For the past seven years, I have examined the relationship between political party control of government and changes to the divided American social welfare state. Divided, in this context, means that in the United States and other countries social benefits and services are sometimes provided directly by the public sector (a public housing project) and sometimes by the private sector with government encouragement (tax breaks for home mortgages).
This is a phenomenon that’s received some academic attention over the years (see books from Suzanne Mettler and Jacob Hacker) and even from policy entrepreneurs who’ve tried to popularize the term "tax expenditures," but the full significance of the divided welfare state to American political economy remains underappreciated. Tax expenditures are both a bigger phenomenon than most people realize and also a more partisan and more ideological one that amounts to a parallel Republican welfare state dedicated to the upward redistribution of economic resources.
1) The divided welfare state is a partisan phenomenon
Democrats and Republicans both have their preferred tax breaks and spending programs, but in my new book, Welfare for the Wealthy, I demonstrate that there is a systematic partisan tendency to the evolution of the welfare state. When Republicans take control of the White House and Congress, there is a subsequent rise in the number and value of tax subsidies for private social welfare (often called tax expenditures). These programs, while not as well-known as Social Security and Medicare, are still recognizable to most citizens as tax breaks.
Republicans have expanded tax deductions for individual retirement accounts (IRAs), created health savings accounts (HSAs), and extended exclusions for employment-based social benefits and services (like educational assistance).
The current crop of Republican presidential candidates wants to continue this trend. Marco Rubio is offering tax credits for paid family leave, and both Rubio and Jeb Bush are proposing increased tax subsidies for health insurance. These new tax expenditures would add to more than 80 social welfare programs — costing a total of $1.14 trillion — already embedded in the tax code. The amount of tax expenditures that go toward things like health care and pensions is larger than the entire discretionary defense budget.
2) The GOP hands out "free stuff" for the same reason as Democrats.
Many Republicans believe that Democrats win elections by giving away government benefits to their core voters such as unions, the working class, and racial minorities (e.g., Jeb Bush’s recent comments about black voters and free stuff). However, the Republican Party is not immune from the electoral pressure to use government power to provide federal money to their most loyal supporters. The main difference between the two political parties is not whether to deliver government benefits to supporters but rather who those supporters are.
The Democrats and Republicans have opposing socioeconomic core constituencies.
The Republican Party’s core socioeconomic voting groups are wealthier households and businesses, both of which benefit when social welfare is provided through the tax code rather than through explicit spending.
The main reason is that given the progressive tax structure of the federal income tax, tax breaks deliver more value to richer households. For example, if a high-income worker in the 39 percent bracket excludes $10,000 from her taxable income, she receives a government subsidy of $3,900. If a lower paid worker in the 10 percent bracket excludes the same $10,000, her tax break is worth only $1,000.
Secondarily, the privatized welfare state offers direct benefits to the private companies whose services it purchases. Funding retirement security via a tax break for savings accounts, for example, generates profits for financial services companies that manage the accounts. It is not a coincidence that banks, real estate companies, and other industries that benefit the most from the federally funded private welfare state also donate more heavily to the Republican Party than to Democrats.
Social welfare tax subsides have the additional electoral benefits of being able to be sold to voters as tax relief, erode public support for popular public programs like Medicare by offering a private alternative, preempt new Democratic proposals for government-run programs (e.g., paid family leave tax credit), lower the effective tax rates for the wealthy, and reduce the amount of future revenue that Democratic administrations will have to spend.
3) Private social welfare is a Trojan horse for upward redistribution
The rich and large corporations have grown more unpopular with the American public in correlation with the rise of income inequality, which has made it politically challenging to offer explicit arguments in favor of shifting financial resources in their favor. Proposing tax breaks for popular social goals like financing college tuition, saving for retirement, or paying for medical bills is a convenient way of skewing the distribution of post-tax income upward while eliding explicit discussion of the distributional issue.
Politicians are able to publicly frame these proposals as conservative solutions for providing citizens’ economic security while ignoring or minimizing the reality that this structure produces the greatest monetary assistance to households with the least financial need.
For example, there are a number of tax-subsidized retirement accounts of which 401(k)s and IRAs are the most famous and important. These programs cost the federal government more than $150 billion annually, and 68 percent of the total benefits accrue to the wealthiest households that on average earn over $200,000 a year. But because many middle-class families also take advantage of these programs, they are much easier to market politically than straightforward cuts in the top income tax rate.
4) Republicans pair social tax subsidies for the rich with public spending cuts for the poor
In my analysis, I found that Republicans in power increased tax subsidies for private welfare and paid for these programs with cuts to discretionary public spending. Republicans in the modern era have shrunk the public welfare state while using federal subsidies to build up a private social system.
Republicans enjoy the institutional advantage of being able to increase their preferred form of government spending "off budget" while forcing Democrats into public battles over discretionary spending in the formal budget. But while most formal spending needs to be reauthorized on an annual basis or it goes away, tax loopholes live until they are explicitly repealed, meaning that only the formal budget is repeatedly taken hostage.
Republicans increase tax subsides since these benefit their constituencies and pay for them with cuts to programs that benefit Democratic voting groups, while Democrats try the reverse strategy of taxing the rich to finance benefits for their base. The GOP trade-off of tax subsidies financed with discretionary spending cuts presents the illusion of scaling back government but in reality maintains the government hand in steering the economy while simply changing the beneficiaries.
5) The total US welfare state is huge, but it’s not targeted at the needy
In Welfare for the Wealthy, I show that the combination of tax subsidies for private welfare and cuts to public programs produces higher levels of income inequality in the United States.
The figure above shows two lines. The bold line represents social tax expenditures as a proportion of total government social spending (public plus tax subsidies), and the dotted line shows changes to the level of income inequality. As you can see, the lines move together quite well over time from 1970 to 2012.
The combined US welfare state, encompassing both traditional public programs and tax subsidies, is as large as most European welfare states but not nearly as effective in combating poverty and inequality. The American welfare state divides beneficiaries by socioeconomic class and thus reinforces existing inequities instead of reducing them.
Eliminating current policies that contribute to the growing income gap could be a powerful tool for curbing inequality. The GAO, CBO, and former Federal Reserve Chair Alan Greenspan have all recommended that tax subsidies be included alongside traditional spending in the annual budget process.
This change would create an environment for more efficient government spending and reduce welfare subsidies for the wealthy. If tax subsidies for private welfare are placed alongside public spending in the formal budget process, then policymakers could be held accountable when they choose to cut programs for the poor while increasing welfare for the wealthy.
Christopher Faricy is the author of Welfare for the Wealthy: Parties, Social Spending, and Inequality in the United States (Cambridge University Press 2015).