The Welfare State is no longer needed

The CIS has an excellent report from April 2005 by Peter Saunders, discussing the many massive problems with the current welfare system. I encourage any of you who are die-hard supporters of welfare and income redistribution to read all 16 pages and see how rational it is to continue to support a failed concept.

Some key points are:

• In the last 40 years, real incomes have doubled, reducing the need for government assistance. Yet it is in this period that welfare state spending has escalated. The expansion of the welfare state has therefore occurred at precisely the time when the need for government support has been falling away.The welfare state is like a machine that was set running 100 years ago to meet a requirement that is no longer there.
• Government now spends $80billion every year on welfare payments, and another $94billion on services such as health and education. This spending absorbs two-thirds of all the federal and state taxes raised each year

The article then raises and discusses the issue of "Tax/Welfare Churn". Welfare churn is the technical term for describing the process by which the Tax Office puts its hand into your pocket to remove your money, and spends it on public services that you consume. Tax churn describes how the tax office forces people to hand over taxes and then hands it straight back to some people in the form of a transfer payment. (e.g family tax benefit, baby bonus).

Although they do not always realize it, many people who use welfare state benefits and services finance most or all of what they receive through the taxes they pay (‘simultaneous churning’). These people could by-pass the welfare state altogether if they were allowed to retain their money and buy the services they want out of their own pockets.

Some fans of the welfare state will actually use this as proof that the system works, and that in the end, many people can often get back their money that is rightfully theirs. But not all people, and not all of the money that was sacrificed. Under the Howard government, middle class families have been able to get huge amounts of tax concessions and family tax benefits. Single people have not been so lucky however. More importantly, people who don't see churning as a major problem do not even consider that its somewhat unfair that the money was taken out of people's pockets in the first place, even if it does get spent towards things they value.

Equally important is the bureaucratic mess that it creates, as the individual or family in question must submit tax returns and/or time with Centrelink representatives to prove that they are eligible to receive some taxes back in the form of a payment. So much like a casino, the government gets to collect billions in revenue, pay for expensive office space and the hiring of thousands of public servants to administer and manage it, to produce websites and publications that explain how the system works, and then they are able to pay out whats left in actual welfare payments.

The key points from the report about churning, specifically why and how to eliminate it, are summarised below:

• Simultaneous churning is less marked at the extremes of the income distribution, for households in the bottom third of the income distribution rely quite heavily on welfare state transfers. This is why people think scrapping the welfare state would lead to widespread destitution.
• However, the people comprising the poorest third of households change all the time. Poor net recipients of welfare at one time become affluent net tax donors at another, so over a whole lifetime, they too may end up financing many of their own benefits (‘lifetime churning’).
• At least half of all welfare state spending goes on churning. That is, it is money paid by individuals at one time and reclaimed by the same individuals at the same time or at a later date. The welfare system is like a giant piggy bank.
• If the money that is churned could all be left in taxpayers’ pockets, at least $85 billion would be released for tax cuts.This would allow personal income tax to be cut to a flat rate of 10% with the first $20,000 of earnings not taxed at all, which would enable many people to self-fund their health and welfare needs.