Is General Income Security Coming to America?

Now that the Obama administration has laid the groundwork for a single-payer health care system, are you ready for the next phase of the American welfare state? This story from the Australian newspaper the Sydney Morning Herald gives away a hint of what is to come:

Australian businesses with existing paid parental leave arrangements in place are unlikely to decrease the entitlements following the introduction of Federal Government’s new paid parental scheme, global consulting firm Mercer found. The new government scheme allows primary caregivers for newborn or adopted children to be eligible for up to 18 weeks of paid leave at the national minimum wage of $570 a week, funded by the Federal Government. This new scheme is prompting more organisations to look at introducing paid parental leave for employees in addition to the government entitlements. According to Mercer’s Paid Parental Leave Survey of 284 organisations, 28 percent of organisations who don’t yet have a scheme in place, almost a quarter are considering introducing employer paid parental leave in addition to the government’s entitlement with many saying they will offer to pay the difference between the government payment of $570 a week and the employee’s full pay.

This type of entitlement is high on the wish list for many on the left. As this report in the Huffington Post illustrates, some are even pushing parental benefits as a “human rights” issue:

Americans often take pride in ways their nation differs from others. But one distinction – lack of a nationwide policy of paid maternity leave – is cited in a new report as an embarrassment that could be redressed at low cost and without harm to employers. “Despite its enthusiasm about `family values,’ the U.S. is decades behind other countries in ensuring the well-being of working families,” said Janet Walsh, deputy director of the women’s rights division of Human Rights Watch. “Being an outlier is nothing to be proud of in a case like this.” … The report, “Failing its Families,” says at least 178 countries have national laws guaranteeing paid leave for new mothers, while the handful of exceptions include the U.S., Swaziland and Papua New Guinea. … Past efforts in Congress to enact a paid family leave law have floundered, drawing opposition from business lobbyists who say it would be a burden on employers. Instead, there is the 1993 Family and Medical Leave Act, which enables workers with new children or seriously ill family members to take up to 12 weeks of unpaid leave. By excluding companies with fewer than 50 employees, it covers only about half the work force, and many who are covered cannot afford to take unpaid leave.

It is delusional to claim that tax-funded parental benefits would come at “low cost”. There are four million live births in the United States each year. If the federal government granted 12 weeks of tax-funded parental benefits with each one of these babies, and if the compensation was tied to the federal minimum wage, the cost would be $13.9 billion per year.

Who is going to pay those taxes? Well, if we follow the model from other countries it would in the form of a payroll tax on private businesses. In June of 2007, when employment peaked before the current recession, there were 116.6 million employees in the private sector in the United States. Spread the tax out over them and it comes down to $119 per year per employee. Nothing to argue about, right?

Not so fast. To begin with, suppose we match the Australian 18 weeks instead of the 12 weeks assumed above. Now the per-employee cost is all of a sudden $179 per year, or $20.8 billion in total. Still using 2007 numbers, we now divide the total payroll tax needed for this minimum-wage based maternity leave program, average payroll per private business employee. That number is $41,577, which gives us 502,277 – or the number of jobs jeopardized by this tax.

In Canada the Employment Insurance program guarantees tax-paid parental benefits for 35 weeks. If we match that and still use the U.S. minimum wage as the compensation base, we now need a payroll tax equal to the cost of 976,513 jobs.

Let’s now adjust our model for the income insurance formula used in the Canadian system. Among the variables to take into account is the maximum “insurable” income: the Canadian government will only allow you to insure earnings up to $45,900 per year. Mothers can claim up to $485 per week for the 35-week period. This compensation is roughly 22 percent higher than weekly earnings on the average Canadian minimum wage.

Since low-income families receive a more favorable treatment than high-income earners, we cannot calculate a simple per-mother average in order to find the total cost of this system. That would underestimate the total cost of the entitlement program. Since again the maximum amount allowed in the Canadian system is only 22 percent above minimum wage, it is reasonable to use the top amount when we import this formula to the American experiment. Besides, a person earning 122 percent of the U.S. federal poverty level (FPL) takes in $13,627 per year, so using the Canadian formula is a very modest assumption of what an American version would cost.

The total payroll tax needed to pay for this system is now $49.2 billion, or the equivalent of 1,184,000 private-sector jobs. We can continue to adjust the compensation level upward:

  • At 150 percent of FPL the tax would be $60.9 billion, equal to 1,465,000 jobs;
  • At 200 percent of FPL the tax would be $81.2 billion, equal to 1,953,000 jobs.

Advocates of general income insurance programs like this one tend to claim that the money goes back into the economy in the form of household spending. This is correct, and the amount that re-enters is relatively high for financial entitlements (as opposed to in-kind entitlements like child care, public education or health care). However, those who use multiplier-based reasoning as support for government-enforced, tax-paid income insurance often forget two important causal relations in the economy:

a) Higher taxes reduce private-sector earnings. In this case the reduction comes in the form of less money for small businesses to spend on expanding their operations; larger employers have to reduce their number of employees to compensate for the higher tax. Fewer business-to-business contracts and fewer employees overall mean less income in the pockets of American families. As a result, there is less money being spent and businesses lose out in the second multiplier round.

b) When households get something without having to work for it, they reduce their labor participation and their savings accordingly. In terms of funding parenting, American families will put less aside as they plan to build a family, which – according to established labor economics – means they will work less. This in turn reduces total taxable income and erodes government tax revenues designated for this program.

These dynamic effects of an income insurance program are independent of the business cycle. What the proponents of the welfare state know, but purposely avoid discussing, is that in a recession there are always fewer people employed. As an example, consider the bottom of private-sector employment during this recession: in January of 2011 there were 106,199,000 people employed in America’s private sector. To keep funding for this hypothetical parental income insurance program intact, Congress would have had to take in the same tax from far fewer taxpayers. If this program had been in place in this recession, Congress would have had to raise the cost of this particular payroll tax by ten percent for private employers.

Only an iPad-addicted trust-fund kid in the Occupy movement would fail to realize that the American economy cannot afford this. But there is also another reason why this is a totally unnecessary program. Advocates of parental income insurance often claim that it would encourage people to have more kids. This is an argument you often hear in Europe when the left wants extended and more generous income insurance programs. But the fact of the matter is that we already have a relatively high birth rate here in the United States. Ours is, e.g., 21 percent higher than the Canadian birth rate. We also exceed the birth rates of Norway (11 percent higher), Sweden (14 percent higher), Finland (20 percent higher) and Denmark (21 percent higher), all of which have comparatively generous parental income insurance program (52 weeks in Sweden at 80 percent of your earnings).

If we can read anything out of this data, it would be that the parental income insurance program seems to discourage families from having kids.

Speaking of which: the Swedish birth rate is equal to the Chinese birth rate – and the Chinese rate is higher than that of Finland, Denmark and Canada.

As we all know, China has for decades enforced a one-child-per-family policy, thus actively punishing families with more than one child.

The fundamental American approach, namely that people should be free to decide for themselves how they want to live their lives, once again prevails as superior to its welfare-state alternatives.