The Lunacy of the Welfare State; Income Redistribution Will Eventually Reach Its Limit

The Washington Times (Washington, DC), March 24, 2014 | Go to article overview

The Lunacy of the Welfare State; Income Redistribution Will Eventually Reach Its Limit


Byline: Lawrence A. Hunter

The modern American welfare state resembles a kleptocracy in which everyone is stealing from everyone else under the color of law using the income tax and Internal Revenue Service (IRS) as the bagman.

Many Americans today, in addition to paying -- or in some cases, in lieu of paying -- income taxes actually receive cash payments through the Internal Revenue Code. These payments are euphemistically labeled "refundable" tax credits. They are designed to make the welfare state more efficient at income redistribution and social engineering. During the past two decades, for example, tax credits for low- and middle-income working families with children, such as the Earned Income Tax Credit and the Child Tax Credit, have ballooned enormously. Now with the IRS running Obamacare, the Internal Revenue Code will begin providing even upper-middle-class people so-called "advanceable" tax credits even before tax returns are filed.

The Obama administration has quantified the daisy chain of cash payments in this year's budget: 70 percent of all federal spending comes in the form of direct payments to individuals, an all-time high. As John Merline of Investors Business Daily wrote recently: "In effect, the government has become primarily a massive money-transfer machine, taking $2.6 trillion from some and handing it back out to others. These government transfers now account for 15 percent of GDP, another all-time high. In 1991, direct payments accounted for less than half the budget and 10 percent of GDP."

Economists have a name for this reciprocal plunder: "Rent Seeking." At its most elemental level, rent seeking consists of organized groups manipulating democratic institutions and majority-rule voting to concentrate benefits on themselves and their allies while diffusely extracting the resources from across the entire society to pay for the goodies. That way, no single extraction of rent is too onerous to be noticed much or generate significant resistance.

In the aggregate, however, when everyone is playing the same game, the small extractions add up. In fact, they eventually add up to a classic Ponzi scheme that ultimately collapses in a fiscal crisis of the welfare state. As former British Prime Minister Margaret Thatcher once quipped: "The problem with socialism is you eventually run out of other people's money."

The string pullers in Washington justify their organized theft by claiming compassionate egalitarianism as the raison d'etre of the welfare state. The results of government activity are not measured by comparing benefits against the costs. Everything government does must be measured against the yardstick of inequality -- did the government's action result in more or less inequality? …

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