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January 13, 2011


Niklas Smith

I have another argument for reducing benefits as a share of tax revenue.

We can assume that everything that is not under the heading of social benefits is government consumption or investment (e.g. buying aircraft carriers, building schools and employing nurses). Benefits are of course transfer payments.

We can also make the assumption that propensity to consume does not vary on average between net benefit recipients and net taxpayers. Under that assumption there is no macroeconomic impact from transfer payments: they simply shuffle private consumption around between different people.

Given that all taxes are transaction taxes of one kind or another and thus cause deadweight losses to the economy,* on this basis government transfers are wasteful and have no useful macroeconomic impact, unlike government consumption or investment.

On the other hand, if benefit recipients (like poor pensioners) have a higher propensity to consume than net taxpayers (like middle-aged professionals) then transfers may be a useful macroeconomic tool to stimulate demand when it's weak (as now), in the same way as Keynes advocated using government consumption to do the same. But the difference in propensity to consume must be large enough to offset the deadweight cost of the taxes.

Does this make sense?

*Except Council Tax and Inheritance Tax, but these account for only a small part of tax revenues.


The welfare state promotes Human welfare.

Is the argument that we should kill all the sick, disabled, and elderly? Should we refuse to perform appendectomy in case some resources are used up?

Is it not astonishing that the right see no connection between the economy and Human welfare? As if they had no connection? Can you have an economy with no people?

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