Burdens and Subsidies of the Welfare State

Does the modern welfare state really help the poor? The commonly held notion, the idea that has propelled the welfare state and maintained it in being, is that the welfare state redistributes income and wealth from the rich to the poor: the progressive tax system takes money from the rich while numerous welfare and other services distribute the money to the poor. But even liberals, the great advocates and abettors of the welfare state, are beginning to realize that every part and aspect of this idea is merely a cherished myth. Government contracts, notably of the military, funnel tax funds into the pockets of favored corporations [p. 158] and well-paid industrial workers. Minimum wage laws tragically generate unemployment, especially so among the poorest and least skilled or educated workers — in the South, among teenage Negroes in the ghettoes, and among the vocationally handicapped. Because a minimum wage, of course, does not guarantee any worker’s employment; it only prohibits, by force of law, anyone from being employed at the wage which would pay his employer to hire him. It therefore compels unemployment. Economists have demonstrated that raises in the federal minimum wage have created the well-known Negro-white teenage employment gap, and have driven the rate of male Negro teenage unemployment from an early postwar rate of about 8% to what is now well over 35% — an unemployment rate among teenage Negroes that is far more catastrophic than the massive general unemployment rate of the 1930s (20-25%).32

We have already seen how State higher education redistributes income from poorer to wealthier citizens. A host of government licensing restrictions, permeating occupation after occupation, exclude poorer and less skilled workers from these jobs. It is becoming recognized that urban renewal programs, supposedly designed to aid the slum housing of the poor, in fact demolish their housing and force the poor into more crowded and less available housing, all for the benefit of wealthier subsidized tenants, construction unions, favored real estate developers, and downtown business interests. Unions, once the pampered favorites of liberals, are now generally seen to use their governmental privileges to exclude poorer and minority-group workers. Farm price supports, jacked ever higher by the federal government, mulct the taxpayers in order to push food prices higher and higher, thereby injuring particularly the poor consumers and helping — not poor farmers, but the wealthy farmers commanding a large amount of acreage. (Since farmers are paid per pound or per bushel of product, the support program largely benefits the wealthy farmers; in fact, since farmers are often paid not to produce, the resulting taking of acreage out of production causes severe unemployment among the poorest segment of the farm population — the farm tenants and farm workers.) Zoning laws in the burgeoning suburbs of the United States serve to keep out the poorer citizens by legal coercion, very often Negroes who are attempting to move out of the inner cities to follow increasing job opportunities in the suburbs. The U.S. Postal [p. 159] Service charges high monopoly rates on the first-class mail used by the general public in order to subsidize the distribution of newspapers and magazines. The FHA subsidizes the mortgages of well-to-do homeowners. The Federal Bureau of Reclamation subsidizes irrigation water to well-to-do farmers in the West, thereby depriving the urb an poor of water and forcing them to pay higher water charges. The Rural Electrification Administration and the Tennessee Valley Authority subsidize electric service to well-to-do farmers, suburbanites, and corporations. As Professor Brozen sardonically observes: “Electricity for poverty-stricken corporations such as the Aluminum Corporation of America and the DuPont Company is subsidized by the tax-free status of the Tennessee Valley Authority (27 percent of the price of electricity goes to pay the taxes imposed on privately operated utilities).”33  And the government regulation monopolizes and cartelizes much of industry, thereby driving up prices to consumers and restricting production, competitive alternatives, or improvements in products (e.g., railroad regulation, public utility regulation, airline regulation, oil proration laws). Thus, the Civil Aeronautics Board allocates airline routes to favored companies and keeps out and even drives out of business smaller competitors. State and federal oil proration laws provide for absolute maximum limits on crude oil production, thereby driving up oil prices, prices that are further kept up by import restrictions. And government throughout the country grants an absolute monopoly in each area to gas, electric, and telephone companies, thus protecting them from competition, and sets their rates in order to guarantee them a fixed profit. Everywhere and in every area the story is the same: a systematic mulcting of the mass of the population by the “welfare state.”34

Most people believe that the American tax system basically taxes the rich far more than it taxes the poor and is therefore a method of redistributing income from higher to lower income classes. (There are, of course, many other kinds of redistribution, e.g., from the taxpayers to Lockheed or General Dynamics.) But even the federal income tax, which everybody assumes to be “progressive” (taxing the rich far more than the poor, with the middle classes in between), does not really work that way when we take into account other aspects of this tax. For example, the [p. 160] Social Security tax is blatantly and starkly “regressive,” since it is a soak-the-poor-and-middle-class tax: a person making the base income ($8,000) pays fully as much Social Security tax — and the amount is rising every year — as someone making $1,000,000 a year. Capital gains, mostly accruing to wealthy stockholders and owners of real estate, pay far less than income taxes; private trusts and foundations are tax exempt, and interest earned on state and municipal government bonds is also exempt from the federal income tax. We wind up with the following estimate of what percentage of income is paid, overall, by each “income class” in federal taxes:

If federal taxes are scarcely “progressive,” the impact of state and local taxes is almost fiercely regressive. Property taxes are (a) proportional, (b) hit only owners of real estate, and (c) depend on the political vagaries of local assessors. Sales and excise taxes hit the poor more than anyone else. The following is the estimate of the percentage of income extracted, overall, by state and local taxes:

[p. 161]

Following are the combined estimates for the total impact of taxation — federal, state, and local — on income classes:

Still more recent (1968) estimates of the total impact of taxes on all levels of government amply confirm the above, while also showing a far greater relative rise in the three years of the tax burden on the lowest income groups:

Many economists try to mitigate the impact of these telltale figures by saying that the people in the “Under $2,000” category, for example, receive more in welfare and other “transfer” payments than they pay out in taxes; but of course this ignores the vital fact that the same people [p. 162] in each category are not the welfare receivers and the taxpayers. The latter group is socked heavily in order to subsidize the former. In short, the poor (and the middle class) are taxed in order to pay for the subsidized public housing of other poor- and middle-income groups. And it is the working poor who are socked a staggering amount to pay for the subsidies of the welfare poor.

There is plenty of income redistribution in this country: to Lockheed, to welfare recipients, and so on and on . . . . but the “rich” are not being taxed to pay for the “poor.” The redistribution is within income categories; some poor are forced to pay for other poor.

Other tax estimates confirm this chilling picture. The Tax Foundation, for example, estimates that federal, state, and local taxes extract 34% of the overall income of those who make less than $3,000 a year.37

The object of this discussion is not, of course, to advocate a “really” progressive income tax structure, a real soaking of the rich, but to point out that the modern welfare state, highly touted as soaking the rich to subsidize the poor, does no such thing. In fact, soaking the rich would have disastrous effects, not just for the rich but for the poor and middle classes themselves. For it is the rich who provide a proportionately greater amount of saving, investment capital, entrepreneurial foresight, and financing of technological innovation that has brought the United States to by far the highest standard of living — for the mass of the people — of any country in history. Soaking the rich would not only be profoundly immoral, it would drastically penalize the very virtues: thrift, business foresight, and investment, that have brought about our remarkable standard of living. It would truly be killing the goose that lays the golden eggs.

• 32Among numerous studies, see Yale Brozen and Milton Friedman, The Minimum Wage: Who Pays? (Washington, D.C.: Free Society Association, April 1966); and John M. Peterson and Charles T. Stewart, Jr., Employment Effects of Minimum Wage Rates (Washington, D.C.: American Enterprise Institute, August 1069).
• 33Brozen, “Welfare Without the Welfare State,” pp 48-49.
• 34In addition to Brozen, op cit., see Yale Brozen, “The Untruth of the Obvious,” The Freeman (June 1968), pp 328-40. See also Yale Brozen, “The Revival of Traditional Liberalism,” New Individualist Review (Spring, 1965), pp 3-12, Sam Peltzman, “CAB Freedom from Competition,” New Individualist Review (Spring, 1963), pp 16-23, Martin Anderson, The Federal Bulldozer (Cambridge MIT Press, 1964). An introduction to the oil price story is Hendrik S Houthakker, “No Use for Controls,” Barrons (Nov 8, 1971), pp 7-8.
• 35For the estimates, see Joseph A. Pechman, “The Rich, the Poor, and the Taxes They Pay,” Public Interest (Fall, 1969), p. 33.
• 36R. A. Herriott and H. P. Miller, “The Taxes We Pay,” The Conference Board Record (May 1971), p. 40.
• 37See William Chapman, “Study Shows Taxes Hit Poor,” New York Post (February 10, 1971), p. 46; U.S. News (December 9, 1968); Rod Manis, Poverty: A Libertarian View (Los Angeles: Rampart College, n.d.); Yale Brozen, “Welfare Without the Welfare State,” op. cit.