By Arnold Kling
"I am a bleeding heart libertarian. Because I'm a nice guy and want to address society's problems and I want disadvantaged people to become better advantaged. By instincts and experience I believe that government seldom delivers the benefits the "bleeding heart liberals" and "big government conservatives" always seem to hope for. In many cases government only makes things worse. As with technology and prose, less is often more. I'm not one of those doctrinaire Big-L Libertarians who want to eliminate government. My aim is to improve government by making it smaller. The most important part of this process is to persuade our fellow citizens to demand less of our government."
-- Stefan Sharkansky
Of the roughly $3 trillion that government in the United States at all levels collects in taxes of all kinds, close to two-thirds goes to pay for Social Security, education, and health care. This is the Welfare State.
The conventional wisdom is that the intent of the Welfare State is to reduce the disparity between the unfortunate and the well-off. The Welfare State supposedly redistributes income and reduces poverty. In fact, I believe that the Welfare State redistributes poverty and reduces income. As Karl Kraus once said of psychoanalysis, the Welfare State is the disease which it purports to cure.
The Bleeding-Heart Libertarian Approach
To contrast with the Welfare State, let me offer the Bleeding-Heart Libertarian approach to income redistribution. Conceptually, it would involve abolishing public education, all forms of free or subsidized health care, and Social Security. It would abolish all forms of taxation other than a tax on personal consumption. All consumer spending, including spending on education and health care, would be subject to tax. To assist the poor, there would be a negative consumption tax, somewhat like the negative income tax that was originally proposed by Milton Friedman.
The entire Bleeding-Heart Libertarian Welfare State can be summarized by the equation:
T = .4C* - $7000
where T is the total taxes that an individual would pay and C* is the person's consumption expenditures including spending on education and health. $7000 is a constant term that creates a personal exemption of $5000.
For a family of four, the equation would be T = .4C* - $28,000. Because there are four people, the constant term gets multiplied by four. Below is a table that shows how a family of four would be taxed assuming that it spends exactly 100 percent of its disposable income.
I chose the parameters in order to redistribute as much income as the current Welfare State, and also to collect enough additional taxes to fund the remaining functions of government. In the aggregate, personal consumption spending plus spending on education and health care amounts to roughly $8.5 trillion. Multiplying (.4) times $8.5 trillion gives $3.4 trillion in gross taxes, which is roughly what is collected today. Multiplying $7000 per person times a population of 280 million gives roughly $2 trillion in total exemptions. Thus, the net tax take of this system is about $1.4 trillion, which is close to the amount needed to fund that part of the government that is not the Welfare State.
If we had a larger exemption, we would have a more generous bleeding-heart welfare state, but we would not have enough money to fund the rest of the government. Another way of saying this is that the table above is indicative of the most redistribution that can be accomplished with a marginal tax rate of 40 percent.
Remember that in the table it is assumed that a family consumes all of its income. Suppose instead that a family with $90,000 in income spends only $70,000. Because the family would pay taxes only on its spending, such a family would pay no taxes. If they spent $80,000, the family would pay $4000 in taxes.
Some liberals would object that this consumption tax is "regressive." People with high incomes who choose low consumption would pay less in tax than people with low incomes who choose high consumption. However, I think it is a misnomer to call this "regressive." As an economist, I view consumption as the more reasonable indicator of well-being. There is no reason to tax people on the income that they save -- to do so reflects only dogmatic anti-capitalist prejudice.
Winners and Losers
A low-income family of four would have quite a struggle. Remember, under the bleeding-heart libertarian approach they have to pay for schooling for their children. Also, they have to pay for health insurance. There is no Medicaid, and no freeloading at the hospital emergency room. There would be no food stamps or other forms of assistance. Only cash in the form of the negative consumption tax, plus the family income. For example, with an income of $14,000 supplemented with $16,000 from the government, such a family would have to afford food, shelter, education, health care, and everything else on a budget of $30,000.
Does the bleeding-heart libertarian approach seem harsh? Actually, the Welfare State is worse. The Welfare State targets much more of its largesse to people who are less needy. Medicare pays for hospital bills for everyone over 65, including millionaires. The school districts with the highest per-pupil spending rates tend to be those with the wealthiest residents. Many of the elderly who receive Social Security are well-to-do.
Where does the Welfare State get the money to fund benefits for the non-needy? Mostly, it comes from the working poor. Families with incomes in the range of $15,000 to $40,000 face effective marginal tax rates of 100 percent, or even more. That is because as their income increases, they lose eligibility for housing subsidies, food stamps, Medicaid, and so on; at the same time, their tax burdens rise, primarily because of the payroll taxes that fund Medicare and Social Security. In the bleeding-heart libertarian model, a family with an income of $28,000 would receive a supplement of $12,000 from the government. Under our current system, such a family would receive very little government assistance, apart from the "benefit" of a bottom-of-the-barrel public school. Moreover, it would be subject to payroll taxes, property taxes, sales taxes, and state income taxes.
The bleeding-heart libertarian approach systematically redistributes resources to people in need. The Welfare State arbitrarily creates winners and losers among people with similar income and spending circumstances. Compared with the bleeding-heart libertarian model, in today's Welfare State:
* Well-off elderly who spend a lot on health care are winners. So are people who choose not to buy health insurance but instead receive free care at emergency rooms. The working poor who have health insurance and pay taxes for Medicare are the losers.
* Among people who can afford to save for retirement, those who choose not to do so are rewarded with Social Security benefits. Those who do save are punished with taxes on their investment income.
* Children who live in school districts located where there is a lot of high-priced real estate are subsidized. Children who live in rural areas and small towns, or children whose parents pay for private school, are penalized.
To put it succinctly, the Welfare State makes losers out of people who want to get ahead through hard work, thrift, or education. Those are precisely the activities that produce economic growth and social wealth, and they are hit particularly hard by Welfare State redistribution.
Politics and the Welfare State
The Welfare State certainly has well-organized constituencies. The winners, such as the AARP and the teachers' unions, know who they are. The losers -- the working poor, children stuck in low-quality school districts -- have much less political clout. The Welfare State has friends in both parties, as evidenced by the move to add a prescription drug benefit to Medicare.
As the Baby Boomers age, longevity increases, and new medical technology is developed, the cost of the Welfare State is going to rise. Economists agree that in another generation the share of GDP required by the Welfare State will exceed the share of GDP of total tax revenues today. The outlook for the working poor and other Welfare State losers is decidedly grim.
The Bush Administration is undermining the Welfare State by trying to limit taxes as a percent of GDP. However, no one in either party is willing to talk plainly about the failures and inequities of the Welfare State. Those failures and inequities are the crazy aunt that politicians on both parties try to hide.
Suppose that the Welfare State is abolished or curtailed, and no redistribution mechanism is erected in its place. In that case, I am not certain what would happen to poverty. It certainly would be redistributed: some current beneficiaries would lose, while some who are trapped in poverty by the current system would escape. With overall economic growth higher, we might very well see a decline in overall poverty.
However, the scheme I outlined above would provide a better alternative. If it were adopted, there would be improved overall living standards, as a result of encouraging the activities that lead to growth. Overall higher living standards, combined with the efficiency of the redistribution mechanism, would drive out poverty. The working poor would see their effective tax burdens plummet. Thrifty people would live very comfortably in their retirement. Access to a good education would be more equal.
All things considered, it seems to me that the risk involved in embarking on a course to abolish the current Welfare State is actually rather small. I think that there are much better alternatives available, along the lines of the bleeding-heart libertarian model. Committing ourselves to the Welfare State as it exists today amounts to robbing the poor.