Tuesday, April 22, 2008

Does a welfare state strengthen the social fabric?

There is a view that income redistribution through the welfare system strengthens the social fabric because it involves citizens in combining together with a common purpose. I once held that view myself.

I changed my mind during the 1970s when rising unemployment made it apparent that the security that many people had come to expect the welfare system to provide was not affordable. In the early 1970s I thought that the policy game was all about sharing the fruits of economic growth. Within a few years, however, it was apparent that unrealistic expectations of what governments could provide had resulted in a squabble over distributional shares that was harming economic growth.

The point that should be recognised is that if sharing the fruits of economic growth means taking from people who produce wealth and giving it to people who do not produce wealth, then there must inevitably be less incentive to produce wealth. This results in less wealth produced and more conflict over the distribution of wealth.

The argument that the welfare state strengthens the social fabric also overlooks the corrupting effects of income redistribution on ethical standards. In order to consider this I have compared attitudes toward tax and benefit fraud and corruption in countries with different levels of redistribution of incomes by governments.

The indicator of income redistribution used in this exercise is ‘transfers and subsidies as a share of GDP’. This information was obtained from the 2007 Dataset used by the Fraser Institute in constructing its index of economic freedom. (It is publicly available here.) Attitudes toward tax and benefit fraud are taken from surveys which ask respondents to indicate whether the following actions “can always be justified, never be justified, or something in between:
· Cheating on taxes if you have a chance
· Claiming government benefits to which you have no right
· Someone accepting a bribe in the course of his / her duties”.
(This information was obtained from: Ronald Inglehart et al, Human Beliefs and Values, 2004, F114, F116, F117.)

After matching the two data sets, information was available for 55 countries for the year 2000.

The analysis involved ranking countries by transfers and subsidies as a percentage of GDP and calculating averages for each quintile of the percentages who say that tax cheating, welfare cheating and accepting a bribe are never justified.

The results, presented below, indicate that public attitudes are less opposed to tax and benefit fraud and corruption in countries with large welfare states.

Australia is in the second quintile (with levels of transfers and subsidies as a percentage of GDP lower than the average for the 55 countries in the data set). The relevant attitudes of Australians are as follows: tax cheating never justified (62%), welfare cheating never justified (73%) and accepting a bribe never justified (86%).

Some might wonder whether the results presented above are just a result of the fact that welfare states tend to be larger in relatively high income countries in which people might be more inclined to have open minds about the possibility that there could be some circumstances in which they might be able to justify tax and welfare cheating and even accepting bribes. The countries in the first quintile are indeed low-income countries and those in the fifth quintile are predominantly high-income counties in northern Europe. However, in regression analyses in which both income and ‘transfers and subsidies as a percentage of GDP’ are included as explanatory variables, the transfers variable is significant but the income variable is not significant. This suggests that the observed difference in ethical standards can be attributed to the size of the welfare state. (Anyone who would like to see these regression results is welcome to contact me.)

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