Why not let people opt out of the welfare state?

Many people who are quite capable of supporting themselves and their families are heavily entangled in Australia’s welfare system. Vast sums of money are collected in taxation only to be recycled back to the same taxpayers. A recent analysis by Peter Saunders of the Centre for Independent Studies suggests that this churning is most in evidence in middle and upper-middle income households (The Government Giveth and the Government Taketh Away, 2007, Table 2.4b, p24). On average people in the 3rd and 4th income quintiles pay about 32 percent of their income in tax (direct and indirect) and receive back the equivalent of about 28 percent of their income in benefits (including health and education services as well as cash benefits e.g. family support payments).

This churning is not innocuous because incentives are distorted along the way. Taxes on income and spending reduce incentives to earn additional income. Collective funding arrangements force some people who would prefer to use private providers of education and health services to accept the services that governments provide.

Churning is also inequitable because the taxes that people are required to pay in support of public education and health systems are not reduced correspondingly if they use private systems.

I believe that opting out has potential to be a major reform initiative. A few years ago I wrote:
The introduction of arrangements to enable people to opt out of collective funding of services may be an appropriate way to bring to an end the battle over the role of government that characterised the twentieth century. On the one hand, those people who see collective funding as having special merit would be able to continue to have a government agency pay for education, health and other services on their behalf, from the proceeds of the tax they pay. On the other hand, those who prefer to pay directly for the services they use would be able to avoid the deadweight costs associated with collective funding. (See: How Much Government?, New Zealand Business Roundtable, 2001, p 71-2).

I think it would be desirable for opting out arrangements to be consistent with the following objectives:

1. Those who opt to take responsibility for costs of family education, heath care etc should be fully compensated for costs no longer incurred by governments in providing those services.
2. Those opting out should not be subject to more than the minimum coercion necessary to ensure that they will not become a burden on the public purse in future e.g. requirements for minimum contributions to health insurance and superannuation.
3. Those opting out should continue to contribute through tax payments to the cost of supporting people who are unable to provide for themselves.
   Those who want to continue to obtain the services provided by the welfare state and to continue to pay for those services through their taxes should be able to do so with minimal change in current arrangements.

It is possible that a variety of different opting out arrangements could be consistent with those objectives, but the proposals put forward by Peter Saunders (see reference above) seem to me to deserve serious consideration.