Social security and social inclusion

by Roland Duchatelet | Sep 19, 2016 | Opinion

Social security emerged in Western Europe with voluntary solidarity contributions within labour unions in the late 19^th century developing into a mandatory insurance contribution organised by the state in 1950. A mandatory insurance payable to the state is a tax, in this case a tax on labour. Because the employer pays all if it, it does not matter if legislation categorises it as employee’s contribution or employer’s contribution.

In addition, the 20^th century saw the birth of a new type of tax: the income tax, designed to capture the total income of wealthy people. However, after 1950 the income tax started to hit the rising incomes of the working class. It became the second component of the tax on labour. Zero in 1930, insignificant in 1950, the total tax on labour is now by far the most important tax income for Western European states. It varies between 50 to 200 percent of the net labour income of the workers, making the cost of labour on average twice as high compared to what the worker gets.

The history of its creation explains why social security is linked to labour participation. The political class assimilates “job creation” to welfare: the more people work, and the longer they do, the more taxes are paid and the better for the state budget. This thinking induced many countries to increase the age of retirement. Obliging older people to work longer when there is a five-fold increase of unemployed young people waiting for a job, is absurd. It is an example of wrong collective thinking by people indoctrinated by the “Labour Church”, because they assume “full employment” is still possible.

In the cultural sector, the high tax on labour is a problem. We can watch fantastic artists for free on television. High taxes on labour increase the wage cost of artists. Most local performances cannot compete unless they get subsidies, which is now current practice in most Western European countries. Would it not be more straightforward to have no taxes and no subsidies in the cultural sector?

Education and healthcare are heavily subsidised in many countries to cover the cost of their employees including the tax on their labour and other expenses. Their net finances would be the same if taxes on labour would be set to zero and subsidies lowered with the same amount.

Same for services completely paid by our tax money like police, justice, the military, federal and local administration: the labour tax cost included into the payroll expenditure of the state is paid and collected by the state, the same wallet. Setting their labour tax to zero would not affect their net finances.

In Western Europe, 40 to 50 percent of employment is publicly funded which means the corresponding labour tax has no effect on net state receipts.

For a state, the real proceeds of labour tax come from the non-subsidised private sector. Hence, the proceeds are much lower than what policymakers are tempted to believe while looking at public accounts which provide gross rather than netted labour tax income figures.

Meanwhile, the high tax on labour effectively increases the cost of services for those who want their shoes, a washing machine or a bike to be repaired.  Mind that the “Labour Church” does not allow citizens to trade services.  Services should be acquired from service companies because allowing citizen’s to work for each other by exchanging services would be unfair competition to the firms selling such services.

These firms charge a labour cost at least twice as high as what their workers get, because of the tax on labour. This higher price obviously reduces the demand for repair services and many people try to paint their house themselves, maintain their garden themselves and their kids drive bikes without proper lights or brakes.  The tax on labour reduces exchange of services, hence it reduces the creation of wealth in the proximity economy.

In Western Europe, the labour Church created this barrier to social inclusion by segregating contractual labour from voluntary and informal work. Helping each other in an informal way, like our grandparents did, is not permitted anymore: the labour tax collectors are chasing offenders. However, poor people can get help from subsidised workers if they successfully find and convince the right state personnel that they are really poor. Clearly, the economic religion put in place by the “Labour Church” does not empower the population to help each other.

Would it not be more effective to convert the directive, complex, fraud-prone and costly social security allowance system into its basic income equivalent and allow the social economy to thrive again by allowing people to work for each other in an informal way, like our ancestors did until 50 years ago?