American Republic Online

The end of the welfare state. Or, the end of the Democratic Party. Or, why I support the FairTax.

Life and most contained within it, moves in cycles: the moon, business, the stock market, seasons, women, etc. Following this line, we can observe a great shift happening in our society.

For the past sixty or so years, the idea has been advanced that government should provide for more and more of our needs: education, healthcare, retirement, job security, etc. It certainly did not start out this way. Take Social Security for example. It was introduced as an insurance program: a safety net for those who, though they tried, were unable to provide for themselves after they were unable to work. Then, politicians realized they could buy votes with it, and now you can make claims against it if you have been injured (not just a loss of limb, but carpel tunnel too), and even if you have paid nothing into it. Consider the Earned Income Credit on Federal tax returns. The government decided that families of a certain size should have a certain level of income, and if you did not make that much, they would give it to you. This is now the most abused (read: cheated) “credit” on tax returns. Government schools have doubled spending on students (adjusted for inflation). On average, about $10,000 is spent per student per year, $200,000 per classroom, and yet our children are consistently scoring lower in achievement tests.

Let’s give the benefit of the doubt, and say almost all of this was good-intentioned. It is a natural desire as a parent to want your children to have a better life than you did. They developed programs to make life easier for us: to give us more than they had. But life is not easier, and never will be. In fact, by foregoing the struggles of life and achievement, our generation has developed a very dangerous entitlement mentality. We live in the most prosperous nation in all of history, and yet all we think about is how “bad” we have it. There has never been more opportunity available to a generation, and yet we expect everything we want. Twenty-somethings expect a high-paying, high-level job right out of college, and more. They expect everything their parents worked so hard for all their lives, but without the effort.

The effect of all these entitlement programs has culminated with an obvious example: hurricane Katrina. Perhaps one of the most devastating disasters in our nation’s history happened this past fall. However, watching the victims’, and the government’s, reactions, one would think that the government was the only one with responsibility. It was the government’s fault for not coming to their house, arranging transportation, driving them to a safe area, finding them temporary housing, providing room and board until their homes were rebuilt, and for not doing it all at the government’s expense. Of course, there were some that, without all this help, would most assuredly have perished. But these are not the people whom we see on TV. The ones making the headlines now are those still in motels, lamenting the fact that FEMA is going to stop paying their bill, not their inability to provide for themselves.

Examples could, of course, fill countless volumes, but the author hopes that his point has been made. Just like Wells� Eloi, we have been lured by the promise of leisure towards our own destruction. If the government will provide us with $200 a week in unemployment or welfare, and we can only make $300 a week working full-time, what is the point of working? We would effectively be working forty hours a week for $100. That’s $2.50 an hour. Besides children under the age of seven, no one would accept such a proposed wage, except those that desire the satisfaction and fulfillment of putting in an honest day�s work for an honest day’s pay. Sacrifice and hard work are the cornerstones of true character, and our society: the requirements to build leaders, and form cohesive societal mores. However, through entitlement programs, this is exactly what we have been taught to avoid. In all fairness, this was not all intentional. As discussed above, previous generations did it out of a desire to give us all that they felt was lacking in their life. Though the very situation of want is precisely what we needed. As Albert Einstein once said, “There is only one road to true human greatness: through the school of hard knocks.” What we need most is need.

The “Great Society” programs espoused by our forebears are being funded out of our pockets. In trying to provide for the next generation, they have sewed up their own security on our backs. Right now, there is a $74 trillion shortfall in Medicare and Social Security promises. Excogitate this: if we sold every single thing of value in the entire country (homes, businesses, cars, cash, beds, socks, etc.), it would add up to about $44 trillion. Or, let’s put it another way. Say you started a business on the day Jesus was born, and you lost $1 million per day until today. It would still take over 700 more years to equal $1 trillion. Needless to say, this is unsustainable. Nonetheless, what we constantly hear is that what we need is more government spending, more government involvement in all facets of our life. As the entitlement programs begin to crack, so do the promises of a better country through bigger government.

One of the most important things we must consider is who is really paying for all of this? Where does the government get its money for charity programs? Taxes. This is the way the federal government collects funds, through taxation of income. The next (hopefully obvious) question is who pays taxes? The answer is a little less, but still, obvious: the rich pay taxes. In fact, the top 5% of income earners pay about 55% of Federal Income taxes, the top 50% pay 97% of taxes. The majority contrive with politicians in order to gain access to the bank accounts of the rich, effectively legalizing plunder. This is the antithesis of Law. As Bastiat put it, Law in its best and purest sense protects essential gifts from God: Life, Liberty, and Property. Period. To suggest that the top 5% of wage earners pay more than half of the taxes is simply looting their wealth. The end result is one of two things: loss of incentive to earn more or ever-increasing tax shelters. But what is the solution we hear from politicians? Raise taxes on the rich. While this may secure votes among welfare recipients, it does little to help the current situation.

This plunder also runs counter to any example of experiences of consumers. What would you think if you went into a furniture store to buy a sofa, and instead the salesman took your money and gave a sofa (and matching loveseat, coffee table, lamps, and accent rug) to another family? You would be outraged, of course. But this is precisely what happens every day through the federal government’s income redistribution. Those that derive the most benefit from its services pay the least into it. Indeed, the more money you make, the less “services” you are “entitled” to. The rich can afford it, we hear, look at how much money they have. They don’t need all that money; they can afford a higher tax rate and fewer services. The rich, however, do not share this sentiment.

Look at how much money is fleeing our country. Trillions of dollars are moving overseas. Trillions! Companies are incorporating in other countries to avoid paying the high tax rates in America. In fact, on any given day, the Caribbean Islands are the largest net foreign buyer or seller of US Treasuries. Now, we don’t normally associate these islands with such wealth, but the reason for this is due to the fact that mutual funds and hedge funds have sought refuge there from burdensome taxation. They are also drawing the best and the brightest to work and live there too. It’s pretty simple, really. Would you rather live in New York with the snow and one-third of your income going to the government, OR live in the Cayman Islands with the sand and keep all your income?

This reality would not have been nearly as possible or attractive until recently. Twenty years ago a call from New York to Los Angeles would have cost you $2 a minute, now it costs $0.02 per minute. With VOIPs, you can even make local calls from Hong Kong to New York. Technology has contracted distances and time. Video conferencing, Blackberries, cell phones, etc. all make living and doing business in a country that welcomes high income, and doesn’t punish it, more and more appealing.

This trend is not likely to stop. More and more money will leave America until it is full of people living off the government. These people are not likely to give up their “entitlements.” So, the only thing that will really be left to do is become the U.S.S.A.: United Socialist States of America. The dream will be over, or at least shifted to another country. The author does not say this lightly. However, look at the signs: legislators are calling for more money for retirement programs, more money for education, more money for housing, more money for childcare, even recommending nationalized medicine. Only a politician can lambaste the government’s response to hurricane Katrina, and in the next breath insist that the government would make healthcare better. And only citizens educated by the government would agree with him/her.

And now we come to it. The nagging question: is there any hope? Or should we just make plans for our move to Nicaragua? The answer is, of course, there is always hope. At the outset the author introduced the reality of cycles: everything tends to move in cycles. From all appearances, the cycle of governmental growth, loss of individualism and responsibility, etc is starting to reverse its course. As a new generation grows up, some of them are beginning to look for opportunity; others are looking for the promises made to them by the preceding generations. While these look as though they are mutually exclusive pursuits, they are not. In fact, they are quite intertwined. Promises to one mean less opportunity to another and less opportunity to one is a broken promise to another. This is a reality that is beginning to dawn on many people. As well as being evident in the election results over the past decade as people are beginning to realize what politicians� promises really mean: the ultimate cannibalization of our country.
Some have chosen to look elsewhere, as described above. They have abandoned this country to those who would loot them, and those who cheer the looters. These are the people who have moved to other countries, seeking opportunity in areas that will welcome, not punish, their success. They have taken their talents and money with them. What they desire is a better service provided for their investment: in government, that is. Right now, their return from America’s government is negative: they get practically nothing while paying for almost everyone else’s services. These individuals are not looking for a handout. Quite the opposite: they merely desire a place that will allow them to create and maintain their dreams. All they really require is a governing body that will protect them and not raid their wealth. They choose a government for protection, just as we choose which restaurant to feed us. And just as competition increases efficiency, lowers costs, and provides better service for your money in every other area in which it is applied, so it will with government. Is it really that much of a stretch to think of governments competing with each other? Have we not quite reached that paradigm shift? We better, because it is upon us.
For instance, observe Iridium, the satellite phone company. For those who have never called another country, every country has its own �country code.� So, when you want to dial Spain, you dial 34, Afghanistan is 93, and so on. When Iridium was developing their phones and launching their satellites, they needed to make it so that people calling their customers� phones only had to dial one number, no matter where they were in the world, in any country. So they applied for, and received, their own �country code.� Think about that for a second. A company has its own country code. Now, this may seem trivial, but it is simply the beginning. This company has a physical building somewhere, but what if it didn�t? What if it only existed in a filing cabinet somewhere? They could do it by outsourcing all the manufacturing jobs elsewhere, contract out their accounting and marketing and human resources and so on. The executives could even live in the country of their choosing, and videoconference their meetings. The company would only exist as an idea, and yet it would have its own dialing code. Is the reader beginning to grasp the fundamental shift that is happening? How and who do you tax in a situation like this? The permutations of situations such as this are endless, and the welfare states will suffer as a result.
Let�s take it further one more step: the emergence of the sovereign individual. Davidson and Rees-Mogg spend a whole book of the same name developing this idea, so we�ll discuss it briefly. As countries compete for citizens, some will allow access to benefits and services for a set fee (flat or percentage). So, for, say $100,000 a year, you can get a passport and driver�s license, you can legally reside within their borders, and you will have the “protection” of said country’s armed forces. Now, for those who make $100,000 a year, this doesn’t sound too attractive, but if you made $10 million a year, it does. That’s only 1% of your income. These people will come to negotiate directly with governing bodies, and purchase access to several different countries at a time: at once have multiple citizenships, and no citizenships, thus achieving their own “sovereignty.” It is not beyond comprehension, and yet remarkable to consider.

This is what will ultimately spell the end of the welfare state. Welfare states cannot bear the weight of competition, the advent of the information age. Our generation will see the introduction of competition among governments. Ruling authorities will have to compete in the global marketplace in order to attract these people (and really, citizens in general). Indeed, they already are, as is evident by the continuous exodus of capital and talent from welfare states. Legislative bodies that realize this will be the centers for growth and innovation. Those that do not will die off.

Still others pine for ways to revitalize and revolutionize our country and its citizens. The author is happy to report that he is in this group. There is still hope. There will always be hope. Companies that choose to remain in America are seeking new and better ways to do business. Apple is one such example. They used to spend most of their effort and capital developing, building, and selling computers. Now, they have shipped the most volatile part of their business overseas: the physical manufacturing of their products. All that really remains are the most profitable parts with the highest margins: research and development, and marketing. The I-Pod is a clear illustration of this shift in business practices. They are built in Asia at a 3% margin or so by companies surrounded by willing competitors, then shipped to America, where Apple puts their logo on it, and sells it at a 45% margin within a near-impenetrable market leadership position. Which business would you rather operate? The implications are farther reaching than just a shift in business models. Shareholders in companies such as Apple get a greater return on their investment. The American market is bathed in products that are cheaper than they were before. And the most volatile of jobs are sent to developing countries (that welcome them with ever increasing eagerness). One need not go far, or try very hard to find those without jobs due to outsourcing. To be sure, this fact is lamented by many union leaders. However, as Bastiat once pointed out, there is always what you see, and what you don�t see. What we don�t see is the reality that the fastest growing segment of jobs is white collar jobs: upper-level management. We can mourn the loss of low paying jobs, or rejoice in the increase of high paying jobs. Where is it written that one must work in a factory, instead of behind a desk, in order to make an honest living?

This leads us to the second title/conclusion: the end of the Democratic Party. The first conclusion actually leads us to the same deduction. The end of the welfare state will ultimately spell the end of the Democratic Party. For they have fully invested themselves in the advancement of the welfare state. They lost their way when they stopped “sticking up for the little guy,” and started believing that America is great because of its government, not because of the individuals within its borders. Nonetheless, in the near-term, the disappearance of the blue collar worker will bring the party to a point of irrelevance. As more people move into better paying jobs, in upper-level management, they will have more money for retirement, health care, leisure, etc. and less use for entitlement programs. As more people have more of their money plundered to give to those who refuse to change, they will react with more ferocity to those who promise to raid their bank accounts. (To be fair, the Republicans are not far behind the Democrats. One could argue that if we took the Republicans and the Democrats of today, and put them in the political landscape of 20 or 30 years ago, the Republicans would be considered Democrats, and the Democrats as Socialists. If we add the Libertarian Party to the mix, they resemble the Republicans of so many years ago. And so on. This is not meant to be a political statement, merely an observation by an outsider.) Unions have seen a steady decline in their numbers for many consecutive years. People have little need of them. In the way of the unions, so goes the Democratic Party.

If you have followed me this far, than it will not be too much of a leap if we combine these two conclusions. Let’s see what happens. The welfare state is dying. Better jobs are being created. The best and the brightest are seeking success elsewhere. Less and less people are paying more and more taxes. This will end up in only way (that the author can see): those with wealth will leave. Or, at the very least, their wealth will leave. There will not be rich people left to tax. The only incomes left to prey on by our tax structure will be the rapidly disappearing middle class, and the poor. Neither will find it remotely agreeable to pay into the welfare state as much as the now-gone rich have. But, the government has made promises, and must fulfill at least its most rudimentary function of protecting its citizens (or else a mass upheaval will take place). The legislature was elected to carry out those promises. They must raise funds in some way, and there will be only two options: either through a property tax, or a consumption tax.

Let’s consider the implications of the first. A federal property tax would basically spell the end of individual ownership of property. The tax rate would price many out of the realm of property ownership, and most assuredly, the tax rate would be progressive. The richest, nicest properties would be taxed at a higher rate, thus driving the few remaining true-believing rich from these shores. Some will see opportunity, and there will be a small group of people, or corporations, that take control of the majority of the property in this country. Needless to say, this will be unacceptable to the majority who do not own property, who will then use the power of government to seize all said property. When this happens, America will then officially be a communist state. There will be no individual ownership of property, and the “people” will decide, through the government, who gets what when. A ruling class within the government will arise, who then show the citizens how much freedom they have given up.

Whew.

Now, let’s step back from that dark, dark vision of the future, and contemplate the effects of a consumption tax. Depending on how it is conceived and implemented, the difference could not be greater. A taxation structure based upon consumption, rather than income, would free capital and those with it. No more would people be taxed based upon what they earned, but upon what they spent. People would be encouraged to earn money, and discouraged from spending it. Savings and investment would increase, and people and companies who fled the former shape of taxation would then flock to such an environment. What if America adopted such a tax structure? What would happen if America was considered the tax shelter of the world? Our country is considered the safest, best environment for investment. If we added to that freedom from taxes, can your imagination conceive the revolution that would occur? There would be no country on earth that could possibly compete with that. America would then once again be vaulted to the forefront, and talk of the decline of the West would all but vanish. In fact, other governments would then be forced to implement similar taxation structures, and a world-wide explosion in growth and innovation would transpire. America would start a tidal wave. In fact, it�s almost a first come first served proposition. The first developed country to implement such an idea would lead the revolution; others would merely react to it. So the question remains: will we start the tidal wave, or be consumed by it?

One answer to this is a piece of legislation already written, and already in the Ways and Means Committee of the House of Representatives: H.R. 25, the Fair Tax. The Fair Tax would eliminate the income tax, and replace it with a consumption tax. The author will not delve too deeply into the specifics of this taxation plan (besides relaying the effects described above), he will simply state that it is by far the best-conceived plan for consumption-based taxation.

The Fair Tax would turn the tide, and complete the resurgence of the cycle described above, already in motion. Liberalism, Progressivism, the welfare state, all have had their day. A new generation is rising up, ready to meet the future, willing to make and take the bold change needed to gain entry into the successes of our forebears. At least, that is the author�s humble, optimistic opinion. Take it for what it’s worth. It is his sincere belief, and hope, that our generation will see the end of the welfare state, the end of the Democratic Party, and the passing of the Fair Tax.

“If you love wealth more than liberty, the tranquility of servitude better than the animating contest of freedom, depart from us in peace. We ask not your counsel nor your arms. Crouch down and lick the hand that feeds you. May your chains rest lightly upon you and may posterity forget that you were our countrymen.” - Samuel Adams