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BOHANON & CUROTT: Democratic socialism would be costly to middle class

August 10, 2018

Economic Analysis by Cecil Bohanon & Nick CurottDemocratic socialism is in the news as of late, so just what is it? The classic definition of socialism is “ownership of the means of production by the state.” The Webster definition of democratic socialism refers to the political philosophy of social democracy, which means, alternatively, 1. “The peaceful transition from capitalism to socialism by democratic means” and/or 2. “A welfare state that incorporates both capitalist and socialist practices.”

Self-proclaimed democratic socialists heartily embrace the second definition and are mostly vague and evasive about the first. Uniformly, they call for an expanded and more extensive system of government entitlements. They commonly allude to increasing taxes on big corporations and the “top 1 percent” households (with incomes more than $400,000) to finance these ambitions. They often point to Scandinavian nations like Denmark as their model.

A recent national poll asked likely voters their impressions of socialism. Among all participants, 33 percent expressed a favorable view of socialism, while 58 percent had an unfavorable impression. It is interesting that 40 percent of those polled who had incomes under $30K expressed a favorable view, while 45 percent of those with incomes above $200K expressed a favorable view. The income group least favorable to socialism? Those with incomes in the $50K-$100K range. Only 28 percent in that group view socialism in a favorable light. We suspect those middle-income Americans are onto something. They know they will pay for social democracy, that an expanded welfare state will not come from just taxing the rich.

Here is a quick calculation that is consistent with this intuition. A single worker in Copenhagen, Denmark, earning $84,507 (converted from Danish kroners to dollars) will pay $30,810 in income taxes in 2018. His American counterpart earning the same in Indiana will pay $21,736. This does not include the 25 percent value added tax (sales tax) faced by the Copenhagen resident, compared to the 7 percent general sales tax faced by our Hoosier earner. Assuming a modest $40K is subject to sales/VAT taxes in both places, the Danish worker has about $15K less in disposable income than his Indiana counterpart.

Of course, the Danish worker gets access to numerous state-provided social benefits in exchange for this increased tax burden. It is certainly the case that reasonable people may disagree as to whether these benefits are worth the price. What is not likely contestable, though, is that the welfare benefits of democratic socialism will be paid for only by the rich. Trust us, they won’t.•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

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