Sanders’ Scandinavian Welfare Confusions

January 4, 2016 0 Comments

Bernie Sanders, more often than not, is wrong about many things. This is because, more often than not, Sanders is confused about many things. One of the greatest sources of his confusion involves his love lust for the social democracies of the Scandinavian countries. It’s a particular, especially among the progressives, that socialism and welfare states can indeed work because the Nordic nations are proof of that with their robust economic growth and very low wealth inequality.

Although, I’m not entirely sure how much of this is accurate. Economic growth in Sweden, Denmark and Norway has been nothing short of lackluster, to the point of where their respective central banks have decided to lower interest rates into the negative territory (a phenomenon currently occurring in only the most depressed economies). Also, while it’s true that these nations are indeed ‘welfare states,’ I’m not exactly sure if they are considered ‘socialist.’ The socialism and welfare are often interchangeable these days (despite being at odds with one another), the purpose of this blog entry isn’t to debate whether or not these nations are welfare states, but rather, to reveal how these Nordic countries fund theirs.

Here is what Scandinavia has to offer, according to Sanders:

“In countries in Scandinavia like Denmark, Norway, Sweden, they are very democratic countries,” Sanders said. “Voter turnout is a lot higher than it is in the United States. In those countries, health care is the right of all people; college education and graduate school is free; retirement benefits, child care are stronger than the United States of America. In those countries by and large government works for ordinary people and the middle class, rather than, as is the case right now in our country, for the billionaire class.”

And how does Sanders want the American government to work for the ordinary people: by instituting a federal spending program on implementing single-payer, increasing social security, improving infrastructure, free education and more worth $18 trillion dollars over the next 10 years.

Sure, we spent $2 trillion dollars fighting two wars overseas. What’s $18 trillion over ten years in the grand scheme of things? Unfortunately for Sanders, it’s cost MUCH less for our government to kill people and break things than it does to implement all of the social welfare programs that he wants. The Nordic nations Sanders is so fond of already realized this, and thus, have changed the way they fund their system by adopting a more efficient revenue collecting tax structure.

The U.S. Has The Most Progressive Tax Structure In The Industrialized World

This is really well established, and still, highly misunderstood. Some people tend to believe the progressivity of a tax structure relates to how high the government taxes the wealthy about the poor. Others believe progressivity relates to how well the tax structure redistributes taxes. It’s really important to understand that the two are not the same. Progressivity measures how the distribution of the tax burden is shared while redistribution measures how much the tax system reduces inequality. The following chart shows the progressivity of taxes the OECD nations.

The first column shows that the Top 10% of households in the U.S. pays 45.1% of all income taxes in the country (both personal and payroll taxes). The only other industrialized nation that pays more than 40% is Italy (42.2%) while the average tax burden for the top decile of households in OECD countries is 31.6%.

The second column shows that the richest decile in America earned 33.5% of the market income in the nation between 2005 – 2011. Again, there are few countries, like Italy, where the top deciles have earned a greater portion of wealth than our rich. There are very few countries that are on par with the United States in this category, such as the United Kingdom and New Zealand.

The third column adjusts for the allocation of income by showing the ratio of income taxes paid to the share of income earned by the top decile in the country. A ratio of 1 means that the rich in their respective nations have a tax burden that relatively equal to their share of market income. The United States endorses a concept that the richest are generally obligated to more taxes, about their overall earnings. Because of this, you’ll see that the ratio for the U.S. is 1.35. Using statistical data, this shows that the United States does have the most progressive tax system in the industrialized world.

The data of the Nordic countries appear to have a more interesting story to tell. If you look at Sweden or Denmark, you’ll see that the ratio is relatively equal, suggesting that they have a much less progressive tax system than the United States.

Paying The Poor By Taxing The Poor

How do we reduce inequality and fund the essential programs utilized by mostly low-income earners? Raise taxes on the wealthy, of course. At least, that is the universal suggestion when it comes towards lowering cost. Sanders has adopted the idea of significantly raising taxes on the rich like all progressives love to do.

However, the problem with taxing progressively is that if the statutory rate is high enough, people will try to avoid paying taxes at that rate. It’s not enough to simply tax but to tax in more efficient ways. One popular principle regarding taxation dictates that it is far better to tax consumption than income because taxing what is spent rather than what is earned does less damage to the incentive to save. By adopting more efficient ways of taxation, countries can collect enough revenue to fund their social programs, and at the same time, mitigate the effects of lower economic growth.

For example, if you look at the Nordic countries, they have a much less progressive tax system than the United States, yet somehow, are able to spend more than a third of their GDP on social transfers. This is because they collect much more in taxes, especially by using the Value-Added Tax, which is a form of consumption tax that added the value of a good or service as it moves through the production chain to the consumer.

A VAT is considered a more efficient method because governments can collect more revenue while placing an extra burden on businesses (who can receive credits from previous VAT sales transactions). For example, in many OECD countries, revenue as a percentage of GDP are as high as 16%, while the United States only collects 4% of its GDP in consumption taxes. Many EU nations have a VAT higher than 20%, with Nordic countries levying a VAT as high as 25%. Regardless of their rates, you’ll find that nations are more likely to collect more revenue with a Value-Added Tax.

However, these nations are able to collect more in revenue because the Value-Added Tax is considered to be a regressive tax. These form of taxes don’t change, regardless of how much a person earns. As such, a regressive tax falls mainly on those who spend a larger share of their income, mainly the poor. While the sales tax in the United States is considered regressive, it’s fairly low in most states, with some states eliminating the sales tax altogether. Some states, such as New York, eliminates the sales tax on certain items such as Food and Clothing while Nordic countries simply reduce the VAT for specific items. Nations, such as Denmark, levies a 25% VAT across the board, regardless of the good or service.

Another interesting principle of taxation involves the idea that goods and services most sensitive to price should be taxed the least, and vice versa. It’s also important to remember that a tax can be considered regressive if it taxes an activity that poorer individuals engage in more than the rich. Nordic nations have found that it’s better to tax habits such as smoking, drinking, and other luxuries because these things are addictive and most people will buy at any price. Statistics also show that low-income earners use these products at greater levels than high-income earners. In the U.S., however, most states tax relatively low when it comes to sin. As such, not too many states profit from the sin tax, making the tax less regressive in nature.

Prosperity Off The Backs Of The Middle Class

Sanders wants single-payer health care, free education and increased benefits to old-age retirement insurance, just like they have in these Nordic nations. How exactly do we pay for these things: by soaking the rich? Higher taxes on the wealthy is always a popular idea when it comes to funding the government. However, if Sanders truly wants our economy to become more like what it’s like in Scandinavia, he’s going to have to adopt a similar tax structure.

Of course, it’s already been established that Nordic countries have a much more regressive tax system than the United States when we consider consumption taxes. However, how do these nations stack up when we consider direct taxes:

As we can see, Scandinavian social democracies like Denmark, Sweden, and Norway also have a much regressive direct tax structure as well. If we look at the top marginal tax rate (including payroll taxes).

The top marginal rate of the Scandinavian countries is not significantly higher than the United States. Yet, as previous data shows, these nations levy far more regressive taxes than the United States.

Despite being higher, Nordic countries essentially have flatter tax rate, at which more, most people are taxed at these rates. Denmark and Sweden’s individual minimum income tax starts at nearly 30%, which doesn’t include the payroll taxes. Norway’s top marginal rate is much lower than their Nordic peers, but the top marginal rate applies to incomes 1.6x the average income there and 1.5x respectively in Sweden. Compare that to the United States, where the top marginal tax rate is 46.3% (state and federal combined) and applies to people making 8.5 times the average income.

Senator Sanders wants a government that works for ordinary people and the middle class, but it appears that type of government is only obtainable by the middle class putting much more skin in the game.

Soaking The Rich? Not So Much…

Along the campaign trail, Sanders has also romanticized notions of a Financial Transaction Tax, essentially a Wall Street sales tax, and use the revenue to make college tuitions free. This idea has been adopted by other nations in the EU — namely Sweden — in the 1980s, that have decided institute their own transaction tax on financial firms.

Needless to say, it was a complete disaster. The Swedish government never collected anywhere near the revenue it was expecting to, along with the problems occurring in capital flight. Policymakers from other countries (such as ours) have decided not to learn from the examples of the Swedish; however, the Nordic nations have decided to learn from their mistakes: revenue gathering from businesses is highly unreliable.

Although, it’s been 25 years since Sweden has scrapped their financial transaction tax gimmick, and not much has changed since then. In the early 1990s, Nordic countries have worked to make their financial markets more competitive than most western nations. Empirical evidence of this has been documented by Peter Lindert, of the University of California, Davis, who offers answers towards the end of his book, “Growing Public: A Monumental History of Two Centuries of Social Spending.

Through his research, Lindert has found that in these social welfare states, such as retained earnings, new equity, and lending to manufacturing businesses, aren’t taxed much differently than they are in other parts of the world.

Or on dividends for that matter:

Lindert notes within his research that during the 1980s, the effective net tax rate on capital personal income was negative for the top 60% of Swedish income ranks. It was estimated that a tax on capital personal income actually reduced government tax revenues by half a percent of GDP in 1982; coincides with their findings that a financial transaction tax was a net drain on gathering revenue, which was inevitably scrapped in 1991.

Instead, social welfare states have found that it is far better to collect revenue by taxing labor more heavily than capital. They have also favored a more regressive method of collective revenue, as opposed to their Western counterparts.

Case Study: Vermont’s Single-Payer Debacle

What happened in Vermont is a case example of how difficult it is to make a program available for everyone without considering how it will be funded. Many people believe that things, such as health care, is best when it’s free. Of course, it isn’t free; you pay for it with your taxes. The problem is that it’s impossible to know where the money is going to come from without knowing how the problem is going to be funded.

Vermont’s health care plan, called Green Mountain Care, was an initiative to offer board healthcare insurance to citizens of Vermont using “platinum-plated health insurance.” Similar to Obamacare exchanges that have actuarial values ranging from Bronze to Gold (60% – 80% coverage), GMC Platinum plan pays up to 90%. It’s not exactly single-payer, but it was as close to the program as Vermont was going to get.

The cost of the new GMC plan was estimated to cost more than 4 billion in 2017.

The problem is that the government was only projected to earn as much as $1.7 billion in tax revenue by the same time frame. This meant that the government would have to raise as much as $2.5 billion dollars in revenue, a 160% increase. With this comes the issue of imposing excessively high payroll taxes on a state that is not exactly tax friendly.

Sure, one can blame political pressures for the ultimate demise of the plan. Republican Scott Milne ran against Peter Shumlin against in the 2014 Gubernatorial race, centered around the single payer plan. Obviously, he lost by a margin of only 1%, consisting of only 2 thousand votes. However, if Shumlin was more transparent about the true cost of GMC, the election may have had a different result.

What Can We Learn From This?

Evidently, there are a lot of things to learn from the history of earning a free lunch.

First, we can learn that the progressively of a countries’ tax code is negatively correlated with the amount of redistribution that occurs in that country. Consequently, the only thing progressive about the Nordic countries is the way they spend their taxes.

Although, this is not to say that it is impossible to reduce inequality with a progressive tax system. The system of direct taxes in the U.S. actually reduces inequality more than some countries as well. However, the U.S. is less effective at reducing inequality compared to other nations as well. Other nations are capable of reducing inequality because they are capable of collecting more taxes and spending it efficiently.

Second, it is much easier for the U.S. to get away having an inefficient tax structure, as Tim Cook pointed out because the government spends tax revenue so inefficiently. The not only involves the $2 trillion to fight wars overseas but can also include the $780,000 to study pizza addiction and $279,000 to study why people swipe right on a dating app. Nordic countries spend at least a third of their revenue on social programs, so that leaves very small room for government waste.

It also doesn’t help the fact that government spending in Denmark, Norway and Sweden is more than 50% of GDP; whereas U.S. is only 39% of GDP.

Finally, we can learn that Scandinavia has found that it is much more lucrative for the government to tax labor as opposed to capital. The revenue gathered from taxing financial transactions resulted in significantly less revenue than initially anticipated. They have also learned that higher taxes on wealthier citizens ended up reducing tax revenue by less than half of overall GDP.

The purpose of this blog entry is not to prove that these countries are able to pay their social welfare — public health care, education — because they don’t tax the rich; they do. The point is to show that these nations tax the poor significantly more than they tax the rich.

This entry serves to enhance the awareness and skepticism of the general population, especially when you have politicians offering free stuff. Sanders doesn’t suggest that egalitarian social benefits would come at zero cost. Rather, he suggests that majority of the cost could easily be paid for off the backs of Wall Street and the super wealthy. As the single-payer experiment in his own backyard has shown, this is not likely to happen.

The most interesting part of this lesson is the idea of chastising politicians like Mitt Romney for suggesting that 47% of the country sponge from the rest of nation. Whether or not this is politically correct is beside the point. The point is if people truly care so much about providing free education and health care to everyone, then they should be upside at the 47% as well.

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