The Welfare State

In most western countries tax payers pay a great deal of money to the government in taxes, much of which comes back to themselves and others in the forms of various kinds of welfare. It seems to me that there are three distinct rationales for paying welfare and that they are often not stated but somehow assumed and I think lead to confusion over what we are trying to achieve. My three rationales are:

1) A social safety net. This is the barest minimum level, and the idea is only to protect those in real hardship from starving etc and ensuring all minors say have the ability to obtain at least a basic level of education.

2) Redistribution of wealth. Welfare (along with progressive taxes) become a way of ensuring a flattening of the income distribution. We are taking from the rich to give to the poor.

3) Social engineering. Can come in various forms but the recent ones we’ve seen in Australia have been with regards encouraging families. eg. Family Tax benefit B and the Maternity payment. In principle though it could be anything but this is not income or poverty based, rather it tries to target various social goals.

It seems that you could divide these three into welfare that would be supported by clasical liberals in the first case. Social Democrats in the second and Conservatives in the third, although Social democrats also do the third rationale. There are no hard lines between the three categories. Obviously what is a bare minimum for a safety net is up for debate, but they do I think underline different ideas behind running welfare.

While I’ve been happy to enjoy the benefits of rationale 3, it seems to me the main purpose of welfare is 1) with an element of 2). I think some form of progressive taxation is a good idea and that the basic level of cover should be better than just avoiding starvation.

Where proposals such as mutual obligation come is also interesting (ie deserving poor tests). Generally it seems that they are an attempt to turn basic insurance into more social engineering. Its not clear to me that we should ever be doing welfare on the basis of 3.

Probably not my greatest post but just wanting to get some ideas down.

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13 Responses to The Welfare State

  1. Sacha says:

    Steve – it’s great just to write ideas down – every post doesn’t need to be your best!

    Social democrats would be in favour of 1, and probably Conservatives too, especially if the latter were in favour of some form of social contract where those who are able to look after themselves contribute to those who aren’t.

    I’m also in favour of 1, maybe in favour of 2 (although I don’t know to what extent), and not really in favour of social engineering unless there are some demonstrably good reasons!

  2. Steve says:

    Yes I didn’t mean to be exclusive. Liberals would be in favour of exclusively 1) but it part of the brief for social democrats and probably most conservatives.

  3. Sacha says:

    Ah yes. It’d be interesting to do really good in-depth discussions on pts 2. and 3.

  4. yobbo says:

    I think some form of progressive taxation is a good idea and that the basic level of cover should be better than just avoiding starvation.

    Safety-net welfare can easily be maintained well above starvation level without need to resort to progressive taxation.

    Progressive taxation carries with it disincentives to work harder and produce more. Unless you can show why it is absolutely necessary I don’t see how you can support it.

    A big part of the rationale behind progressive taxation is envy and a large part of the rest is greed on the part of governments.

    If the only spending of the government was welfare we probably wouldn’t need any form of income tax at all.

  5. Steve says:

    Its certainly not envy on my part since I am in general paying those higher rates.

    The disincentive extists though I won’t deny that although its ultimately the rate rather than the progressive part that makes it so. A part of the reason I work 4 days a week is that they tax the crap out of the last days earnings, although less so than when I originally got the 4 day deal.

    Having a steeply rising scale like we used to have 7-8 years ago when the top tax rate kicked in at 50k is silly. Still I have no issue with having a slightly higher rate kick in for those on say 5 times the average wage, if it means we can have a higher tax free threshold, or lower rate for low-medium incomes.

  6. Mark Hill says:

    Like I said on LP and Graeme Bird’s blog, an auctioning off of crown assets could pay out pensions and invalids, and then the rest of the proceeds from selling land and shares of corpoaratised GBEs should be gifted in equal allotments to everyone.

    Why the hell would we *need* welfare anymore?

    SS&W welfare take 40% of Federal taxation, assuming the same for all levels, abolishing it could mean ending income taxes and at least a 5.28% one-off increase in GDP and permantly higher growth rates.

    Given the data on Australian pre income tax philanthropy and US data on incomes and income taxes, why should there be any concern for the destitute etc when bureacratic welfare is problem ridden?

  7. Jason Soon says:

    Mark
    Fortunes are won and lost. How can a once-off gift take account of family poverty down the line?

  8. steve munn says:

    Yobbo says:

    “Progressive taxation carries with it disincentives to work harder and produce more. Unless you can show why it is absolutely necessary I don’t see how you can support it.”

    This is part of classical liberal mantra but I’m yet to see the evidence. Do people in high tax countries like Norway work less harder than people in low tax USA? Is there research that shows workers in an office reduce productivity subsequent to a pay rise that puts them in a higher tax bracket? I think not to both of these.

    If you pick up a business management textbook and examines theories on worker productivity you’ll see that the issue is actually complex.

    I’m becoming increasingly bored with the libertarian tendency to reduce complex social reality to what my tattered old Macroeconomics 101 textbook tells me.

    And by the way, your thoughts are always worth reading, Steve. Thanks.

  9. steve munn says:

    One more comment- social engineering gets an undeserved bad rap. I don’t have a problem with incremental social engineering, for example social worker intervention in dysfunctional families; extensive prisoner rehabilitation programs; head start type oprograms for lower SES kids.

    The real dangers lie with what Popper called utopian social engineering- ie the attempt to dramatically transform a society as per a Marxist style revolution.

    Incremental, or in Popper’s words piecemeal, socuial engineering is much more benign. A program can be put in place, evaluated then kept, altered or modified depending on the outcomes. This is what invariably happens in liberal democracies and is one of its strengths.

    I blogged on social engineering a while back and will return to the type at some stage -http://allocasuarina.blogspot.com/2007/01/in-defence-of-law-as-tool-of-social.html

  10. Mark Hill says:

    Jason, that is a good point (downward ability always exists) but you haven’t shown why that makes welfare necessary under a situion after gifting state resources and paying out pensions.

    If you remove generational poverty, increase disposable incomes, economic growth and remove expectations of future welfare, attitutdes, behaviours and expectations will change enought to take account of this. People will save or otherwise charity will work much better than it does now. The current system keeps a lot of people poor for various reasons, entrenched cultutre, poverty traps, minimum wages, low growth rates, as for being “worthy”, on top of any dishonest applicants or those who could work but refuse to do so. Why wouldn’t the remaining “worthy” cases of poverty on top of invalids be supported by philantrhopy or support organisations?

  11. Rod Clarke says:

    Personally I think the issue should be turned on its head. and the question should be:

    Sould the government and its welfare programmes be so large that, at the margin the best, brightest and most industrious are effectively working 2.5 days per week for the government thru the tax system? Isn’t this a social justice issue?

    And if a business wants to buy $10,000 worth of Steve Edney time they effectively have to come up with $20,000 for the governments cut.

    How many business projects dont go thru because the Government takes its 30% cut?

    I think society would be alot healthier if the government said “at the max we’ll take 1 day per week or a 20% tax rate and do what we can with that. And otherwise well just get out of the way.

    How much of the “Skills Crisis” is caused by early retiries and others just dropping out or “sea changing”making the economic decision that its not really worth working?

    How much of the “Child Care Crisis/ Family breakdown Crisis / ADHD Crisis” is caused the fact that mum and dad both work 1.5 – 2.5 days plus for the goverment.

    And what about “the health crisis or the Obesiety crisis or the Aged Care Crisis”

    Couldnt alot of these and other problems be saved if people got to keep more of their own money and time to spend how they wish?

  12. Rod Clarke says:

    I think what’s terrible is that the idelogical assumption that considers the marketplace to be a self-evident evil, instead of the force for progress, well-being and self-determination it really is.

  13. Sacha says:

    steve munn Says:

    February 1st, 2007 at 10:08 pm
    Yobbo says:

    “Progressive taxation carries with it disincentives to work harder and produce more. Unless you can show why it is absolutely necessary I don’t see how you can support it.”

    This is part of classical liberal mantra but I’m yet to see the evidence. Do people in high tax countries like Norway work less harder than people in low tax USA? Is there research that shows workers in an office reduce productivity subsequent to a pay rise that puts them in a higher tax bracket? I think not to both of these.

    Just a short comment on this one of Steve Munn’s – When effective marginal tax rates are quite high, people can choose to work fewer hours as the amount of money gained after tax for the extra effort otherwise put in may be too little. I know one person in the Qld public service on a fairly good salary who told me that she could work 9 days a fortnight instead of 10 and only comparatively lose about $40 after tax – she decided the extra day off work was definitely worth the loss of $40.

    Personally, when I changed to working 9 days a fortnight from 10, my after-tax income turned out to be about 95% of my previous after-tax income, and the extra time and “mental space” was definitely worth that difference. I suppose that everyone has their own “utility-function” comprising some mixture of income, effort needed to work, free time, time to do other things, etc.

    This isn’t a comment on progressive taxation per se, but rather about high effective marginal tax rates.

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