Towards a Worldwide Index of Human Freedom

222 • Towards a Worldwide Index of Human Freedom
the level of taxation is, the higher the growth rate of the economy is (Bergh
and Karlsson, 2010; Bernholz, 1986; Romer and Romer, 2010; Vedder and
Robe, 2009; Weede, 1991).38 Not all taxes are equally harmful. Corporate
taxes and progressive income taxes are worst; consumption and property
taxes are less harmful (Arnold, 2008).39 The only hope to limit the tax burden
comes from globalization and tax competition (Tanzi, 2011: 140-145).
Limited government in the West suffers from erosion, in pacific
Western Europe more than in the United States. Whereas democracy
depends on the prior establishment of economic freedom and prosperity,
democracy might nevertheless undermine its prerequisites. In Europe,
transfer payments have become the dominant element of government
budgets. The new focus of European governments on transfers and the
provision of welfare must lead to unfortunate consequences. First, the tax
and welfare state cannot avoid punishing hard work by taxing workers and
rewarding the lack of economic success by transfers. Such reinforcements
undermine incentives. Second, the welfare state looks self-destructive. It
gets more costly, if more and more people are ready to claim benefits
fraudulently. An empirical analysis of World Value Survey data supports
the view that generous welfare states encourage illegitimate claims and
deteriorating ethics (Heinemann, 2008). Third, the welfare state also
undermines the willingness of parents to discipline and educate their children
(Lindbeck and Nyberg, 2006). It hardly affects one’s living standard
whether one is an unskilled worker or lives on income support at the taxpayer’s
expense. So, why should parents of modestly gifted children teach
them discipline and a willingness to work hard? Fourth, the welfare state
stimulates the wrong kind of migration. Look at high tax and welfare states.
There are incentives for high earners to migrate to lower tax states and
incentives for would-be welfare recipients to immigrate. All of these developments
undermine the long-run viability of European welfare states.
Worse still, most European welfare states have not been capable of
financing their persistent expansion out of current taxation (Tanzi, 2011:
98, 232). Deficits and government debt have been growing for decades.
With an explicit debt-to-GDP ratio close to 80 percent, Germany still
counts as solid and attracts the envy of other states. Assuming that public
debt continues to grow at the same speed as during the last decades, however,
German public debt will be nearly three times as large as its gross
domestic product in 2030 (Simon, 2011: 69). But the German welfare state,
like other Western democracies, including the United States, has made lots
of unfunded promises concerning health care as well as pensions (Peterson,
38 Unfortunately, this view is not unanimously accepted. For example, see Lindert (2004).
39 Although Arnold (2008) does not make much of it, his regressions are compatible with
the view that high tax burdens as such also decrease economic growth rates.
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