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How the United States built a welfare state for the wealthy

- February 12, 2016
Scrooge McDuck. (AP)

Syracuse University political scientist Chris Faricy is the author of the newly published book “Welfare for the Wealthy.” The book has been called “critically important” and “eye-opening.” He kindly answered some questions via email. A lightly edited transcript is below.

Q: The conventional wisdom is that the Democrats want to expand government and Republicans want to shrink it. But you argue “a vote for the Republican Party is not necessarily a vote for smaller government.” Why is that?

The Republican Party is not immune from electoral pressures to use the federal government to benefit Republican constituencies. The main difference between Democrats and Republicans is not whether to spend federal money but rather who those constituencies are.

For the GOP, two important groups are wealthier households and businesses. Republicans have pursued policies that benefit both — things like government subsidies for IRAs and Health Savings Accounts (HSAs).

Q: A key element of this more “private” welfare state is a tax expenditure. Can you define that briefly?

Most people know tax expenditures by its informal name – a tax break. Budget experts and many policymakers (including Republicans such as [House Speaker] Paul Ryan) consider targeted tax breaks as being similar to actual government spending.

Both tax expenditures and spending programs direct federal money to government-approved activities or groups. Both influence the private market by picking winners and losers, and increases in either one are ultimately paid for through higher taxes, lower spending for other programs, or increased borrowing.

In 2015, the federal government spent over $1 trillion via tax breaks and the majority of that money went to social welfare programs.

Q: You argue that tax expenditures disproportionately benefit the wealthy and not the middle class or the poor. What are some examples of programs that do this?

One example is the collection of tax subsidies for private pensions. In 2015, the average household in the top 1 percent received pensions subsidies worth over $13,000 while the average benefit for a middle-class family was only $1,000.

The main reason for this discrepancy is the progressive federal income tax structure. For example, if a high-income worker in the 39 percent bracket contributes $10,000 for her pension, she receives a subsidy of $3,900. If a lower paid worker in the 10 percent bracket excludes the same $10,000 for her pension, the tax break is worth only $1,000.

Q: So because I have an employer-sponsored 401K and health care plan, take the home mortgage interest deduction on my tax return, and save money for my kids’ college education in 529 accounts, I am a great illustration of what you’re talking about.

Yes, you are a welfare queen. Many tax expenditure programs for private welfare just reward wealthy, white-collar professionals for saving money that they were already saving.

The opportunity to take advantage of federal tax subsidies is not evenly distributed throughout the economy. Wealthier citizens receive more generous welfare subsidies since they are more likely to be offered employer benefits, can afford larger suburban homes, and have enough disposable income to save.

Q: What’s the political logic here? Why would Democrats and Republican support different kinds of social welfare spending?

Political parties mobilize partisan voters and interest groups by using their government power to distribute benefits and services. In essence, it is the logic of Jude Wanniski’s “Two Santa theory.”

The Democratic Party built a successful voting coalition around their creation of the New Deal and Great Society programs. Republicans countered the Democratic Santa of public programs with their own Santa of tax expenditures starting in the late 1970s.

The same is true now. For example, Republican presidential candidate Marco Rubio is offering new tax credits for paid family leave and health insurance.

Such subsides can also be sold to voters as tax relief, preempt new Democratic proposals for government-run programs, lower effective tax rates for the wealthy, and reduce the amount of future revenue that Democrats might want to spend.

Q: There is a correlation between the growing polarization of the Democratic and Republican parties and the rise in private welfare spending like tax expenditures. What’s behind that correlation?

Political polarization relates to increased tax subsidies in three ways. First, polarization has increased the difficulty of passing new spending through the normal budget process and therefore privileges subsidies with fewer legislative veto points.

Second, as polarization has reduced the public trust in government, legislators have had to find a way to fund their policy priorities without being perceived as growing the government.

Finally, polarization has been asymmetric — with Republicans becoming more conservative than Democrats have become more liberal. Because of this, periods of divided government favor political compromises that use tax expenditures.

Q: You link the growth in tax expenditures to the growth in inequality. What’s the nature of that link, and why might it arise?

In my analysis, I show that Republican control of the federal government has contributed to the rise of income inequality by expanding social welfare tax expenditure programs at the expense of discretionary social spending. This social policy strategy moves federal money to the rich and middle class and away from more vulnerable populations all in the name of economic security.

Q: Most Americans don’t really seem to want the government to spend money helping relatively wealthy people get more wealthy. There’s consistent majority support for raising taxes on the wealthy, for example. So why has there not been any real public outcry or backlash as tax expenditures have grown?

Most citizens, even educated ones, do not understand who primarily benefits from tax subsidies. The complexity of tax expenditures makes it easier to distribute federal money to unpopular groups such as the wealthy and corporations.

And middle-class voters who use these programs (although to a smaller degree) don’t want to give up these benefits, even if in the abstract they want the government to reduce inequality.

Q: You say that the U.S. welfare state is “European in size but not in spirit.” What does that mean, and is it ever likely to change?

The United States government spends more on social welfare programs per capita than most European countries once we include both traditional public spending and tax subsidies. But contrary to European welfare states, benefits are not concentrated on the poor in the U.S.

In essence, there are two American welfare states. A public one built primarily by Democrats that serves the elderly and the poor and a private one built by both parties but expanded by Republicans that provides welfare to the wealthy.

In an era of rising inequality, a social system that spends hundreds of billions each year to provide a safety net to the richest Americans could prove politically unsustainable.