American Socialism for the Already
Rich
by Christopher Howard
Democracy: a Journal of Ideas
http://www.alternet.org/, March
27, 2007
Call it phony universalism, Robin Hood
in reverse, or socialism for the rich -- the United States spends
almost as much helping the have-plenties as the have-nots.
Editor's note: This article originally
appeared in the Spring 2007 issue of Democracy: A Journal of Ideas
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 overinvest
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 longstanding 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 can 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 semiwelfare 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 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 healthcare 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, healthcare 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 healthcare.
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 12 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 fewer. 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 bureaucracies.
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
-- Sen. Jacob Javits and ERISA, President George H.W. Bush and
the ADA, Sen. 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 healthcare, 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 insurance.
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.
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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