How Limited Socialism Spreads

After reading my blog about how many non-liberals support limited, targeted socialism, one of my conservative friends admitted that he supports targeted socialism too, and asked me how it might be possible to limit the limited or targeted socialism to the specified target, without allowing it to grow into the massive socialist boondoggle we call government today in America. (He blamed Obama for the massive boondoggle, which by the way is my term, not his, but in truth the cancer of socialism has been growing in American government since at least the "Progressive Era" in the first decade and a half or so of the 20th century, and arguably since even earlier.)

I suggested that he read Milton Friedman's Free to Choose to find examples of well-crafted, limited socialist policies proposed by someone who understands full well why markets work better than government. Free to Choose ironically, while advocating limited socialism (written at a time when almost no politician in American supported merely limited socialism), has done more to persuade people of the benefits of free markets than any other single book. Some libertarians simply loathe Friedman for not being sufficiently pure, and yet Friedman has done more to persuade people of the benefits of free markets and limited government than any single other libertarian writer. (I also suggested that my conservative friend read David Friedman's The Machinery of Freedom, Bastiat's Economic Sophisms and indeed anything by Benjamin Constant to learn why even limited government interventions, targeted socialist policies, produce bad results; Friedman should serve as a start, not an end, to one's education about the blessings of free markets and the curse of government intervention.)

Having read Free to Choose some months back, my conservative friend asked if Milton Friedman's negative income tax served as the inspiration for the earned income tax credit we currently have in the Internal Revenue Code.

In case you're not familiar, here's how a negative income tax works. Let's say that currently the Internal Revenue Code provides for a standard deduction of $5700 for a single individual, and a personal exemption of $3650, for a total of $9350. Under the negative income tax, the government would subsidize the $9350 for an individual who earned less than $9350. Friedman himself proposed a rate of 50% for the negative income tax. If you earned zero income, for instance, the federal government would pay you, right through the income tax system, 50% of $9350, or $4,675, instead of giving you a host of welfare benefits which you could get under the current system of federal social programs. For every dollar you earned, the federal government would reduce your subsidy by only 50 cents, so your after-tax (or after-subsidy) income would rise. At no point would you be worse off by earning more, as you'd gain 50 cents extra for every dollar that you earn.

The whole point of the negative income tax is that it reduces the disincentives to work provided by standard welfare programs. Under standard welfare programs you simply lose all benefits when you earn too much income, creating an extremely high marginal income tax rate at low levels of income. (Say, for example, that under the current welfare system, if you earn $5,000 in income you lose $10,000 of food stamps and $5,000 of AFDC, or a total of $15,000 in benefits. Losing $15,000 of benefits for earning $5000 of income produces a tax rate of 300%!!! Technically too that's just the average tax rate, not the marginal rate. If you get $15,000 of benefits at $4,999 of earned income and $0 benefits when you earn $5,000 income, you have a marginal tax rate--a rate of tax on your one extra dollar, of 1,500,000%!!)

The negative income tax works so that for every dollar you make, you lose less than a dollar, so your marginal income tax rate is always less than 100% and you always have more income after the income tax by earning more. Friedman also said that the negative income tax rate itself must be low, or the marginal tax rate of phasing it out becomes high (even though it's below 100%). Many people would rather stay on the negative income tax than to earn only 10 cents on the extra dollar. So if your negative income tax rate is only 25% (low subsidy) then your marginal tax rate for phasing out the negative income tax as your income rises will be only 25%. If the government is "generous" and subsidizes your personal and standard deductions 75% instead of 25%, then your suffer a 75% marginal tax rate getting off of the negative income tax, keeping only an extra 25 cents per extra dollar you earn.

So what happened to Friedman's negative income tax idea? Back in 1973, Democrats in Congress said, "Another welfare program! Hot damn!" and then voted to turn it into one of dozens of tax credits and welfare programs. President Nixon said, "Well, Friedman suggested it, so it must be a good idea," and he supported it too, as did Republicans in Congress, not bothering to read Friedman's caution that a negative income tax would reduce the disincentive to work inherent in our current welfare system only if we abolished all other welfare programs and relied solely on the negative income tax. Friedman also warns in Free to Choose that the current welfare system has too many vested interests for Congress to allow the negative income tax to become the only socialist program for the poor, and that Congress and such interests would always have an incentive to increase the subsidy rate above the 50% he suggested. The higher the rate, as I showed above, the more the disincentive to get off of the subsidy. Henry Hazlett has a decent article at http://mises.org/story/2406 about how the earned income credit did just what Friedman predicted--although for some odd reason Hazlett refused to admit that Friedman predicted it--grew out of control, until it has become the largest cash benefit for low-income Americans (and aliens) of any social program for the poor. (Of course the Social Security system, the massive socialist program for the retired elderly, the wealthiest age cohort in America, dwarfs even the earned income credit.)

The mutation of the negative income tax as the only welfare program into the earned income credit as merely the largest of dozens of welfare programs for the poor demonstrates how even the most well-crafted of limited socialism turns into just another tumor as targeted socialism metastasizes across the American body politic.

The one saving grace of the negative income tax comes from the fact that for the working poor it helps offset the most evil of all taxes, the Social Security tax, which starts at the very first dollar of income. Poor, uneducated people, disproportionately members of minority groups, have to start working earliest and paying the tax first, even though they're lucky if they can make ends meet once they lose their welfare benefits. What's surprising is not that so many of them remain on welfare indefinitely (or as long the law allows) but rather that anyone in their position bothers to work at all, given the imposing marginal income tax rates for the working poor. Yet poor people, especially poor minorities, have the shortest life expectancies, and so collect the least in SS benefits. And who collects the most in SS benefits--wealthy white women, who live the longest of any large demographic in America. So the SS tax is a massive redistribution of income from poor, minority workers to retired, wealthy white woman. Liberals should be ashamed that the system their hero FDR engineered punishes the people they claim to care about and rewards people that liberals often sound like they hate. Most liberals of course have no shame anymore, as whatever feels good to them goes in their postmodern world of "judge me not because only I get to judge."

Republicans too should be ashamed that the most massive socialist welfare program of all is the one in which they're most complicit by their refusal to do anything to fix it or stop it from redistributing income from the poor to the rich. If ever there were a policy that supports the liberal claim that Republicans want to make "the poor get poorer and the rich get richer" it's Republican complicity in maintaining the liberals' SS system.

The very fact that the working poor need the earned income tax credit to (partially) offset the regressive SS tax demonstrates how one government intervention leads to another--how one socialist tumor inevitably metastasizes across the American body politic. So if you want to get rid of the socialist cancer, you need to agree to cut out not only the tumors you don't like, but the one you do like. Otherwise we're in for a long, slow, painful death--and you helped kill us.