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The Wizard of the Social Welfare State



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Barack Obama is spinning a fabulous tale for the American electorate. Look! (Fireworks explode.) We don’t have to touch Social Security, Medicare or Medicaid! Look! (REO Speedwagon strikes up “Roll with the Changes.”) We can have a new entitlement for health insurance! Look! (The fog machines bellow a deep mist.) You don’t have to pay a dime — the rich just need to learn shared sacrifice!

Fabulous, indeed. An American economy festooned with a sclerotic European welfare state — all with no impact on economic growth or cost to the middle class. It is already becoming obvious that the first isn’t true. Should the American middle class believe the second?

No, as explained in more clinical detail here.

Let’s take a look across the pond. European social-welfare spending does vastly exceed that of the United States. It averages nearly 23 percent of GDP on the continent, compared to only 16 percent in the United States. That’s more than 30 percent more (as a percent of GDP). And that is the average, which is held down by parsimonious states like Ireland and Poland. The progressives’ ideal, France, weighs in at over 28 percent.

So, to fulfill the president’s dream, the U.S. will have to spend a lot more. This administration’s propensity for red ink notwithstanding, somebody’s taxes are going to go up. Do we really see a Tax Free Europe for the middle class?

In the United States, the “rich” (the top 10 percent) already pay more of the income- and payroll-tax burden than is the case in Europe. In France, for example, the rich pay under 30 percent of the taxes; in the United States it is already over 45 percent. For the European countries shown, the average is just under 35 percent.

If the rich aren’t bearing the extra 10 percent of the tax burden that they do in the United States, arithmetic alone dictates somebody else is. In Europe, the lucky winners are . . . the middle class! (Fireworks stop. REO Speedwagon falls silent. The mist clears.) In the United States, the average wage earner pays a combined tax rate of 30 percent. With the sole exception of Ireland, European rates are higher. In many cases they are much higher. France and Germany are close to 50 percent. But even in countries like Spain and Portugal they are in the vicinity of 40 percent.

Where does this leave us? It is inevitable that when the distractions fade and the curtain is pulled back, the Wizard of the Social Welfare state will be revealed as a simple, plainspoken threat to the middle class. Recall that the average European social-welfare bill totals 22.9 percent of GDP. That means that to reach his objective, the president would have to lay the groundwork for an increase in social spending of 6.7 percent of GDP — $1 trillion more each year!

What does this mean for the middle class? The good news is that the top 10 percent will pick up 45 percent of the tab, leaving the middle class with an additional yearly burden of $550 billion. Suppose that the middle class constitutes 150 million Americans earning on average the $43,040 labor earnings computed by the OECD. If so, the president’s social dream means an extra $3,666 in taxes each year, or 8.5 percent of income.

Tax rate now: 29.7. Wizard’s tax rate: nearly 40 percent. Fabulous.



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