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 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 an 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 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 urban 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 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:

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 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.

What Can Government Do?

What, then, can the government do to help the poor? The only correct answer is also the libertarian answer: Get out of the way. Let the govern­ment get out of the way of the productive energies of all groups in the population, rich, middle class, and poor alike, and the result will be an enormous increase in the welfare and the standard of living of everyone, and most particularly of the poor who are the ones supposedly helped by the miscalled "welfare state."

There are four major ways in which the government can get out of the way of the American people. First, it can abolish?or at the very least drastically reduce?the level of all taxation, taxation which cripples productive energies, savings, investment, and technological advance. In fact, the creation of jobs and increase of wage rates resulting from abol­ishing these taxes would benefit the lower-income groups more than anyone else. As Professor Brozen points out: "With less attempt to use state power to compress the inequality in the distribution of income, inequality would diminish more rapidly. Low wage rates would rise more rapidly with a higher rate of saving and capital formation, and inequality would diminish with the rise in income of wage earners."₃₈ The best way to help the poor is to slash taxes and allow savings, invest­ment, and creation of jobs to proceed unhampered. As Dr. F. A. Harper pointed out years ago, productive investment is the "greatest economic charity." Wrote Harper:

According to one view, sharing a crust of bread is advocated as the method of charity. The other advocates savings and tools for the production of additional loaves of bread, which is the greatest economic charity.

The two views are in conflict because the two methods are mutually exclusive in absorbing one's time and means in all the choices he makes day by day?.

The reason for the difference in view really stems from different concepts about the nature of the economic world. The former view stems from the belief that the total of economic goods is a constant. The latter view is built on the belief that expansion in production is possible without any necessary limit.

The difference between the two views is like the difference between a two-and three-dimensional perspective of production. The two-dimensional size is fixed at any instant of time, but the third dimension and therefore the size of the total is expandable without limit by savings and tools?

All the history of mankind denies that there is a fixed total of economic goods. History further reveals that savings and expansion of tools constitute the only way to any appreciable increase.39

The libertarian writer Isabel Paterson put the case eloquently:

As between the private philanthropist and the private capitalist acting as such, take the case of the truly needy man, who is not incapacitated, and suppose that the philanthropist gives him food and clothes and shelter?when he has used them, he is just where he was before, except that he may have acquired the habit of dependence. But suppose someone with no benevolent motive whatever, simply wanting work done for his own reasons, should hire the needy man for a wage. The employer has not done a good deed. Yet the condition of the employed man has actually been changed. What is the vital difference between the two actions?

It is that the unphilanthropic employer has brought the man he employed back into the production line, on the great circuit of energy; whereas the philanthropist can only divert energy in such manner that there can be no return into pro­duction, and therefore less likelihood of the object of his benefaction finding employment?.

If the full role of sincere philanthropists were called, from the beginning of time, it would be found that all of them together by their strictly philanthropic activities have never conferred upon humanity one-tenth of the benefit derived from the normally self-interested efforts of Thomas Alva Edison, to say nothing of the greater minds who worked out the scientific principles which Edison applied. Innumerable speculative thinkers, inventors, and organizers, have con­tributed to the comfort, health, and happiness of their fellow men?because that was not their objective.40

Second, and as a corollary to a drastic reduction or abolition of taxa­tion, would come an equivalent reduction in government expenditures. No longer would scarce economic resources be siphoned off into wasteful and unproductive expenditures: into the multibillion dollar space pro­gram, public works, the military-industrial complex, or whatever. In­stead, these resources would be available to produce goods and services desired by the mass of the consuming population. The outpouring of goods and services would provide new and better goods to the consumers at far lower prices. No longer would we suffer the inefficiencies and the injury to productivity of government subsidies and contracts. Fur­thermore, the diversion of most of the nation's scientists and engineers to wasteful military and other governmental research and expenditure would be released for peaceful and productive activities and inventions benefiting the nation's consumers.41

Third, if the government also cut out the numerous ways in which it taxes the poorer to subsidize the wealthier, such as we have named above (higher education, farm subsidies, irrigation, Lockheed, etc.), this in itself would stop the government's deliberate exactions upon the poor. By ceasing to tax the poorer in order to subsidize the richer, the govern­ment would aid the poor by removing its burdens from their productive activity.

Finally, one of the most significant ways in which the government could aid the poor is by removing its own direct roadblocks from their productive energies. Thus, minimum wage laws disemploy the poorest and least productive members of the population. Government privileges to trade unions enable them to keep the poorer and minority-group workers from productive and high-wage employment. And licensing laws, the outlawing of gambling, and other government restrictions pre­vent the poor from starting small businesses and creating jobs on their own. Thus, the government has everywhere clamped onerous restric­tions on peddling, ranging from outright prohibition to heavy license fees. Peddling was the classic path by which immigrants, poor and lack­ing capital, were able to become entrepreneurs and eventually to become big businessmen. But now this route has been cut off?largely to confer monopoly privileges on each city's retail stores, who fear that they would lose profits if faced with the highly mobile competition of street peddlers.

Typical of how government has frustrated the productive activities of the poor is the case of the neurosurgeon Dr. Thomas Matthew, founder of the black self-help organization NEGRO, which floats bonds to finance its operations. In the mid-1960s, Dr. Matthew, over the opposition of the New York City government, established a successful interracial hos­pital in the black section of Jamaica, Queens. He soon found, however, that public transportation in Jamaica was so abysmal that transportation service was totally inadequate for the hospital's patients and staff. Find­ing bus service inadequate, Dr. Matthew purchased a few busses and established a regular bus service in Jamaica, service that was regular, efficient, and successful. The problem was that Dr. Matthew did not have a city license to operate a bus line?that privilege is reserved to inefficient but protected monopolies. The ingenious Dr. Matthew, dis­covering that the city did not allow any unlicensed busses to charge fares, made his bus service free, except that any riders who wished could buy a 25? company bond instead whenever they rode the busses.

So successful was the Matthew bus service that he proceeded to estab­lish another bus line in Harlem; but it was at this point, in early 1968, that the New York City government took fright and cracked down. The government went to court and put both lines out of business for operating without licenses.

A few years later, Dr. Matthew and his colleagues seized an unused building in Harlem owned by the city government. (The New York City government is the city's biggest "slumlord," owning as it does a vast amount of useful buildings abandoned because of nonpayment of high property taxes and rotting away, rendered useless and uninhab­itable.) In this building, Dr. Matthew established a low-cost hospital?at a time of soaring hospital costs and scarcity of hospital space. The city finally succeeded in putting this hospital, too, out of business, claim­ing "fire violations." Again and again, in area after area, the role of government has been to thwart the economic activities of the poor. It is no wonder that when Dr. Matthew was asked by a white official of the New York City government how it could best aid Negro self-help projects, Matthew replied: "Get out of our way, and let us try some­thing."

Another example of how government functions occurred a few years ago, when the federal and New York City governments loudly pro­claimed that they would rehabilitate a group of thirty-seven buildings in Harlem. But instead of following the usual practice of private industry and awarding rehabilitation contracts on each house individually, the government instead awarded one contract on the entire thirty-seven building package. By doing so, the government made sure that small, black-owned construction firms would not be able to bid, and so the prize contract naturally went to a large white-owned company. Still another example: In 1966, the federal Small Business Administration proudly proclaimed a program for encouraging new black-owned small business. But the government put certain key restrictions on its loans. First, it decided that any borrower must be "at the poverty level." Now since the very poor are not apt to be setting up their own businesses, this restriction ruled out many small businesses by owners with moder­ately low incomes?just the ones likely to be small entrepreneurs. To top this, the New York SBA added a further restriction: All blacks seeking such loans must "prove a real need in their community" for filling a recognizable "economic void"?the need and the void to be proved to the satisfaction of remote bureaucrats far from the actual economic scene.42

A fascinating gauge of whether or to what extent government is help­ing or hurting the poor in the "welfare state" is provided by an unpub­lished study by the Institute for Policy Studies of Washington, D.C. An inquiry was made on the estimated flow of government money (fed­eral and district) into the low-income Negro ghetto of Shaw-Cardozo in Washington, D.C., as compared to the outflow that the area pays in taxes to the government. In fiscal 1967, the Shaw-Cardozo area had a population of 84,000 (of whom 79,000 were black) with a median family income of $5,600 per year. Total earned personal income for the residents of the area for that year amounted to $126.5 million. The value of total government benefits flowing into the district (ranging from welfare pay­ments to the estimated expenditure on public schools) during fiscal 1967 was estimated at $45.7 million. A generous subsidy, amounting to almost 40% of total Shaw-Cardozo income? Perhaps, but against this we have to offset the total outflow of taxes from Shaw-Cardozo, best estimated at $50.0 million?a net outflow from this low-income ghetto of $4.3 mil­lion! Can it still be maintained that abolition of the entire massive, unproductive welfare state structure would hurt the poor?43

Government could then best help the poor?and the rest of society? by getting out of the way: by removing its vast and crippling network of taxes, subsidies, inefficiencies, and monopoly privileges. As Professor Brozen summed up his analysis of the "welfare state":

The state has typically been a device for producing affluence for a few at the expense of many. The market has produced affluence for many with little cost even to a few. The state has not changed its ways since Roman days of bread and circuses for the masses, even though it now pretends to provide education and medicine as well as free milk and performing arts. It still is the source of monopoly privilege and power for the few behind its facade of providing welfare for the many?welfare which would be more abundant if politicians would not expropriate the means they use to provide the illusion that they care about their constituents.44

The Negative Income Tax

Unfortunately, the recent trend?embraced by a wide spectrum of advocates (with unimportant modifications) from President Nixon to Milton Friedman on the right to a large number on the left?is to abolish the current welfare system not in the direction of freedom but toward its very opposite. This new trend is the "guaranteed annual income" or "negative income tax," or President Nixon's "Family Assistance Plan." Citing the inefficiencies, inequities, and red tape of the present system, the guaranteed annual income would make the dole easy, "effi­cient," and automatic: The income tax authorities will pay money each year to families earning below a certain base income?this automatic dole to be financed, of course, by taxing working families making more than the base amount. Estimated costs of this seemingly neat and simple scheme are supposed to be only a few billion dollars per year.

But there is an extremely important catch: the costs are estimated on the assumption that everyone?the people on the universal dole as well as those financing it?will continue to work to the same extent as before. But this assumption begs the question. For the chief problem is the enormously crippling disincentive effect the guaranteed annual income will have on taxpayer and recipient alike.

The one element that saves the present welfare system from being an utter disaster is precisely the red tape and the stigma involved in going on welfare. The welfare recipient still bears a psychic stigma, even though weakened in recent years, and he still has to face a typically inefficient, impersonal, and tangled bureaucracy. But the guaranteed annual income, precisely by making the dole efficient, easy, and automatic, will remove the major obstacles, the major disincentives, to the "supply function" for welfare, and will lead to a massive flocking to the guaran­teed dole. Moreover, everyone will now consider the new dole as an automatic "right" rather than as a privilege or gift, and all stigma will be removed.

Suppose, for example, that $4,000 per year is declared the "poverty line," and that everyone earning income below that line receives the difference from Uncle Sam automatically as a result of filling out his income tax return. Those making zero income will receive $4000 from the government, those making $3,000 will get $1,000, and so on. It seems clear that there will be no real reason for anyone making less than $4,000 a year to keep on working. Why should he, when his nonworking neigh­bor will wind up with the same income as himself? In short, the net income from working will then be zero, and the entire working popula­tion below the magic $4,000 line will quit work and flock to its "rightful" dole.

But this is not all; what of the people making either $4,000, or slightly or even moderately above that line? The man making $4,500 a year will soon find that the lazy slob next door who refuses to work will be getting his $4,000 a year from the federal government; his own net income from forty hours a week of hard work will be only $500 a year. So he will quit work and go on the negative-tax dole. The same will undoubtedly hold true for those making $5,000 a year, etc.

The baleful process is not over. As all the people making below $4,000 and even considerably above $4000 leave work and go on the dole, the total dole payments will skyrocket enormously, and they can only be financed by taxing more heavily the higher income folk who will continue to work. But then their net, after-tax incomes will fall sharply, until many of them will quit work and go on the dole too. Let us contem­plate the man making $6,000 a year. He is, at the outset, faced with a net income from working of only $2,000, and if he has to pay, let us say, $500 a year to finance the dole of the nonworkers, his net after-tax income will be only $1,500 a year. If he then has to pay another $1,000 to finance the rapid expansion of others on the dole, his net income will fall to $500 and he will go on the dole. Thus, the logical conclusion of the guaranteed annual income will be a vicious spiral into disaster, heading toward the logical and impossible goal of virtually no one work­ing, and everyone on the dole.

In addition to all this, there are some important extra considerations. In practice, of course, the dole, once set at $4000, will not remain there; irresistible pressure by welfare clients and other pressure groups will inexorably raise the base level every year, thereby bringing the vicious spiral and economic disaster that much closer. In practice, too, the guar­anteed annual income will not, as in the hopes of its conservative advo­cates, replace the existing patchwork welfare system; it will simply be added on top of the existing programs. This, for example, is precisely what happened to the states' old-age relief programs. The major talking point of the New Deal's federal Social Security program was that it would efficiently replace the then existing patchwork old-age relief pro­grams of the states. In practice, of course, it did no such thing, and old-age relief is far higher now than it was in the 1930s. An ever-rising Social Security structure was simply placed on top of existing programs. In practice, finally, President Nixon's sop to conservatives that able-bodied recipients of the new dole would be forced to work is a patent phony. They would, for one thing, only have to find "suitable" work, and it is the universal experience of state unemployment relief agencies that almost no "suitable" jobs are ever found.45

The various schemes for a guaranteed annual income are no genuine replacement for the universally acknowledged evils of the welfare sys­tem; they would only plunge us still more deeply into those evils. The only workable solution is the libertarian one: the abolition of the welfare dole in favor of freedom and voluntary action for all persons, rich and poor alike.