Thursday, May 17, 2012

The Hidden American Welfare State

Bruce Bartlett has produced a useful book providing just about anything anyone would want to know about the tax system in the United States: The Benefit and the Burden. The subject here is "tax expenditures."
"....some tax preferences are, in effect, spending programs. These provisions, which economists call ‘tax expenditures,’ are a major source of complexity, unfairness, and economic distortion. Sometimes they reduce the tax liability of a business or family by exempting or excluding income from taxation; at other times they involve tax credits that reduce tax payments directly. And in some cases these credits are refundable for those with no income tax liability to offset, making them identical to a direct spending program in all but name."

These tax expenditures have come to replace direct funding approaches because they are easier to pass into law, and they maintain the appearance of limiting the size of government. They are generally intended to encourage behavior that is considered socially beneficial. Hence, most can be labeled social expenditures. The magnitude of this form of social spending is about a trillion dollars per year. The funds do not show up in the published budget numbers, and in many cases, beneficiaries of the federal largess are unaware that they are participating in a government-sponsored program.

We have recently discussed the effects of these tax expenditures in supporting the growth in income inequality by favoring the wealthy in Tax Policies and Income Inequality. The deleterious effects of this form of legislating on the functioning of a democracy were considered in Governance in the United States: Confronting the Submerged State. Bartlett provides yet another context in which to view US governance: "the hidden American welfare state."

"A recent OECD study calculated social spending as a share of GDP in major countries, taking account of things such as tax expenditures that consume economic resources without showing up in the budget or standard measures of government as a share of GDP."

The results are presented in the following table as a percentage of GDP.

Occasionally, a conservative politician will complain about a spending bill by saying something like: "You’re trying to make us into France!" Well, we aren’t quite France yet, but we are almost Sweden, and we have left Italy, Denmark, and Norway in the dust when it comes to social spending.

Actually, it is unfair to the above countries to compare them to the US. They still persist in the old technique of trying to solve a problem by directly applying funds to a solution. The US approach seems to consist of scattering money widely in hopes that some of it will trickle down to those who need it. How successful is this approach? Recall Bartlett’s words:

" expenditures are a major source of complexity, unfairness, and economic distortion."

In other words, much of our social expenditure is not only a waste, but it is counterproductive.

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