Hidden Welfare State

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The Hidden Welfare State is a term coined by Christopher Howard, assistant professor of government at the College of William and Mary, to refer to tax expenditures with social welfare objectives that are often not included in discussions about the U.S. welfare state. Social Security, Medicare, and Aid to Families with Dependent Children (AFDC, now Temporary Assistance to Needy Families) are programs that constitute the visible welfare state of direct expenditures. Social welfare tax expenditures are equivalent to direct expenditures for income sercurity, health care, employment and training, housing, social services, education, and veterans' benefits. Examples of tax expenditures with social welfare objectives include incentives to encourage retirement saving, charitable contributions, higher education, and homeownership, as well as exclusion from taxable income of benefits from some of the social welfare direct expenditure programs. Tax expenditures and direct expenditures essentially have the same effect on the federal budget. Direct expenditures represent the amount of money the government is paying out, whereas, tax expenditures represent the amount of money not collected by the government. To better understand the concept of social welfare tax expenditures and how they are similar to direct expenditures Edward Berkowitz gives the example of “if a person owes $100 in taxes to the government and the government forgives the obligation on the condition that the person buy a health insurance policy then the situation is the same as if the government itself spent the $100^[1].” Each expenditure also targets a specific portion of the population in an effort to give the selected population some type of relief.

Contents 1 Structure of the Hidden Welfare State 2 Origins 3 Politics of Hidden Welfare 4 See Also 5 Notes 6 References

[edit] Structure of the Hidden Welfare State

The hidden welfare state is almost half the size of the visible welfare state. In 1995, the government spent 900 billion dollars on the visible welfare state and 400 billion dollars on tax expenditures via social welfare^[2]. The hidden welfare state provides goods and services directly comparable to those provided in the visible welfare state of direct spending. Similar to public assistance and social insurance programs of the visible welfare state, there are tax expenditures for income security, health, employment and training, housing, education, and social services. The U.S. government spends as much, or more, on social services and on employment training through the tax code as it does through direct spending^[3].

The Treasury Department and Internal Revenues are responsible for all tax expenditures. In general, the government uses the tax code to entice market actors to consume in socially desirable ways. Tax expenditures are financial incentives to encourage employers and individuals to purchase goods like health care, housing, and child care. Tax expenditures also subsidize public programs, such as Social Security and Medicare, which basically benefit all citizens. The Earned Income Tax Credit is an example of when the Treasury provides cash directly to individual taxpayers with no restrictions concerning the type of good or service individuals can purchase or when they can use the cash^[4].

As David A. Rochefort, a Northeastern University professor, points outs, “the most significant function in the hidden welfare state is income security, accounting for roughly half of all expenditures, and the single most important program of this tax breaks in support of employer-provided pensions. Exclusion of employers’ health insurance contributions from corporate taxation represents another leading area of expenditure that when combined with retirement initiatives, adds up to an enormous public subsidy for employers and their workers"^[5]. These large subsidies on employer benefits are one reason affluent citizens tend to benefit from the hidden welfare state the most. These plans and benefits are usually available in larger companies, unionized companies, and better paying occupations. Also, tax expenditures often benefit activities that the less affluent can not afford to engage in, such as owning a home. The majority of tax expenditures go to people who earn more than the median income^[6]. Who benefits from the visible welfare state seems to be more equal. Most benefits of the visible welfare state go to people with average income. Christopher Howard research reveal that one quarter of direct spending goes to public assistance and three- quarter goes to social insurance and that the visible welfare state serves a far greater proportion of individuals below the poverty line than does the hidden welfare^[7]. Only about 5 percent of tax expenditures are targeted at people at or near the poverty line^[8]. Many Americans are aware of the national housing policies that help the poor through subsidized rent or public housing, however, it is misleading to think of U.S. housing programs as small and only targeted at the poor. Many middle and upper class people benefit from housing programs because 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^[9]. As Thomas Shapiro, author of “The Hidden Cost of Being African-American, points out, the fact that most Americans are not aware of the many housing tax expenditures that the government provides shows that these programs are “ingrained and taken for granted by home owner subsidies have become, as opposed to the intense annual scrutiny programs assisting needy families receive”^[10].

[edit] Origins

The visible welfare state was primarily formed during two major periods, the mid-1930’s and the mid-1960’s. In the first period the Social Security Act was created and Medicare, Medicaid, and a variety of social service, education, and job training programs that targeted the poor was created during the second period. Although, the visible welfare state was formed in two big burst, the hidden welfare state has been steadily created throughout the twentieth century. The government began creating tax expenditures in the twentieth century. Since the 1910’s at least two tax expenditures have been created each decade^[11]. Even during periods of resistance to social policy initiatives in the late 1910’s and 1920’s, tax expenditures were created. In the 1930’s tax expenditures passed that exempted benefits from public programs created during the New Deal. In the 1940’s, 1950’s, and 1960’s tax expenditures related to housing and health care passed. Since the 1960’s tax expenditures have been passed that offer individuals’ alternative sources of income and targeted a variety of needs of low-income taxpayers.

Throughout American history the enactment of direct spending social welfare programs has caused debate, controversy, resistance. However, history shows that the tax expenditures associated with the hidden welfare state have had been fairly easy to enact. They have been enacted at a steady rate and have not been the result of social movements or mass protest. A reason tax expenditures have been able to be enacted without much debate is simply because many people did not know about them. These items were not included in the governments until after 1969. As Edward Berkowitz explains “people who wanted to know the value of, say, the mortgage deduction needed to do the calculations themselves, making an esoteric subject that much more arcane^[12].” Moderate and conservative members of Congress have been the main people behind many of the tax expenditures that make up the hidden welfare state, which is ironic because they are usually seen as antagonistic to new social programs^[13]. Tax expenditures have been enacted with relative ease. As Christopher Howard, points out “the tax expenditure for corporate pensions had probably the quietest start of any major social program in contemporary welfare state. It was approved without debate late one night as Congress worked out the details of the Revenue Act of 1926^[14]. The Earned Income Tax was created during the debates over the Family Assistance Plan. However, although the Family Assistance plan generated a lot of attention, there was little debate over the Earned Income Tax when it was passed.

Tax expenditures have also had an easier time being passed than direct expenditures because tax expenditures are funded and authorized by the same congressional committee in each house, whereas direct spending programs are not. In order for a direct spending program to be passed, new legislation has to be passed. However, tax expenditures are also usually added to legislation in must pass revenue bills created by the revenue committees. For example, the Targeted Jobs Tax Credit was passed as an amendment to the Revenue Act of 1978. Tax expenditures have also been steadily passed because of what Howard calls their “inherent ambiguity. Tax expenditures are able to gain diverse support because tax expenditures are often ambiguous in terms of their clientele (serve, workers, employers, service providers), and in terms of their purpose (social welfare, economic stimulation, labor support, political constituency, and more^[15]

[edit] Politics of Hidden Welfare

Attention has recently been brought to the hidden welfare state because the hidden welfare state affects numerous aspects of society. In terms of social programs, the US’s social welfare state is smaller than many European Countries. The United States has yet to institute successful European social welfare programs, such as universal health care. However, if the hidden welfare state of tax expenditures with social objectives is taken into account, the American welfare state becomes a lot of larger. Thus, showing that it may not be that the American welfare state is smaller or laggard in comparison to theEuropean welfare state, but instead that the U.S. welfare state is just structured differently. The United States welfare state is comprised of social welfare programs, as well as, tax expenditure programs.

Knowledge about the hidden welfare state is also important because it shows that a larger portion of the U.S. population benefits from welfare than it is usually believed. Many of the social welfare programs are targeted to help lower-income families, who have throughout history have been racial minorities, such as African Americans. This has caused controversy and a stigma to be attached the welfare. However, this hidden welfare state shows that welfare is not something that should just be associated with the poor or racial minorities. Many affluent whites benefit from the welfare state, too, through tax expenditures related to retirement saving, charitable contributions, higher education, and homeownership.

[edit] See Also

• Corporate welfare
• Public welfare
• Welfare (financial aid)
• Welfare

[edit] Notes

[edit] References

(1) Berkowitz, Edward D. "Revealing America's Welfare State." Reviews in American History 26.3 (1998): 620-625. Academic Search Premier. 31 Mar. 2008<http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=1096676&sit e=ehost-live>

(2) Howard, Christopher. "The Hidden Side of the American Welfare State." PoliticalScience Quarterly 108.3 (1993): 403-436. JSTOR. 1 Apr. 2008 <Stable%20URL:%20http://links.jstor.org/sici?sici=0032 3195%28199323%29108%3A3%3C403%3ATHSOTA%3E2.0.CO%3B2-E>

(3) Howard, Christopher. The Hidden Welfare State: Tax Expenditures and Social Policy in the United States. New Jersey: Princeton Ubiversity Press, 1997.

(4) Rochefort, David A.(2001) Book Reviews The Journal of Politics 63 (2), 630–699 doi:10.1111/1468-2508.00083

(5) Shapiro, Thomas M. The Hidden Cost of Being African American. New York: Oxford University Press, 2004.

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