Thursday, March 17, 2016

Bernie Sanders and the Funding of Social Programs

We have a serious Democratic candidate for the presidency, Bernie Sanders, who likes to point to countries like Denmark as examples of how the United States should conduct its business.  This candidate has been mocked by Republicans as “an ideal candidate for the presidency—of Sweden.”  Sanders is claiming that we can afford to provide all the social services that the Scandinavian countries provide if we would just tax the wealthy more.  No one, not even mainline Democrats, seem to believe him.

Bruce Bartlett produced a book on the US tax system a few years ago, The Benefit and the Burden, that provided a fascinating look at how the United States actually spends—or wastes—its money.  He included a brief section under the heading “The Hidden American Welfare State” that presented this chart.

The data was from a 2005 compilation by the OECD (a rich-country organization that provides data and analyses of rich-country issues).  What was compiled was all the money governments spend on providing social benefits as a percentage of the country's GDP. 

What is interesting is that the United States ends up just behind Sweden and ahead of Denmark and Norway in social spending.  How can this be?  The Scandinavian countries provide essentially free healthcare, education, preschool child care, plus income floors, and pensions with the money they spend.  We spend at least as much and get none of these benefits.

To understand what is going on one must recognize the intrinsic stupidity of the way we do business.  What is included in our system is something called private healthcare, and something called tax expenditures.  Healthcare costs about twice as much as a percentage of GDP as in other countries, and provides generally worse health outcomes.  Our system is designed to avoid any interference with the accumulation of revenue by physicians, hospitals, drug and device corporations, and insurance companies—and at least half the healthcare cost comes out of the government budget. 

About $1 trillion is tied up in tax expenditures which are rarely even associated with tax revenue.  These are a collection of tax rebates and deductions that are, in effect, a tax collection followed by a redistribution (an expenditure), with the redistribution aimed at accomplishing some social goal.  These include the mortgage interest deduction (encourage home ownership) charity contribution deduction (encourage charity), 401k contributions deduction (save for retirement)….  The list is long.

When the Scandinavians wish to address a social issue they tax people to produce the revenue and create a program to solve the problem.  When we wish to address a problem we take some of our existing revenue and throw it up in the air hoping that a bit will land someplace useful.  The net result is that little is accomplished, and, even worse, most of the money thrown upward lands in the laps of the wealthy who don’t even need it.

So Bernie Sanders is right; the United States could afford the services provided by the Scandinavian countries if it had the will to change its ways.  However, the European countries do it by charging high taxes to everyone, not just the wealthy.

Thomas Picketty addresses almost everything associated with wealth in his book Capital in the Twenty-First Century.  He provides this insight into the way France taxes its people to provide its expensive social programs.

“….a detailed study of French taxes in 2010, which looked at all forms of taxation, found that the overall rate of taxation (47 percent of national income on average) broke down as follows.  The bottom 50 percent of the income distribution pay a rate of 40-45 percent; the next 40 percent pay 45-50 percent; but the top 5 percent and even more the top 1 percent pay lower rates, with the top 0.1 percent paying only 35 percent.”

 The taxes are certainly high by US standards, but it would be difficult to describe them as a “soak the rich” scheme.  It would actually be more accurate to describe the system as one that taxes most heavily those who benefit the most from the services provided by the taxation.  There is an intriguing sense of fairness about this approach.

An examination of who benefits most from a high tax, high service/benefits society reveals that it is the middle class.  The European “welfare states” have been much more successful at the creation of a middle class than has the United States.  A family of four in the United States must be quite wealthy or it must spend its life saving every penny to cover healthcare, childcare, education, and retirement costs.  If all that was offered essentially for free provided one would be willing to pay French-like taxes, the smart citizen would decide to pay the taxes.

So, thank you Bernie for daring to dream the impossible dream, but please also dare to level with the people who are entranced by your vision.  After all, the truth isn’t so bad.

The interested reader might find something informative in The Creation of the Middle Class.

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