Hidden welfare state

Last updated January 04, 2025

The hidden welfare state is a term coined by Christopher Howard, 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. Howard's terminology implies that "visible" social welfare programs are designed to help the neediest, but the "hidden" programs often offer benefits to wealthier individuals and companies.

Programs that constitute the visible welfare state of direct expenditures include: Social Security, Medicare, and Aid to Families with Dependent Children (AFDC, now Temporary Assistance to Needy Families).
The hidden welfare state refers to tax expenditures (deductions) with social welfare objectives: tax deductions for retirement saving, charitable contributions, higher education, and the home mortgage interest deduction. All of these deductions benefit constituencies with considerable disposable income.^{[ citation needed ]}

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.

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 corporate welfare, military welfare, and 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 corporations, military contractors, Wall Street, income security, health, employment and training, housing, education, and social services. The United States 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 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.^[2] In general, the government uses the tax code to entice market actors to consume in socially desirable ways.^{[ citation needed ]} Tax expenditures include 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, which basically benefit all citizens, although the Social Security Administration notes that poorly paid workers benefit the most from this particular program, Social Security.^[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^{[ citation needed ]}^{[ clarification needed ]} of this tax supports 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.^[3] 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.^{[ citation needed ]}^{[ clarification needed ]} Christopher Howard's research reveals 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.^[3] Only about 5 percent of tax expenditures are targeted at people at or near the poverty line.^[3] 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.^[2] 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."^[6]

Origins

The visible welfare state was primarily formed during two major periods, the mid-1930s and the mid-1960s. 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 these two big bursts, the hidden welfare state has been steadily created throughout the twentieth century.^{[ citation needed ]} The federal government began creating tax expenditures in the twentieth century. Since the 1910s at least two tax expenditures have been created each decade.^[2] Even during periods of resistance to social policy initiatives in the late 1910s and 1920s, tax expenditures were created.^{[ citation needed ]} In the 1930s tax expenditures passed that exempted benefits from public programs created during the New Deal.^{[ citation needed ]} In the 1940s, 1950s, and 1960s tax expenditures related to housing and health care passed. Since the 1960s tax expenditures have been passed that offer individuals alternative sources of income^{[ clarification needed ]} 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 and resistance. However, history shows that the tax expenditures associated with the hidden welfare state have been fairly easy to enact.^{[ citation needed ]} 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.^{[ citation needed ]} These items were not included in the governments until after 1969.^{[ clarification needed ]} 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."^[1] Moderate and conservative members of United States 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.^[3] Christopher Howard points out that "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."^[3] 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.^{[ citation needed ]}

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^{[ citation needed ]} 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. Howard also claims that tax expenditures have "inherent ambiguity" and that they 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."^[3]

Politics of hidden welfare

Attention has recently been brought to the "hidden welfare state" because Howard and others believe it negatively impacts numerous aspects of society. In terms of social programs, the US's social welfare state is smaller than many European countries.^{[ clarification needed ]}^{[ citation needed ]} The United States has yet to institute some of the most common 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 is actually much larger.^{[ citation needed ]}

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 been racial minorities, such as African Americans. Socio-economic and racial issues such as those have both caused controversy and a stigma to be attached to social assistance programs. In contrast to the reasons for that stigma, wealthy and poor beneficiaries of many of the aforementioned tax expenditure programs are net-contributors to IRS receipts, unlike many of those who receive "visible" welfare, i.e. the portion who are receiving it due to long-term unemployment. Nonetheless, many affluent whites benefit from the welfare state, too, through tax expenditures related to retirement saving, charitable contributions (although these often help those in need of "visible" welfare, not only the philanthropist), higher education, and home ownership.

The argument on the other side would be that those receiving "hidden welfare" have an amount that is supposed to be paid in taxes but is credited back whereas those receiving visible welfare do not have an amount that is supposed to be paid in taxes and receive additional welfare. One produces a theoretical loss (those getting the tax deductions) and the other an actual loss (those receiving welfare without paying in more than 100% of benefits).

Related Research Articles

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<span class="mw-page-title-main">Welfare state in the United Kingdom</span> Welfare Programs in the United Kingdom

The welfare state of the United Kingdom began to evolve in the 1900s and early 1910s, and comprises expenditures by the government of the United Kingdom of Great Britain and Northern Ireland intended to improve health, education, employment and social security. The British system has been classified as a liberal welfare state system.

A welfare state is a form of government in which the state protects and promotes the economic and social well-being of its citizens, based upon the principles of equal opportunity, equitable distribution of wealth, and public responsibility for citizens unable to avail themselves of the minimal provisions for a good life.

Welfare spending is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifically to social insurance programs which provide support only to those who have previously contributed, as opposed to social assistance programs which provide support on the basis of need alone. The International Labour Organization defines social security as covering support for those in old age, support for the maintenance of children, medical treatment, parental and sick leave, unemployment and disability benefits, and support for sufferers of occupational injury.

Welfare reforms are changes in the operation of a given welfare system aimed at improving the efficiency, equity and administration of government assistance programs. Reform programs may have a various aims, sometimes the focus is on reducing the number of individuals receiving government assistance and welfare system expenditure, at other times reforms may aim to ensure greater fairness, effectiveness and allocation of welfare for those in need. Classical liberals, libertarians, and conservatives generally argue that welfare and other tax-funded services reduce incentives to work, exacerbate the free-rider problem, and intensify poverty. On the other hand social democrats and socialists generally criticize welfare reforms that minimize the public safety net and strengthens the capitalist economic system. Welfare reform is constantly debated because of the varying opinions on a government's need to balance providing guaranteed welfare benefits and promoting self-sufficiency.

In macroeconomics and finance, a transfer payment is a redistribution of income and wealth by means of the government making a payment, without goods or services being received in return. These kind of payments are one-sided in nature, i.e. one party enjoys economic benefits from the other party. These payments are considered to be non-exhaustive because they do not directly absorb resources or create output. Examples of transfer payments include welfare, financial aid, social security, and government subsidies for certain businesses.

In the United States, the Supplemental Nutrition Assistance Program (SNAP), formerly known as the Food Stamp Program, is a federal government program that provides food-purchasing assistance for low- and no-income persons to help them maintain adequate nutrition and health. It is a federal aid program administered by the U.S. Department of Agriculture (USDA) under the Food and Nutrition Service (FNS), though benefits are distributed by specific departments of U.S. states.

Subsidized housing is government sponsored economic assistance aimed towards alleviating housing costs and expenses for impoverished people with low to moderate incomes. In the United States, subsidized housing is often called "affordable housing". Forms of subsidies include direct housing subsidies, non-profit housing, public housing, rent supplements/vouchers, and some forms of co-operative and private sector housing. According to some sources, increasing access to housing may contribute to lower poverty rates.

Social welfare, assistance for the ill or otherwise disabled and the old, has long been provided in Japan by both the government and private companies. Beginning in the 1920s, the Japanese government enacted a series of welfare programs, based mainly on European models, to provide medical care and financial support. During the post-war period, a comprehensive system of social security was gradually established. Universal health insurance and a pension system were established in 1960.

In France, taxation is determined by the yearly budget vote by the French Parliament, which determines which kinds of taxes can be levied and which rates can be applied.

<span class="mw-page-title-main">United States federal budget</span> Budget of the U.S. federal government

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<span class="mw-page-title-main">Social programs in Canada</span>

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The European social model is a concept that emerged in the discussion of economic globalization and typically contrasts the degree of employment regulation and social protection in European countries to conditions in the United States. It is commonly cited in policy debates in the European Union, including by representatives of both labour unions and employers, to connote broadly "the conviction that economic progress and social progress are inseparable" and that "[c]ompetitiveness and solidarity have both been taken into account in building a successful Europe for the future".

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<span class="mw-page-title-main">Social programs in the United States</span>

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Tax expenditures are government revenue losses from tax exclusions, exemptions, deductions, credits, deferrals, and preferential tax rates. They are a counterpart to direct expenditures, in that they both are forms of government spending.

In general, the United States federal income tax is progressive, as rates of tax generally increase as taxable income increases, at least with respect to individuals that earn wage income. As a group, the lowest earning workers, especially those with dependents, pay no income taxes and may actually receive a small subsidy from the federal government.

References

1 2 Berkowitz, Edward D. (1998). "Revealing America's Welfare State". Reviews in American History. 26 (3): 620–625. doi:10.1353/rah.1998.0042. ISSN 0048-7511.
1 2 3 4 Howard, Christopher (1997). The Hidden Welfare State: Tax Expenditures and Social Policy in the United States. Princeton, NJ: Princeton University Press. ISBN 0-691-02646-7.
1 2 3 4 5 6 7 Howard, Christopher (1993). "The Hidden Side of the American Welfare State". Political Science Quarterly. 108 (3). Political Science Quarterly, Vol. 108, No. 3: 403–436. doi:10.2307/2151697. JSTOR 2151697.
↑ Why a different formula is used, Windfall Elimination Provision, socialsecurity.gov
↑ Rochefort, David A. (2001). "Book Review of The Hidden Welfare State". Journal of Politics. 63 (2). The Journal of Politics, Vol. 63, No. 2: 636–638. doi:10.1086/jop.63.2.2691772. JSTOR 2691772.
↑ Shapiro, Thomas M. (2004). The Hidden Cost of Being African American: How Wealth Perpetuates Inequality . New York: Oxford University Press. ISBN 0-19-515147-X.

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[Berkowitz1998-1] 1 2 Berkowitz, Edward D. (1998). "Revealing America's Welfare State". Reviews in American History. 26 (3): 620–625. doi:10.1353/rah.1998.0042. ISSN 0048-7511.

[Howard1997-2] 1 2 3 4 Howard, Christopher (1997). The Hidden Welfare State: Tax Expenditures and Social Policy in the United States. Princeton, NJ: Princeton University Press. ISBN 0-691-02646-7.

[Howard1993-3] 1 2 3 4 5 6 7 Howard, Christopher (1993). "The Hidden Side of the American Welfare State". Political Science Quarterly. 108 (3). Political Science Quarterly, Vol. 108, No. 3: 403–436. doi:10.2307/2151697. JSTOR 2151697.

[4] Why a different formula is used, Windfall Elimination Provision, socialsecurity.gov

[Rochefort2001-5] Rochefort, David A. (2001). "Book Review of The Hidden Welfare State". Journal of Politics. 63 (2). The Journal of Politics, Vol. 63, No. 2: 636–638. doi:10.1086/jop.63.2.2691772. JSTOR 2691772.

[Shapiro2004-6] Shapiro, Thomas M. (2004). The Hidden Cost of Being African American: How Wealth Perpetuates Inequality . New York: Oxford University Press. ISBN 0-19-515147-X.

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