Social welfare spending on both sides of the Atlantic

An interesting analysis via Freakonomics, comparing social welfare payments in the US to those in Nordic countries.

The Nordic countries collect income taxes on the cash payments made to social welfare recipients at rates that are four to five times the rates paid by American recipients.  Then when the Nordic recipients go out to make purchases, they pay consumption tax rates on their purchases that are 4 to 5 times the rate paid by the poor in America.  Furthermore, the U.S. government offers a series of tax breaks to promote social welfare that are not found in the Nordic countries.

The difference between the U.S. and the Nordic countries is closed further when expenditures per total population are considered. … If the adjustments for purchasing power are correct, net public social expenditures by government in America in 2003 ranked roughly in the middle of the Nordic countries.  Per capita net public social welfare spending in 2003 (in 1990 dollars) in the U.S. was $5,400, while Sweden’s was $6,300, Norway’s $5,900, Denmark’s $5,472, and Finland’s $4,200.

Americans have more opportunity to reach higher incomes because Americans in the upper half of the distribution have much higher incomes than Nordic people in the upper half of their income distributions.  On the other hand, households below the 10th percentile in America fare much worse on average than the lowest group in the Nordic countries.  Despite a large array of poverty programs, people in the U.S. are falling through holes in the safety net.

Nevertheless, it is undeniable that there is more income inequality in the US.  But the study seems to suggest that a high Gini coefficient in the US might have just as much to do with the prevalence of high income earners, as it does with the occurrence of low income earners.

What would be more interesting to see, is whether the differences in redistribution model have an effect on lifetime mobility.  I would imagine that a high marginal tax rate over still relatively low incomes – which is the norm in Nordic countries, will dissuade people from leaving all the welfare benefits behind and enter, or re-enter the labour force.

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