The Case Against Socialism

by Rand Paul

  Barack Obama joined the chorus on a 2013 pilgrimage to Sweden when he said: “Sweden also has been able to have a robust market economy while recognizing that there are some investments in education or infrastructure or research that are important, and there’s no contradiction between making public investments and being a firm believer in free markets.”8

  At least President Obama admitted that Sweden had both capitalism and a welfare state and not socialism. Obama did, however, argue that “Nordic countries have some of the least income inequality in the world, which may explain one of the reasons that they’re some of the happiest people in the world.”9

  Pakistan and Ethiopia are right up there with Nordic countries with the least income inequality. Wonder how they are doing on the happiness scale?

  Despite tax reductions over the past few decades, Scandinavians today still pay very high taxes. CNN reports that “Danes pay some of the highest taxes in the world, including a 25% tax on all goods and services, and a top marginal tax rate hovering near 60%.” Sweden’s top rate is 56.4 percent while “the top tax rate in the U.S., by comparison, is less than 40%.” However, when combined with our state and local taxes, the wealthy in the United States also pay more than half of their income in taxes.10

  Danish taxes still approximate nearly 50 percent of their GDP. In America, as much as we complain about our tax burden, taxes here are about 20 percent of GDP.

  If they want us to become Denmark, Bernie and the new socialists should at least be honest and inform everyone that the overall tax burden would have to more than double and a significant part of that burden would be placed squarely on the middle class and working poor if we adopted their 25 percent national sales tax.11

  In America, though, the top income tax rate is limited to the upper class while in Scandinavia the top rate hits a huge swath of the middle class. According to Palumbo, “If America had Denmark’s tax brackets, someone earning $60,000 a year would be subject to the top 60% tax rate.” Whereas, in the United States, that person would likely pay an income tax rate of less than 15 percent.

  Denmark also imposes some of the highest car taxes in the world. Until last year’s tax cuts, new cars were taxed at nearly 200 percent of the car price. It is now down to a “reasonable” 100 percent. So if you want to buy a $30,000 car, you now only have to come up with an additional $30,000 for the government. Yes, you read that correctly. According to Rasmussen, “You take a loan almost like a mortgage to buy a car. No students have cars. It’s insanely expensive.” No wonder the Danes are always shown riding their bicycles and looking so fit and ruddy-cheeked! I suspect most Americans, however, would balk at having to rely on bike transportation in frigid weather.12

  In addition to those punitively high income and car taxes, everyone, the poor, the middle class—everyone—in Denmark, Sweden, and Norway pays a 25 percent national sales tax on virtually everything they buy, including food.13

  This national sales tax is a consumption tax known as a value-added tax, or VAT, and is much hated. This sales tax is applied up and down the production chain rather than just at the point of sale. No one escapes the VAT. Rich or poor or middle-class, the VAT is omnipresent and ensures that the Scandinavian welfare state gets a healthy bite of everyone’s paycheck.14

  Since consumption is a higher percentage of your income the less income you have, a 25 percent sales tax translates to low- and middle-income families paying taxes at a higher rate than the rich. The Scandinavian tax system is the very definition of regressive taxation.15

  To summarize, today’s socialists say they want socialism but are vague on the details of which industries the government should own and when. Today’s socialists want Scandinavian socialism except it’s not socialism because the state doesn’t own or control most of the means of production. Today’s socialists want to emulate Scandinavia’s welfare state except for their high taxes on the middle class, their regressive 25 percent VAT, and the absence of punitive taxes on their top one percent.

  Confused?

  Well, maybe today’s socialists don’t know what socialism is and haven’t read enough history to understand the horrors that occur whenever complete socialism is attempted. Perhaps today’s socialists are simply welfarists who utilize envy to incite the majority to pay the bill.

  After all, today’s socialists clap the hardest for free health care and free tuition. Since we already have a certain degree of welfarism, perhaps they just want more.

  What today’s socialists really want is free health care, lunch, tuition, and someone to pay for really, really long maternity and paternity leave.

  Most progressives, the ones who don’t willingly self-identify as socialists, at least, understand that the argument for welfarism is much easier than the argument for socialism. No need to defend Stalin, Hitler, Mao, Pol Pot, Hugo Chavez, etc. But can one promote an economy that’s a happy medium between capitalism and socialism, thus sidestepping the need to defend the indefensible attempts at real socialism?

  This argument is only legitimate for the progressives who don’t argue they are socialists. For Bernie, Ocasio-Cortez, and the other proud socialists it is incumbent upon them to explain why their socialism won’t ultimately require totalitarian methods to enforce.

  But what of the welfarists who promote big-government social programs and high taxes but would leave protections for private property and a stock exchange in place? Can these advocates of a mixed economy argue that the Enforcement Police will be a compassionate presence?

  Let’s take a look. In America, we have a mixed economy. The government owns the old-age pension program, Social Security. It is mandatory and paid for by taxes. Your forced savings don’t go into an account. The money goes into the general budget and is spent. The government technically borrows the money and gives the Social Security Administration a promise to pay later—a nonnegotiable Treasury bill that is not redeemable in the marketplace. These Treasury bills are only redeemable with new taxes on the next generation. When you retire, you don’t receive the money the government took from you. You receive money the government taxes from the next generation. The problem is, as family sizes diminish, there are not enough young people to pay for the old people. Social Security now pays out more than it brings in. Consequently, as of 2017, there is approximately an $11 trillion shortfall in funds necessary to keep Social Security afloat.

  There is a “gotcha” question that reporters love to ask conservatives and libertarians who criticize Social Security. They ask: “Do you think Social Security is socialism?” Most critics of Social Security squirm and evade the question. But it is a good question—Is Social Security a socialist program? Social Security is mandatory and involves the force of taxation. So, what is it?

  Before we answer that question, perhaps we should visualize government control and welfarism as a spectrum, ranging from no government—anarchy—to complete government—totalitarianism. The spectrum can stretch from complete freedom (no government) to complete lack of freedom (totalitarianism). Thomas Paine and most of our founders viewed government as such. They argued that government was a necessary evil, necessary to prevent the chaos of no government but evil in that government always requires force to implement its policies.

  As we’ve seen, the more complete the socialism, the more complete the confiscation of property, the more force that is necessary. Force, ultimately in the form of government brutality, is an essential companion to complete equality. The more “equality” you want, the more force necessary to bring it about.

  Social Security, government health care, free tuition, and the rest can all be seen in the same way. In a free society, people will voluntarily decide how much they will save. In a completely socialist society, all decisions about retirement would be controlled and dictated by the government. After all, you can’t be trusted to do it yourself!

  Where on the spectrum is America? Social Security taxes are 7.5 percent of everyone’s income plus the 7.5 percent your employer �
��contributes.” Realize, however, that your “employer’s contribution” is put down in his or her accounting as a wage expense; therefore, it is part of your salary, just not received. Social Security taxes are only applied to the first $100,000 or so of income.

  So, is Social Security socialism? A better question is what policies go toward more socialism and what policies go toward more freedom. Policies that promote more state control of your pension would include raising your Social Security taxes or increasing the income limits subject to the payroll tax. Both policies are supported by most of today’s progressive Democrats, and both are more socialist.

  Alternatively, policies that promote more freedom by making the Social Security tax completely voluntary, allowing workers to choose individual accounts to store their “contribution,” and lowering the Social Security tax would take the pension system in the direction of capitalism.

  The same goes for health care. Under complete socialized health care, the state would own all the hospitals, doctors, and nurses. No private options would be allowed. Actually, even under Mao’s China they never got that far, although it was certainly their goal. In the United States, we have the hospitals and doctors and nurses in private hands, but about half of the health care in America is paid for with public funds.

  Obamacare took us closer to socialism. Obamacare continued our hybrid system but increased taxes to have more of health care paid for by the taxpayer.

  Alternatively, if we want to go in the direction of more capitalism, we would allow people to save more of their money tax-free for health care. We would allow patients to organize and buy their insurance through associations. We would remove obstacles to buying insurance across state lines, and we would legalize the sale of all forms of insurance, including high-deductible, low-premium insurance, which is a reasonable lower-cost alternative for young, healthy people.

  If we chose more capitalism in the distribution of prescription drugs, we would legalize discount prices for wholesale buyers. Currently, the courts prevent transparent discounts for larger purchasers of prescription drugs. A complicated rebate system arose to get around this government impediment, but the rebate system allows middlemen to carve out part of the profit without really letting the consumer in on the transaction.

  Less socialism in legal drug distribution would mean less government protection of Big Pharma’s legal patent monopoly. Drugs would still have patent protection, but it would expire at a certain date and generic competition would seamlessly follow without the millions of dollars in legal impediments that Big Pharma places in the way. Less socialism in pharmaceuticals would mean no banning of international drug sales.

  More socialism in pharma could mean having the government assume ownership of Big Pharma, a disaster I hope we never choose, or it could mean keeping private ownership of the drug companies and increasing taxes to pay for the drugs. Drug companies would be all for it; Big Pharma’s profits expanded greatly under Obamacare, something progressives hate to admit. Or we could allow more tax-free saving to purchase prescription drugs, legalize co-ops to have leverage to bring drug prices down, and prevent Big Pharma from gaming the system to extend their patents forever.

  As Democrats call for a government-run “Medicare for All” system, it is interesting to note that in the last twenty-five to thirty years the wealthy in Denmark have increasingly opted out of the public health system for private health care and hospitals, while still paying the full taxes to support the public system, of course. According to Annegrethe Rasmussen, this has created “a parallel system that did not exist in my childhood.”

  And it’s not just the wealthy who are opting out of the public health system. Often Danish companies offer private health care to their executives. For example, if a COO needs a medical procedure and his company doesn’t want him to wait for two months to have the surgery because they need him back at work faster, they will pay for care at a private hospital.

  Ms. Rasmussen elaborated that “you cannot choose, completely freely, your health care in the public system. There are waiting lists. You have to wait. I think the waiting list for a hip replacement is 3 to 6 months. But you know, if you want it in America you can have it in a week. So there is obviously a difference. While the care is generally quite good, you have to choose a doctor nearby. You cannot, for example, choose to go to the best doctor in Copenhagen if you live out in the countryside.”

  When asked her opinion on the increasing number of Danes opting out of the public health care system, Ms. Rasmussen responded, “In general, I think this trend is because Denmark has become less uniform and more classically liberal, or as you Americans call it, capitalist.”

  Chapter 15

  Sweden Is Shrinking Taxes and Welfare

  The liberal love fest with Scandinavia has been going on since the 1970s. Jeff Jacoby remembers for us a 1976 story in Time that described Sweden as “a country whose very name has become a synonym for a materialist paradise. Its citizens enjoy one of the world’s highest living standards. Neither ill-health, unemployment nor old age pose the terror of financial hardship. [Sweden’s] cradle-to-grave benefits are unmatched in any other free society outside Scandinavia.”1

  Unfortunately the long-term results of soaring taxes and incipient socialism were not so utopian. As Jacoby reports, “taxes soared, welfare payments expanded, and entrepreneurship was discouraged. . . . Sweden’s world-beating growth rate dried up. . . . By then, Swedes had begun to regard their experiment with socialism as, in Sanandaji’s phrase, ‘a colossal failure.’”

  Across Scandinavia, the results were similar. The flirtation with socialism led to decreased economic growth and a flight of wealth.2

  When Sweden embraced socialism in the 1970s, the laws of economics finally caught up. Economic growth slowed dramatically, and unemployment rose. The facts demonstrate that Sweden grew dramatically and led Europe in growth as a relatively low-tax, capitalist economy, and when Sweden’s welfare state grew, its economy slowed and stagnated.

  Sanandaji relentlessly debunks the myth that Nordic countries became rich by relying on socialism. He reminds us that “as late as the 1960s, taxes in Scandinavia were still comparable to the US. Denmark had a rate of 25%. Sweden’s rate was 29% compared with 29% in the US.”3

  Before entering the high-tax era of the 1970s, taxes across Scandinavia competed with or even outcompeted the tax rates of America. During this low-tax era, there was an economic boom.4

  Stefan Karlsson writes, “This changed in the 1970s after Olaf Palme, from the left wing of the Social Democratic party, became Prime Minister. Palme stepped up the socialist transformation in Sweden, rapidly increasing anti-business regulations, and sharply increased payroll taxes.”5

  During the 1970s and ’80s, Sweden drifted toward socialism and became one of the highest-taxed nations in the world. Tax revenues rose dramatically to consume 50 percent of Sweden’s GDP. Denmark also saw taxes rise to consume more and more of their GDP, eventually also reaching 50 percent. Economic growth suffered and ever since that time, Swedish governments have been turning away from socialism. 6

  Swedish voters’ unhappiness with their government was no state secret. As Karlsson recounts: “Popular discontent from the economic woes created by the global economic downturn, the massive tax increases, the increased regulations, and the increasing inflation enabled the center right to come into power in 1976, breaking 44 years of uninterrupted Social Democratic rule.”7

  In 1970, Sweden was the fourth-wealthiest country in the world. Over time the ill effects of high taxes and increased regulation consumed a significant share of Sweden’s wealth until they fell to fourteenth in the world in 1993.8

  As taxes rose and economic growth stalled, Sanandaji reminds us that during this time, “Sweden’s growth rate fell to the second lowest among western European countries.” Even as Sweden’s growth rate fell, though, the great wealth created in the previous era allowed the illusion of socialist success.9

  A
ll across Scandinavia, as the Nordic countries embraced higher taxation, economic growth stalled. By the 1980s, politicians across Scandinavia began to debate whether they’d gone too far in raising taxes. It became impossible to ignore the economic stagnation.10

  As the welfare state grew by leaps and bounds and the taxes ate an ever-bigger chunk of everyone’s paycheck, Denmark’s GDP per capita went from seventh to tenth and Sweden’s went from fourth to eleventh.11

  But the flight of successful Scandinavians and the slowing of economic growth ultimately led to a change of heart in the populace and a change in direction for government.12

  Swedish taxes got so high in the 1970s that the effective marginal rate sometimes exceeded 100 percent. As Rich Lowry comments at the New York Post: “There is a reason that IKEA founder Ingvar Kamprad fled the country in 1973. Sweden instituted a scheme to confiscate corporate profits and hand them over to labor unions. The idea was, in the words of a Swedish economist, to have ‘a market economy without individualist capitalists and entrepreneurs.’”13

  Other famous Swedes who fled include Alpine skier Anja Paerson, high jumper Kajsa Bergqvist, and triple jumper Christian Olsson.14

  During the 1980s, Scandinavian governments began to wake up to the economic effects of their crushing taxes. Denmark, Norway, and Sweden all cut their corporate taxes in half until their rates reached the mid-20s—more than ten percentage points lower than that of the United States.15

  Jeff Jacoby writes in the Boston Globe, “That 1976 story in Time, for example, went on to report that Sweden found itself struggling with crime, drug addiction, welfare dependency, and a plague of red tape. Successful Swedes—most famously, Ingmar Bergman—were fleeing the country to avoid its killing taxes. ‘Growing numbers are plagued by a persistent, gnawing question: Is their Utopia going sour?’”16