The Hidden Side of the American Welfare State

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The Hidden Side of the American Welfare State

Magazine article excerpt

By: Christopher Howard

Date: 1993

Source: Howard, Christopher. "The Hidden Side of the American Welfare State." Political Science Quarterly 108 (1993): 411–416.

About the Author: Christopher Howard (b. 1961) is an Associate Professor of Government at the College of William and Mary. He is the author of The Hidden Welfare State: Tax Expenditures and Social Policy in the United States (1997) and The Welfare State Nobody Knows: Debunking Myths about U.S. Social Policy (2007).

INTRODUCTION

For the first 150 years of American history, the federal government provided little direct support to American citizens. Throughout most of this period, federal income remained severely limited, relying largely on tariffs and the sale of federally owned real estate. While many Americans felt compassion for the needy, few believed the responsibility for their care lay with the government, and churches and other charitable organizations played the major roles in indigent care.

When the stock market crashed in 1929, the American economy ground to a halt as banks failed, businesses closed, and jobs vanished. The ranks of the unemployed swelled, and poverty ballooned, particularly among the elderly. By the mid–1930s, numerous politicians had concluded that the federal government did have a responsibility to provide income for elderly Americans, as well as other forms of basic assistance for other citizens.

In the two decades before the Depression, several states passed laws providing assistance for single mothers. These programs, known as mothers' pensions, provided monthly cash grants to single mothers and were the first formal welfare programs enacted in the United States. However, these programs were funded and administered locally, meaning that eligibility requirements and benefit levels varied widely across the country.

In 1935, with the United States spending heavily on work programs for the unemployed, President Franklin Roosevelt announced a fundamental change in U.S. government philosophy. In his State of the Union speech, Roosevelt declared that the government should accept responsibility for protecting citizens from the major hazards and uncertainties of life. He hoped to achieve this ambitious goal by instituting federal aid programs for the unemployed, the elderly, and single mothers. Roosevelt's initiative led to the creation of the Social Security system and numerous other agencies collectively known as social welfare programs.

From their inception, the federal government's welfare programs created controversy, as political forces battled over who should be served, how they should be helped, and how much help they should receive. Government social programs grew slowly, then expanded dramatically during the 1960s as part of Lyndon Johnson's War on Poverty. By 2001, the government ran six different departments that distributed benefits including food stamps, housing support payments, assistance for Women, Infants, and Children (WIC), Medicaid, and Head Start. These programs, including both state and federal funds, cost an estimated $434 billion in 2000, or about $5,600 per tax-paying household.

While cash payments to single mothers and food stamps clearly qualify as welfare, other government expenditures may also fit that description. For example, some analysts argue that the United States subsidizes home ownership, because homeowners receive government assistance in the form of a mortgage interest deduction. Corporations also receive tax reductions for pensions, insurance, and some other benefits, making them the beneficiaries of an indirect form of government assistance. Though such expenditures are not normally classified as welfare, some analysts argue that they should be.

PRIMARY SOURCE

STRUCTURE OF THE HIDDEN WELFARE STATE

Earlier I argued that tax expenditures and other forms of indirect spending belonged in any comprehensive account of modern welfare states, no matter what definition of welfare state was used. The definition does make a difference, however, in determining the overall size of the hidden welfare state. If one defines the welfare sate narrowly as comprising only those programs targeted at the poor, few tax expenditures in the United Sates qualify. On the other hand, such a definition excludes programs like Social Security and Medicare that policy makers, academics, and ordinary citizens routinely include when they discuss U.S. social policy or the American welfare state.

To most people, a welfare state guarantees a minimum standard of living and protects citizens against losses of income beyond their control, especially those caused by retirement, sickness, disability, or unemployment. This welfare state contains a public assistance component and a social insurance component. It serves both the poor and the middle classes. Tax expenditures loom large under this standard definition of the welfare state.…

This simple side-by-side comparison is revealing. Tax expenditures with social welfare objectives cost the national government the equivalent of $175 billion in fiscal year 190. This sum was roughly one-third of what the government spent on traditional social programs. Seen from another angle, the U.S. government paid out an estimated three dollars in tax expenditures with social welfare objectives for every ten dollars it collected in individual and corporate income taxes in 1990.

The relative importance of tax expenditures varies by function. The Untied States spends as much or more on social services and on employment and training through the tax code as it does through direct spending. The key provisions are tax expenditures for charitable contributions and child care. The government spends approximately one dollar through the tax code on health and on income security for every three dollars of direct spending. Very little is spent on tax expenditures for low-income housing.

In absolute dollars, the most important categories of tax expenditures are income security, especially retirement security, and health care. The tax expenditure for corporate retirement pensions ($60 billion) is the third largest social program in the American welfare state after Social Security and Medicare. Tax expenditures for Social Security benefits and Individual Retirement Accounts (IRAs) add another $28 billion to retirement security. All of these programs benefit the same citizens—workers with long and stable histories of wage-earning—who fare best in the visible welfare state. The tax expenditure for corporate health insurance ($36 billion) is almost as large as Medicaid.…

The tax expenditures for corporate pensions, health insurance, and other fringe benefits demonstrate that the line separating public and private is not a rigid barrier…Some medium-size and smaller tax expenditures subsidize public programs: Social Security, Medicare, workers' compensation, and public assistance benefits all enjoy favorable tax treatment. These latter subsidies are comparatively modest. Altogether, tax subsidies for corporate welfare programs are three times those for government programs.…

Tax expenditures accentuate the importance of the revenue committees (House Ways and Means, Senate Finance), which already have jurisdiction over Social Security, Medicare, and unemployment insurance. What most distinguishes the visible and hidden welfare states are the agencies responsible for administering their respective programs. Most direct spending programs are administered by the Department of Health and Human Services. Others are administered by the Departments of Labor, Housing and Urban Development, and Agriculture. The Treasury Department, on the other hand, is responsible for all tax expenditures, whether they are classified as income support, health, housing, employment and training, or social services. One could argue that the broad range of tax expenditures makes the Treasury, rather than Health and Human Services, the most comprehensive social welfare agency in the United States. Clearly, the addition of some three dozen tax expenditures and yet another social welfare bureaucracy reinforces the prevailing image of the American welfare state as fragmented and disjointed.

Tax expenditures become even more important if we adopt a broader definition of the welfare state. Some scholars, especially those who use Scandinavian welfare states as their point of reference, believe that welfare states do more than provide assistance to the poor and social insurance to the middle classes. In their view, a third function of welfare sates is "ensuring that all citizens without distinction of status or class are offered the best standards available in relation to a certain agreed range of social services." This range of services varies over time and cross-nationally, but it usually includes education and all housing programs. Laws governing minimum wages, consumer protection, and collective bargaining are sometimes included in this definition, but they are omitted here as borderline cases that are hard to express in terms of dollars spent. Some of these scholars stipulate further that social programs must promote income equality, must redistribute income downward; I do not preserve this restriction.

Using this definition, direct spending for social welfare increases from approximately $540 billion to $590 billion. The change in tax expenditures is more dramatic. They increase from roughly $175 billion to over $300 billion. They now exceed one-half of total direct spending for social welfare and one-half of all income tax receipts. Most of this increase is due to the inclusion of middle-class housing programs such as the home mortgage interest tax deduction.…Most housing programs are administered through the tax code rather than appropriations; the U.S. government spends twice as much on housing tax expenditures as on traditional housing programs.

Whether one favors a standard or expansive definition of the welfare state, one crucial fact remains: the middle-and-upper-income classes are the main beneficiaries of the hidden welfare state.

SIGNIFICANCE

Much of the ongoing debate over the scope and focus of federal welfare spending hinges on definitions, specifically concerning which government spending is considered welfare. The U.S. government often directly or indirectly subsidizes activities it feels are beneficial, often by reducing federal taxes for those who participate. Tax breaks for home ownership and charitable contributions are examples of such hidden subsidies, though they are rarely defined as welfare because they do not involve direct cash payments.

Military expenditures frequently provide direct or indirect benefits to corporations; defense contractors for example often receive contracts that virtually guarantee them a profit. U.S. military expenditures in the Middle East directly benefit the gasoline and automotive industries, both of which need steady supplies of petroleum in order to remain profitable. Yet these expenditures, which clearly help maintain profits in both industries, are not generally viewed as welfare spending.

The federal government has occasionally bailed out failing companies or even entire industries. With Chrysler Motors on the verge of bankruptcy in 1979, the federal government guaranteed millions of dollars in loans to keep the floundering carmaker afloat. In mid–2006, Delta Airlines became the latest U.S. airline to announce that it was shutting down its corporate pension plan. Despite the shutdown, the company's pilots will still receive their benefits thanks to the federally funded Pension Benefit Guaranty Corporation, which was expected to shoulder around $6 billion in costs as a result. To the extent that such bailouts help a for-profit corporation remain in business, they amount to corporate welfare, though they are rarely described as such.

The United States government spends more than $2 trillion dollars each year. In many cases, the difference between a worthwhile expenditure and blatant government waste remains entirely a matter of perspective.