Financing of Formal Social Safety Nets

Abstract

I have argued in this book that as economies grow beyond a certain point, informal social safety nets do not suffice, and just as a legal tender is needed for a smoothly functioning financial system, formal social safety nets, financed by taxes, are needed for economies to grow beyond a certain level. It is only natural, then, that whenever one talks about government providing social safety nets, one has to answer at least two important, and related, questions. First, how this provision will affect government expenditure? And second, how is the government going to finance social safety nets? The discussion of the provision of government-provided social safety nets is intimately related to the state of government finances. By a government’s financial status I mean government revenues versus government expenditure situation. After all, if government is going to provide social safety nets, it will have to raise revenue to support such an endeavor. And since the main source of government revenue is taxes, it will need enough tax revenue to support increased expenditure due to its decision to provide social safety nets. In this chapter, along with discussion about government finances, I will also present research that looks at the impact of taxes on various aggregate economic measures including saving, investment, output growth, and income distribution. Before we go any further, however, let us look at the current economic conditions of the United States and compare these conditions with other developed countries.