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Does Big Government Create Poverty?

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By Joe Therasakdhi @ Shutterstock.com

Perhaps the best thing about suggestions by candidates like Bernie Sanders and Liz Warren to a welfare model closer to those seen in Europe is that there are years of evidence about what that could mean for Americans. Despite the candidates’ cherry-picking of old and debunked data, there is a lot of evidence in Europe that legislating wealth equality will, in fact, have the opposite effect. My friend Chris Edwards of the Cato Institute writes about a new study by Pirmin Fessler and Martin Schurz that suggests welfare programs are making wealth inequality worse, not better.

Fessler and Schurz performed the study for the European Central Bank, to “explore the relationship between government social spending and wealth distribution in 13 European countries using a survey database of 62,000 households. The database contains household balance sheet information. Regression analyses by the authors confirm that ‘the degree of welfare state spending across countries is negatively correlated with household net wealth. These findings suggest that social services provided by the state are substitutes for private wealth accumulation and partly explain observed differences in levels of household net wealth across European countries.'”

Edwards continues:

Fessler and Schurz found, for example, that Austria, France, Germany, and the Netherlands have high social spending and low private wealth holdings by less well-off households. But other countries such as Luxembourg and Spain have lower social spending and higher private wealth holdings by less well-off households.

Europe has tried a variety of socialist programs, but instead of confirming socialists’ theories, they found the opposite. The Wall Street Journal reports:

• Sweden. The Nordic country had a wealth tax for most of the 20th century, though its revenue never accounted for more than 0.4% of gross domestic product in the postwar era. One reason is that the levy treated different assets differently. This distorted investment as the wealthy took on debt to buy tax-free assets. If the U.S. farm lobby convinced President Warren to remove farmland as a taxable asset, say, prepare for a property bubble.

The relatively small Swedish tax still was enough of a burden to drive out some of the country’s brightest citizens. IKEA founder Ingvar Kamprad famously left Sweden for Switzerland in the 1970s over onerous taxation. In 2007 the government repealed its 1.5% tax on personal wealth over $200,000.

• Germany. Berlin imposed levies of 0.5% and 0.7% on personal and corporate wealth in 1978. The rate rose to 1% in 1995, but the Federal Constitutional Court struck down the wealth tax that year, and it was effectively abolished by 1997. America’s Founders banned “direct taxes” not apportioned by state population. Ms. Warren argues her law isn’t a direct tax, but courts would get their say.

The German left occasionally proposes resurrecting the old system, and in 2018 the Ifo Institute for Economic Research analyzed how that would affect the German economy. The authors’ baseline scenario suggests that long-run GDP would be 5% lower with a wealth tax, while employment would shrink 2%. Business investment could see more dramatic declines. The report concluded that the wealth tax’s “burden is carried by virtually everyone, as indicated by the decline in GDP, investment, and employment.”

• France. In 1982 Socialist President François Mitterrand imposed a wealth tax with a top rate of 1.5% on assets above $1.5 million at the time. The tax was eliminated then reimposed several years later. In 2013 another Socialist President, François Hollande, tried to hit the wealthy even harder.

The results? Some 70,000 millionaires have left France since 2000, according to the South African research group New World Wealth. In 2017 French President Emmanuel Macron, a former economic adviser to Mr. Hollande, scrapped the scheme in favor of a property tax.

Ms. Warren expects her wealth tax to raise some $3.6 trillion in the first decade, while Mr. Sanders promises $4.35 trillion. France’s experience suggests this is fanciful. In 2016 French economist Eric Pichet noted that the wealth tax caused a net revenue loss. Paris collected €5.4 billion from the wealth tax in 2015. Yet total tax receipts were at least €7.5 billion lower than they otherwise would have been, since investment declined and hundreds of billions of euros moved offshore.

Mr. Sanders and Ms. Warren have proposed a minimum 40% exit tax on anyone renouncing U.S. citizenship—a sort of financial Berlin Wall to block this inevitable capital flight.

With all the evidence stacked against such programs, it is hard to understand why politicians like Sanders and Warren want to bring them to the United States.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com