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Social insurance & the welfare state as substitutes for averting conflict

The development of the welfare state in the Western economies between 1930 and 1990 coincided with a puzzling pattern in the taxation of top incomes. Effective tax rates at the top increased sharply but then gradually decreased, even as social transfers continued rising. These authors propose a new theory of the development of the welfare state to explain these facts. Our main insight is that social insurance and top income taxation are substitutes for averting social conflict. They emphasize the role of the Great Depression as a source of aggregate risk, and argue that the rise of the welfare state can be understood as a process of exploiting efficiency gains in response to gradual technological improvements in the provision of social insurance. Their detailed arguments build on the policy histories of the United States, Great Britain, and Sweden. Full paper in pre-print form here.


1 comment to Social insurance & the welfare state as substitutes for averting conflict

  • derrida derider

    More of what I keep saying – there is a very strong EFFICIENCY, not just equity, case for the welfare state which critics of it (and many supporters too) consistently miss.

    On past top tax rates, be aware that the mantra in reducing them was “broaden the base to lower the rate”. Again both supporters and opponents of those reforms keep underrating the importance of that base broadening. Despite rhetoric in most countries income tax evasion by the rich was much worse in the 1960s and 70s than it is now (that’s in fact the reason I distrust those studies of long-run incomes of the 1% based on tax data). Certainly for non wageearners paying income tax was entirely optional in Australia from about 1970 until the Keating reforms of 1986.

    Despite that, I’m impressed with the well argued technical case by Diamond and Saez that net social welfare would be maximised by setting the top income tax rate up to the Laffer point – about 82 cents in the dollar in the US.

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