The U.S. Welfare State Is Bigger than You Think

This article from The Globalist argues that the welfare state in the United States is roughly the same size as in Europe, where Americans tend to think the welfare state has spiraled out of control.  The main reason the US welfare state is closer in size to the welfare states in EU countries than at first it appears is that while the benefit payouts are not as great, taxes that are paid on those benefits are much larger in the EU.  Government gets back in the form of taxes a much larger share of what they distribute in the EU than in the US.

The article notes that in Sweden and Denmark about 25% of benefits paid to transfer payment recipients end up being directly repaid in income taxes and other direct taxes.  The Value Added Tax (VAT) in all EU countries will take another 20% or so of those transfer payments when recipients purchase something with the money.  The US has no VAT, and sales taxes are at much lower rates than the European VAT.

The article says,  “When public social spending is calculated on an after-tax bases, rather than a gross basis, social spending in the United States increases to 17.6% of GDP.  This is close to the OECD average of 17.8%…”

After noting a number of other differences in the US and EU welfare states, the article concludes “…that the U.S. and European welfare states are a lot more similar in magnitude than is commonly supposed.”  Food for thought.

Randall G. Holcombe is Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America: Building Out of a Crisis (edited with Benjamin Powell); and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America .
Full Biography and Recent Publications
Beacon Posts by Randall Holcombe | Full Biography and Publications
  • Catalyst