"A lot of people claim this, but Im curious how this statement (and the theory it is based on) reconciles with the observation that countries with the highest taxation have the lowest poverty rates."
Well I'm not sure about your statistics, but let's stick to the example given, Canada. Since the aggressive institution of the welfare state, per capita incomes have decreased rapidly.
Let's look at another vaunted example of yours and other welfare state apologists : sweden.
http://www.mises.org/story/2259
"Until the second half of the 19th century, Sweden was fairly poor. But far-reaching free market reforms in the 1860s allowed Sweden to benefit from the spreading Industrial Revolution.
And so, during the late 19th and early 20th centuries, Sweden saw its economy rapidly industrializing, driven by the many Swedish inventors and entrepreneurs.
"
"But between 1950 and 1976, Sweden experienced an expansion in government spending unprecedented during a period of peace, with government spending to GDP rising from about 20% in 1950 to more than 50% in 1975. Virtually every year, taxes were increased while the welfare state expanded relentlessly, both in the form of a sharp increase in the number of government employees and ever more transfer payment benefits.
During the first 20 years, this relentless government expansion took place seemingly without ill effect, as Sweden benefited from rapid global growth — although Sweden's growth had already started to slip in relative terms, from well above average to just average. This changed in the 1970s after Olof Palme, from the left wing of the Social Democratic party became Prime Minister. Palme stepped up the socialist transformation in Sweden, rapidly increasing anti-business regulations and sharply increased payroll taxes."