The Haves and the Have Lots

The American welfare state is bigger than you think, and more unfair than you’d want.

By Christopher Howard

Tagged EntitlementsWelfare

A father goes grocery shopping for his family and returns with the basics–milk, bread, peanut butter, cereal, applesauce, frozen pizzas. He also comes home with a large steak, which he alone plans to eat, and a bottle of good wine, which his pregnant wife cannot share. Money is a little tight, so he buys fewer vegetables and substitutes Kool-Aid for fresh juice. He uses a credit card, knowing they won’t be able to pay off the full balance next month. No one in the house starves that week, and the father eats and drinks unusually well.

If this happened once, most of us would say the guy was being a
little selfish. But if he acted this way year after year, we would be
deeply troubled and tell him to get his priorities straight. And yet
too many U.S. social programs operate exactly this way: While they
serve many people, they often give the most help to those who need it
the least. Classic social insurance programs like Social Security and
Medicare do, indeed, distribute benefits widely and offer extra help to
the poor and the very sick. And means-tested programs like Medicaid and
Temporary Assistance for Needy Families (TANF, also known as “welfare”)
are aimed exclusively at the disadvantaged. Nevertheless, the ability
of these programs to fight poverty and inequality is substantially
negated by other social programs–mainly tax expenditures like the home
mortgage interest deduction and social regulations like the Family and
Medical Leave Act (FMLA)–that benefit primarily the middle and
upper-middle classes. While these latter policies may have their
individual merits, in their current form they often widen the gap
between haves and have-nots.

Economists criticize many of these policies for their
inefficiency–noting, for example, that the mortgage deduction in the
U.S. tax code encourages people to over-invest in large, luxury homes.
But an equally powerful objection is rooted in fairness. A number of
social policies make a mockery of the goal, enshrined in the
Constitution, that government exists to “promote the general welfare.”
Our long-standing commitment to equal opportunity rings hollow when
certain programs help people with good jobs and incomes to get health
insurance, housing, parental leave, and retirement pensions, but offer
little help to the poor and near-poor. We may disagree over how hard
government should try to reduce poverty and inequality. Surely,
however, when millions of Americans live in poverty and inequality has
reached record levels, we can agree that public policies should not
make these problems worse.

Call it phony universalism, Robin Hood in reverse, or socialism for
the rich–whatever the name, the U.S. government is effectively
targeting tax subsidies and legal protections at the more advantaged
members of American society. The level of support is enormous,
amounting to hundreds of billions of dollars each year. For every
dollar spent on traditional anti-poverty programs, the United States
spends almost as much through the tax code helping individuals who are
lucky enough to have health and pension benefits at work or rich enough
to buy a nice home (these are often the same people). This is how the
United States can spend a ton of money on its welfare system and yet
make fewer inroads against poverty and inequality than other affluent
nations. Imagine a campaign against child obesity that encouraged kids
to exercise daily and eat more Cheetos: U.S. social policy is beset by the same kinds of contradictions.

Some policy-makers realize what’s going on. When the Bush
Administration proposed new tax incentives for Health Savings Accounts,
the Center on Budget and Policy Priorities quickly pointed out that
most of these benefits would go to affluent taxpayers. The Democratic
authors of the American Dream Initiative, a set of policies designed to
expand and strengthen the middle class, were careful last year to
propose refundable tax credits for college tuition so that more people
with below-average incomes could benefit. But it’s not enough to oppose
bad ideas, or layer potentially good new programs on top of
dysfunctional old ones. We also need to scrutinize existing programs
and figure out how they got started, whom they really help, and what we
could do to change them. Otherwise, we may find ourselves repeating
these same mistakes as we respond to persistent poverty and growing
inequality today. Moreover, if we can find ways to spend less on some
of these existing programs, we can free up monies to serve more
pressing social needs. The goal should not be to exclude the middle
class from these programs but to ensure that more governmental benefits
are distributed to those who truly need help.

The Strange Shape of U.S. Social Policy

The programs in question are rarely mentioned in debates over social
policy or in studies of the welfare state. The unstated assumption is
that U.S. social programs should resemble those in Europe. From this
perspective, social programs are supposed to take the form of social
insurance and grants. The former is broadly inclusive, and the latter
is usually aimed at the poor. Because the United States spends a
relatively small share of its gross domestic product on these kinds of
social programs, it is considered a laggard or a semi-welfare state by
observers on both sides of the Atlantic.

But the big difference between the American welfare state and its
European cousins is not so much the level of government involvement as
it is the mix of policy tools. After all, social insurance and grants
are not the only tools used to make social policy. Governments also
employ tax expenditures, social regulations, and loan guarantees, among
other mechanisms, and the American welfare state relies on these
alternatives more than any other nation. Instead of national health
insurance, for instance, we offer tax breaks to those who purchase
private health insurance, usually employers. Instead of subsidizing the
wages of disabled workers, we require companies to make the workplace
accessible to the disabled (via the Americans with Disabilities Act).
The historic G. I. Bill extended loan guarantees to help veterans
become homeowners; it did not build them homes.

Turning our attention to these stealthy social policies, it becomes
clear that the American welfare state has expanded substantially in
recent decades. While we haven’t witnessed a “big bang” of innovation
comparable to the mid-1930s or mid-1960s, we have seen a steady stream
of new social programs since the 1970s. You wouldn’t notice this
development, though, if you were looking only for European-style social
programs. Notable additions include the far-reaching Employee
Retirement Income Security Act (ERISA) of 1974, which established
detailed regulations governing the financing, eligibility, and benefits
of company pension plans; created the Pension Benefit Guaranty
Corporation (PBGC) to guard against the bankruptcy of those plans; and
produced a new tax break that gave birth to individual retirement
accounts. The Earned Income Tax Credit (EITC), designed to boost the
incomes of low-wage workers, became law a year later. Regulations
governing employer health benefits passed in 1985 and 1996. The
Americans with Disabilities Act (ADA), which President George H. W.
Bush has called one of the highlights of his presidency, became law in
1990. The FMLA, compelling many employers to offer parental leave, was
one of the first legislative accomplishments of the Clinton
Administration, while the Child Tax Credit (CTC) was one of the main
domestic initiatives during Clinton’s second term. Tax breaks to offset
the costs of higher education emerged in 1997 and 2001. The Medicare
prescription-drug benefit, added in 2003, includes tax breaks for
employers who offer comparable drug benefits to their retired workers.

Some of these new programs grew quickly. Take the EITC and the CTC,
which together function as the equivalent of European-style family
allowances. In 1986 and again in 1990 and 1993, officials expanded
eligibility and increased benefits for the EITC; as a result, the EITC
now costs more than TANF, food stamps, or unemployment benefits, making
it the most important means-tested income transfer in the American
welfare state. The CTC became just as large as the EITC in much less
time. The congressional Joint Committee on Taxation estimates that
these two provisions in the tax code cost almost $90 billion combined
in 2006.

Other, older tax expenditures have posted significant gains as well.
Even adjusted for inflation, the cost of the largest tax expenditures
has more than doubled. In most cases, growth has been due less to
legislative changes than to demographic and economic forces (e.g.,
higher health care costs, an aging population). Tax breaks for company
health and pension plans have been around for decades. In 1980, these
provisions cost $12 billion to $15 billion each. This year, subsidizing
corporate health benefits will cost an estimated $100 billion in lost
tax revenues ($115 billion if one includes similar tax breaks for
individuals and the self-employed). The cost of subsidizing private
pensions is greater. And all the tax breaks for homeowners–deductions
for mortgage interest, property taxes, and capital gains–now exceed
$100 billion, up from $20 billion in 1980. These subsidies dwarf
everything spent on rental housing for the poor (all these figures come
from the Joint Committee on Taxation; other analysts and organizations,
using different assumptions and techniques, put the cost of tax
expenditures even higher).

To those on the political left, these developments might be cause
for celebration, proof that the American welfare state can still expand
to meet citizens’ needs. But such celebration would likely be tempered
once it became clear who is helped by these unconventional social
programs. Several of these programs are designed to support
employment-based benefits, but many American workers don’t receive such
benefits in the first place. When the U.S. government offers tax
incentives for private retirement pensions, it is helping managers and
professionals more than sales clerks or farm workers; full-time workers
in large corporations more than those who work part-time or for a small
business; and unionized more than nonunionized workers. According to
the latest figures from the Congressional Budget Office, only one-third
of all workers earning less than $40,000 are actively participating in
tax-favored retirement plans, compared with more than three-quarters of
workers earning over $120,000. Likewise, when the PBGC bails out
failing pension plans, it’s going to benefit airline pilots and
steelworkers, not cab-drivers or child-care providers.

Health benefits are typically offered by the same kinds of firms
that provide retirement pensions. John Sheils and Randall Haught,
health care consultants at the Lewin Group, estimate that families
earning less than $30,000 receive only one-tenth of the value of all
tax breaks for health care. Families earning over $75,000, in contrast,
receive almost half of the total benefits, and families earning more
than $100,000 receive one-quarter [see also Jason Furman, “Our
Unhealthy Tax Code,” Issue #1]. The so-called COBRA regulations, named
after the budget act that created them, enable workers to continue
using their health insurance after leaving their job. But that assumes,
of course, that workers have health insurance to begin with and that
they can afford to pay the entire monthly premium, since their employer
no longer has to contribute. Considering that company-based health
insurance costs about $4,000 per year for a single worker and $11,000
for a family, it is unlikely that COBRA helps many workers with
below-average incomes.

Or take the FMLA, which liberals hailed as a breakthrough in family
policy upon its passage in 1993. For the first time, workers could take
time off to care for a newborn child or sick relative without worrying
about losing their job. That is certainly progress. But not everyone
can benefit from this piece of social regulation. Businesses with fewer
than 50 employees are exempt, and that covers over half of all workers
in the private sector. Recently hired workers and many part-time
workers are also ineligible. Moreover, because the FMLA guarantees only
unpaid leave, more affluent workers are better able to take the full
twelve weeks.

The Child Tax Credit would not appear to have these problems, as it
is not tied to employment. But the CTC is definitely not targeted at
the poor or near poor. Families earning less than $30,000 saved a
little over $7 billion in income taxes in 2005; families earning over
$75,000 saved twice as much. Moreover, the CTC helps many families who
earn too much to qualify for the EITC, and thus negates much of its
redistributive effect.

Other tax expenditures tilt even further in favor of the haves and
have-lots. The home mortgage interest deduction is almost exclusively a
middle- and upper-middle-class social program; more than two-thirds of
the money goes to taxpayers earning more than $100,000. Taxpayers with
incomes over $200,000, who would qualify as rich almost anywhere in the
country, benefited five times more than those earning less than
$50,000. Considering that homes are the single-most important asset for
Americans, this tax break significantly aggravates inequalities of
income and wealth. Tax deductions for charitable contributions ($36
billion) and for property taxes on homes ($22 billion) are similarly
skewed toward the rich.

We have, then, two related problems. When tax expenditures and
social regulations are routed through employers, they usually benefit
middle- and upper-middle-class workers. When tax expenditures are
directed at individual taxpayers, they usually offer larger benefits to
the more affluent. A tax deduction is worth more to someone making
$200,000 and in the 33 percent tax bracket than someone making $30,000
and in the 15 percent tax bracket. These kinds of tax breaks, in turn,
erode the progressivity of the income tax.

Strange Bedfellows

In the textbook version of American politics, Democrats want more
welfare state programs, while Republicans want less. The New Deal and
Great Society happened because Democrats controlled the White House and
enjoyed huge majorities in Congress. National health insurance came
closest to enactment during the Truman and Clinton administrations. By
contrast, many Republicans compare welfare recipients to alligators or
wolves who became too dependent on humans for food. Welfare should be
cut back, they say, and other programs privatized, to restore
recipients’ natural instinct for self-preservation.

But how can we explain the explosion of benefits during an era when
Republicans gained power nationally at the expense of Democrats? Even
as the two parties became more polarized, with congressional Democrats
becoming more liberal and congressional Republicans more conservative,
elected officials found ways to expand the role of government. ERISA
(1974), COBRA health regulations (1986), the ADA (1990), the Health
Insurance Portability and Accountability Act (HIPAA, 1996), the HOPE
and Lifelong Learning Tax Credits for higher education (1997), and the
CTC (1997) all passed under divided government. Several of them
originated during Republican administrations.

Understanding why Democrats have supported such programs is fairly
easy. For the more liberal wing of the party, it is pragmatism. In an
era of divided government, Republicans could block new spending
initiatives, and thus liberals settled for the proverbial half a loaf,
covering fewer people than they wanted and employing less traditional
tools of social policy in the hope that they would somehow become
genuinely inclusive over time. The more moderate wing of the party, the
so-called New Democrats, have embraced these programs more
enthusiastically because they feel that the Democratic Party needs to
do more to attract middle- and upper-middle-class voters. They are
particularly drawn to tax expenditures as a way for government to
influence individual and corporate behavior without creating new

The more interesting and salient question is why Republicans
cooperate. Although Democrats have been instrumental in enacting these
programs, they could not have succeeded without Republican support.
Indeed, even as Republicans have fought to restrict traditional welfare
programs, they have been strong supporters of less traditional tools of
social policy. In several instances–Senator Jacob Javits and ERISA,
President George H.W. Bush and the ADA, Senator Nancy Kassebaum and
HIPAA–Republicans were committed, vocal advocates of these new
programs. A child tax credit was part of the GOP’s Contract with
America. And Republicans during the last few decades have resisted
efforts to curb the major tax breaks for homeowners and for health and
pension benefits.

If we think of the American welfare state as a building under
construction, then Republicans have been taking a sledgehammer to some
rooms while simultaneously adding on a new wing. Why? Public opinion is
an obvious factor. For years the General Social Survey, a wide-ranging
and well-respected poll conducted by the National Opinion Research
Center at the University of Chicago, has asked Americans what they
think about different parts of government. Although they have serious
concerns about welfare and mixed feelings about the unemployed,
Americans definitely believe that government should help care for the
sick and the elderly. Few people want government to spend less on
health, education, child care, Social Security, or the poor. More
tellingly, individuals who consider themselves Republican are more
likely than not to say that government should spend more rather than
less when asked about health care, Social Security, child care, and aid
to the poor. Conservatives have trouble getting health insurance,
supporting a family, and saving for retirement, just like liberals do.
Simply ignoring these needs would have been political folly. Instead,
Republicans tried to address a number of social problems in ways that
would shift some responsibility away from government and to individuals
and corporations (it didn’t hurt that Republicans could portray tax
expenditures as tax cuts, either).

In fact, the particular shape of the American welfare state is the
result of conscious GOP efforts to stave off the emergence of a more
European-style system. For instance, comprehensive reform of company
pensions had been kicking around Congress since the mid-1960s, and its
prospects were not good. Business groups, labor unions, the Nixon
Administration, and a number of legislators from both parties had
serious reservations. The chances of passage increased, however, after
Social Security expanded dramatically in the late 1960s and early
1970s. In his autobiography, Javits makes it clear that ERISA was
designed in part to slow down the growth of Social Security–if more
workers could rely on company pensions, they wouldn’t have as much need
for public pensions. Congressional Republicans have defended tax
expenditures for health benefits in similar terms, arguing that they
represent an important line of protection against national health

Likewise, in the early 1980s, Reagan officials cut back on
disability benefits and inadvertently triggered a firestorm of
protests. Congress held numerous hearings featuring individuals who had
been unfairly purged from the disability rolls, and the courts started
ruling in favor of those individuals. Reagan officials soon backed off.
In this context, the ADA seemed like a smart move: If more handicapped
people could find and keep a job, they wouldn’t need as much financial
support from government. And in the late 1980s and 1990s, a number of
Republicans objected to how much the government spent on families who
paid for child care. What the government should do, they thought, was
help families (and especially mothers) afford to stay home with their
kids. Unable to terminate existing programs, they added on the CTC,
which can be claimed by families whether or not they pay for child
care. In short, Republicans have been adding a new wing to the American
welfare state in order to move some people out of the old rooms and
keep Democrats from building upon the old foundation. The kicker is
that those new rooms aren’t available to all.

The Future of the American Welfare State

Looking ahead, we are facing divided government for at least the
next two years. If history is any guide, there will be a real
temptation to make social policy through the tax code or regulations
rather than through social-insurance programs or grants. But the
current structure of the American welfare state should convince public
officials and advocacy groups to proceed with caution. To be sure,
while many tax expenditures and social regulations have little positive
impact on poverty and inequality, some do. Plans to increase the
minimum wage, expand the EITC, and create refundable tax credits for
education and housing could do a lot to help the poor and near-poor and
to expand the middle class. But we have inherited a number of tax
expenditures and social regulations that need fixing. Programs such as
ERISA, the FMLA, and the CTC are far less inclusive in practice than
they are on paper. In this respect, they resemble older social programs
that promote homeownership, health insurance, and retirement pensions
through the tax code–all these programs help the haves and the
have-lots more than the have-nots.

There are two paths toward a resolution of this dilemma. The first
is simply to wait and see in the hope that these programs will expand
as a matter of course. This is not as far-fetched as it seems. Social
Security, for example, did not start out as a universal program. It
originally covered about half of the labor force; domestic and
agricultural workers, the self-employed, and a number of professions
(e. g., doctors, lawyers, engineers) were excluded. Thus, in its
original form Social Security served the broad middle of American
society but did not benefit many of the poor or the more affluent, and
it stayed that way for 15 years. Policy-makers started expanding
coverage in 1950, and by the end of the decade Social Security could
legitimately be called universal. Broader coverage in turn increased
the demand for higher benefits, and by the mid-1970s Social Security
had helped cut the poverty rate among the elderly in half.

The history of the minimum wage, one of the oldest pieces of social
regulation, might offer added inspiration. The original Fair Labor
Standards Act (1938), which established the national minimum wage, was
riddled with exemptions for different industries and occupations. It
covered a smaller fraction of the labor force than the original Social
Security program. Liberal Democrats tried and failed several times in
the 1940s and 1950s to expand the scope of the minimum wage. Their
first major success occurred in 1961, when an additional two million
workers in the retail trades gained coverage. The single-largest
expansion came in 1966, as officials extended the minimum wage to
workers in construction, agriculture, and several other industries.
These amendments also covered public schools and hospitals for the
first time, and narrowed the exemption for small business.

These historical analogies start to break down, however, once we
look more closely at how their expansion actually took place. For
Social Security, a small number of advocates in the Social Security
Administration and on key congressional committees were instrumental in
winning broader coverage. These individuals were unusually skilled and
dedicated to expansion, their work was widely respected, and they
operated at a time in U.S. history when “iron triangles” of committees,
agencies, and interest groups controlled many public policies. But
these conditions don’t exist for most parts of the contemporary welfare
state. Social regulations are administered by the Department of Labor,
which has long been a second-tier agency with limited influence on
policy. Tax expenditures are administered by the Internal Revenue
Service, whose main mission is collecting revenue, not making social
policy. As a result, iron triangles largely have been replaced by more
fluid issue networks, which in the case of labor policies include a
large number of business lobbies (e.g., the National Federation of
Independent Business) that are strongly opposed to government-mandated
benefits for their employees. Economic forces won’t help, either.
Employers are cutting back on their health and pension benefits, not
expanding them. Rates of homeownership have increased very slowly. This
problem will not fix itself.

The second path is to deliberately change the distribution of
benefits. Technically, it is not hard to imagine how existing tax
expenditures and social regulations could be modified to help more
Americans. Many Americans with below-average incomes cannot take
advantage of tax deductions and tax credits because they pay little or
no income tax. Officials could convert more tax expenditures into
refundable tax credits, like the EITC. Or policy makers could cap the
value of tax breaks so the affluent couldn’t deduct the full amount of
mortgage interest and companies couldn’t deduct the full costs of
unusually generous health plans. The money saved could be used to help
lower-income families buy a home and decent health insurance. In order
to continue deducting the cost of fringe benefits from their taxes, we
could also require employers to offer those benefits to a larger share
of their workforce. The FMLA could be extended to every firm covered by
minimum-wage laws; this would cover the vast majority of workers.

Designing remedies is not terribly difficult. The hard part is
generating support for reform. The people who benefit most from
America’s tax expenditures and social regulations have considerable
political power. They vote more often, give more money to campaigns,
and belong to more interest groups than people who benefit a little or
not at all from these programs. A number of influential third-party
providers–pension funds, home-builders, health insurers–also have a
vested interest in the status quo. The same is true of organized labor,
since unionized workers tend to have good health and pension benefits.

Given these constraints, someone in power will need to become a
policy entrepreneur, a crusader. She or he will need to ask such
pointed questions as, Should the government really be subsidizing the
purchase of $500,000 homes more than $100,000 homes? Is it fair to
spend lots of money on health insurance for the poor (Medicaid) and the
affluent (tax expenditures) without helping millions of people in
between? Should any social program make inequality worse? The
basic idea is to make the status quo as morally indefensible as
possible–to say, in effect, we need to get our priorities straight.
Although it is unusual for large numbers of unorganized, less affluent
people to triumph over powerful interests in American politics, it does
happen sometimes. Such moments should inspire progressives again.

Read more about EntitlementsWelfare

Christopher Howard is Professor of Government at the College of William and Mary and the author of the new book, The Welfare State Nobody Knows: Debunking Myths about U.S. Social Policy.

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