- - Friday, March 21, 2014

ANALYSIS/OPINION:

The modern American welfare state resembles a kleptocracy in which everyone is stealing from everyone else under the color of law using the income tax and Internal Revenue Service (IRS) as the bagman.

Many Americans today, in addition to paying — or in some cases, in lieu of paying — income taxes actually receive cash payments through the Internal Revenue Code. These payments are euphemistically labeled “refundable” tax credits. They are designed to make the welfare state more efficient at income redistribution and social engineering. During the past two decades, for example, tax credits for low- and middle-income working families with children, such as the Earned Income Tax Credit and the Child Tax Credit, have ballooned enormously. Now with the IRS running Obamacare, the Internal Revenue Code will begin providing even upper-middle-class people so-called “advanceable” tax credits even before tax returns are filed.

The Obama administration has quantified the daisy chain of cash payments in this year’s budget: 70 percent of all federal spending comes in the form of direct payments to individuals, an all-time high. As John Merline of Investors Business Daily wrote recently: “In effect, the government has become primarily a massive money-transfer machine, taking $2.6 trillion from some and handing it back out to others. These government transfers now account for 15 percent of GDP, another all-time high. In 1991, direct payments accounted for less than half the budget and 10 percent of GDP.”

Economists have a name for this reciprocal plunder: “Rent Seeking.” At its most elemental level, rent seeking consists of organized groups manipulating democratic institutions and majority-rule voting to concentrate benefits on themselves and their allies while diffusely extracting the resources from across the entire society to pay for the goodies. That way, no single extraction of rent is too onerous to be noticed much or generate significant resistance.

In the aggregate, however, when everyone is playing the same game, the small extractions add up. In fact, they eventually add up to a classic Ponzi scheme that ultimately collapses in a fiscal crisis of the welfare state. As former British Prime Minister Margaret Thatcher once quipped: “The problem with socialism is you eventually run out of other people’s money.”

The string pullers in Washington justify their organized theft by claiming compassionate egalitarianism as the raison d’etre of the welfare state. The results of government activity are not measured by comparing benefits against the costs. Everything government does must be measured against the yardstick of inequality — did the government’s action result in more or less inequality? All future government actions must be designed with the objective of reducing inequality, in other words: Redistribution.

As I point out in my new book, “Taxed to Death: How A Citizen’s Guide to How the Income Tax and IRS Harm Everyone in America,” the central dynamic of the welfare state is constant redistribution and reallocation of economic resources through the political process in the name of reducing inequality. That is where the income tax and its enforcer, the IRS — the two main pumps and levers of the welfare state — enter the picture to keep the circular flow moving from the hinterlands, into Washington and back out to the masses. Ironically, the more efforts are made to redistribute income (“spread the wealth around,” in President Obama’s words), the more inequality increases.

Politics becomes a blood sport, eventually a life-and-death struggle as everyone frantically tries to take from someone else under the color of law enough to replenish what has been legally stolen from him. Hard-earned gains from trade in free markets give way to ill-gotten gains from political pillage.

The more government taxes, regulates and spends to redistribute resources around and through the welfare-state daisy chain — everyone has their hands in someone else’s pockets — the less society produces and the more citizens are dissatisfied with their plight in life. Individual personal preferences satisfied through free markets and voluntary organizations are displaced by irrational collective preferences cloaked as the “public interest,” which politicians impose on the public as “public goods” in the name of serving the “greater good of the community.”

Ultimately, the players tap out the saps; the political return on investment on legalized theft turns negative and produces a fiscal crisis of the welfare state. The redistribution machinery no longer sucks enough resources into the capital to pump out to satisfy its constituents’ voracious appetite for goodies.

Caught in the throes of its redistributive delirium, the welfare state redistributes more and more of less and less until driven to its ultimate lunacy, it leaves everyone sharing equally in the misery it creates. A fiscal crisis of the welfare state ensues and produces a political crisis in its wake. If left unchecked, that political crisis leads eventually to tyranny and oppression ushered in under the guise of public safety and national security.

Lawrence A. Hunter is author of “Taxed to Death: How A Citizen’s Guide to How the Income Tax and IRS Harm Everyone in America” (Dog Ear Publishing, 2014).

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