored dial-a-ride is available. If that appointment is college-related, no sweat: education grants for single mothers are available, too. Nicole didn’t have to worry about finishing the school year; the state sent a $35-an-hour tutor directly to her home halfway into her final trimester and for six weeks after the baby arrived.

In theory, this provision of services is humane and defensible, an essential safety net for the most vulnerable—children who have children. What it amounts to in practice is a monolithic public endorsement of single motherhood—one that has turned our urban high schools into puppy mills. The safety net has become a hammock.

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On rare occasions, I dream about being a politician or high-level international bureaucrat. Not because I want to be a moocher (please put me out of my misery if that ever happens), but because I periodically read about some sleazy interest group making petulant demands for handouts and I think about how much fun it would be to tell them to go jump in a lake.

In some cases, the sleazy interest group is an entire nation. Greece recently took a bailout from both the European Union (i.e., European taxpayers) and the International Monetary Fund (i.e., all taxpayers). In exchange for getting a handout, Greek politicians agreed to implement a bunch of deficit-reduction policies.

But like many welfare recipients, the country of Greece has an entitlement mentality and is now whining and complaining about having to live up to its side of the bargain.

All I can think about is how rewarding and satisfying it would be to say, “okay, a__h___s, have it your way, we’re revoking your bailout. Have fun becoming Argentina on your way to becoming Zimbabwe, you bloodsucking leeches.”

Actually, if I had that power, Greece never would have received a bailout in the first place, but I think you know what I mean.

Here are some excerpts from the Reuters report about Greece’s chutzpah.

Greece accused the EU and IMF of interfering in its domestic affairs on Saturday after the international lenders said Athens must speed up reforms and sell more public assets. On Friday, EU and IMF inspectors visiting Greece to monitor the implementation of a bailout plan that saved Greece from bankruptcy, approved more aid for the country but adopted a more critical tone than on previous visits. In rare harsh words, the Greek government said the inspectors’ approach was unacceptable, after coming under fire from local media for not reacting to criticism of the pace of reforms and the call for privatizations. …Earlier in the day, government spokesman George Petalotis said: “We asked nobody to interfere in domestic affairs … We only take orders from the Greek people.”

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President Obama’s proposed budget for fiscal year 2012 has been released and there is lots of rhetoric in Washington about “budget cuts.”

At first glance, this seems warranted. According to the just-released fiscal blueprint, the federal government is spending about $3.8 trillion this year and the President is proposing to spending a bit more than $3.7 trillion next year. In other words, the White House is going beyond a budget freeze and is actually proposing to spend $90 billion less next year than is being spent this year.

That certainly seems consistent with my proposal to solve America’s fiscal problems by restraining the growth of spending.

But you won’t find a smile on my face. This new budget may be better than Obama’s first two fiscal blueprints, but that’s damning with faint praise. The absence of big initiatives such as the so-called stimulus scheme or a government-run healthcare plan simply means that there’s no major new proposal to accelerate America’s fiscal decline.

But neither is there any plan to undo the damage of the past 10 years, which resulted in a doubling in the burden of government spending during a period when inflation was less than 30 percent.

Moreover, many of the supposed budget savings (such as nearly $40 billion of lower jobless benefits) are dependent on better economic performance. I certainly hope the White House is correct about faster growth and more job creation, but they’ve been radically wrong for the past two years and it might not be wise to rely on optimistic assumptions.

Some of the fine print in the budget also is troubling, such as Table 4.1 of OMB’s Historical Tables of the Budget, which shows that some agencies are getting huge increases, including:

o     17 percent more money for International Assistance Programs;

o     24 percent more money for the Executive Office of the President;

o     13 percent for the Department of Transportation; and

o     12 percent more for the Department of State.

But these one-year changes in outlays are dwarfed by the 10-year trend. Since 2001, spending has skyrocketed in almost every part of the budget. Even with the supposed “cuts” in Obama’s budget, there will be:

o     112 percent more spending for the Department of Agriculture;

o     100 percent more spending for the Department of Education;

o     154 percent more spending for the Department of Energy;

o     110 percent more spending for the Department of Health and Human Services;

o     175 percent more spending for the Department of Labor; and

o     82 percent for the Department of Transportation.

And remember that inflation was less than 30 percent during this period.

The budget needs to be dramatically downsized, yet the President has proposed that we tread water.

But even that’s too optimistic. America’s real fiscal challenge is that the burden of government spending will dramatically increase in coming decades, thanks largely to an aging population and poorly designed entitlement programs. Barring some sort of change, the United States will suffer the same problems that are now afflicting failed welfare states such as Greece and Portugal.

On the issue of entitlement reform, however, the President is missing in action. He’s not even willing to embrace the timid proposals of his own Fiscal Commission.

Tomorrow, we’ll look at the tax side of the President’s budget.

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President Obama unveiled his fiscal year 2012 budget today, and there’s good news and bad news. The good news is that there’s no major initiative such as the so-called stimulus scheme or the government-run healthcare proposal. The bad news, though, is that government is far too big and Obama’s budget does nothing to address this problem.

But perhaps the folks on Capitol Hill will be more responsible and actually try to save America from becoming a big-government, European-style welfare state. The solution may not be easy, but it is simple. Lawmakers merely need to restrain the growth of government spending so that it grows slower than the private economy.

Actual spending cuts would be the best option, of course, but limiting the growth of spending is all that’s needed to slowly shrink the burden of government spending relative to gross domestic product.

Fortunately, we have two role models from recent history that show it is possible to control the federal budget. This video from the Center for Freedom and Prosperity uses data from the Historical Tables of the Budget to demonstrate the fiscal policy achievements of both Ronald Reagan and Bill Clinton.

Some people will want to argue about who gets credit for the good fiscal policy of the 1980s and 1990s.

Bill Clinton’s performance, for instance, may not have been so impressive if he had succeeded in pushing through his version of government-run healthcare or if he didn’t have to deal with a Republican Congress after the 1994 elections. But that’s a debate for partisans. All that matters is that the burden of government spending fell during Bill Clinton’s reign, and that was good for the budget and good for the economy. And there’s no question he did a much better job than George W. Bush.

Indeed, a major theme in this new video is that the past 10 years have been a fiscal disaster. Both Bush and Obama have dramatically boosted the burden of government spending – largely because of rapid increases in domestic spending.

This is one of the reasons why the economy is weak. For further information, this video looks at the theoretical case for small government and this video examines the empirical evidence against big government.

Another problem is that many people in Washington are fixated on deficits and debt, but that’s akin to focusing on symptoms and ignoring the underlying disease. To elaborate, this video explains that America’s fiscal problem is too much spending rather than too much debt.

Last but not least, this video reviews the theory and evidence for the “Rahn Curve,” which is the notion that there is a growth-maximizing level of government outlays. The bad news is that government already is far too big in the United States. This is undermining prosperity and reducing competitiveness.

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Hello from the Most Serene Republic of San Marino, a 24-square mile enclave centered around Monte Titano in eastern Italy. I’m here for a conference on “Competition and Alliances among States.”

Like many other so-called tax havens, San Marino has been bludgeoned in recent years by politicians from high-tax nations, who resent the flow of jobs and capital to low-tax jurisdictions. This is creating problems for the economy, which is one of the most prosperous in the world.

I will speak later today about the ongoing battle between those who favor tax competition and those who want tax harmonization. Not surprisingly, my presentation will include some jabs at France, Germany, and other high-tax nations, as well as statist international bureaucracies such as the Organization for Economic Cooperation and Development.

But my main goal will be to put this battle in context, pointing out that the attacks against low-tax jurisdictions will get more intense in the future as welfare states begin to fall apart and politicians desperately search for more revenue to delay the day of reckoning.

This is not to imply that San Marino is a laissez-faire paradise. Yes, comparatively low tax rates have generated prosperity, but prosperity generates a lot of tax revenue (the Laffer Curve strikes again!), and the nation’s politicians have succumbed to temptation and spent all the money. Indeed, there is not much difference between the welfare state in San Marino and the one in Italy.

The moral of the story, of course, is that all nations should strive to shrink the overall burden of government. San Marino should try to be more like Hong Kong and less like France. The same is true for the United States.

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I’ve already poked fun at Herman Van Rompuy, the nondescript über-bureaucrat who has risen to the non-elected post of European Council President. I’ve mocked Rompuy’s attempts to compete with other European politicians, and I encourage everyone to have a good laugh at this video of Van Rompuy getting eviscerated by a British MEP.

We now have a new reason to roll our eyes about Van Rompuy. He is whining about those mean, nasty bond traders who have decided that it is a somewhat risky proposition to lend money to Europe’s welfare states. Even though Van Rompuy has no experience with money (other than spending the fruits of other people’s labor), he imperiously thinks it is “absurd” to put Greece and Portugal in the same category as Ukraine and Argentina.

I guess he would prefer if everyone just pretended these countries were in good shape and able to pay their bills, sort of like a fiscal version of “The Emperor’s New Clothes.”

Here’s the relevant passage from an article in the EU Observer.

European Council President Herman Van Rompuy has lashed out at ‘bond vigilantes’ over the treatment of peripheral eurozone economies in recent months. Speaking in London after a meeting with Prime Minister David Cameron on Thursday (13 January), Mr Van Rompuy described recent events as “absurd” and said the likes of Greece and Portugal should not be treated the same as poor countries: “Recent market developments are sometimes rather strange. The spreads now show default risks for some eurozone countries bigger than for emerging countries like Ukraine or Argentina: that is absurd.”

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