The Hidden Welfare State: Tax Expenditures and Social Policy in the United States

The Hidden Welfare State: Tax Expenditures and Social Policy in the United States

The Hidden Welfare State: Tax Expenditures and Social Policy in the United States

The Hidden Welfare State: Tax Expenditures and Social Policy in the United States

Synopsis

Despite costing hundreds of billions of dollars and subsidizing everything from homeownership and child care to health insurance, tax expenditures (commonly known as tax loopholes) have received little attention from those who study American government Here Christopher Howard analyzes the "hidden" welfare state created by such programs as tax deductions for home mortgage interest and employer-provided retirement pensions, and the Earned Income Tax Credit Basing his work on the histories of these four tax expenditures, Howard highlights the distinctive characteristics of all such policies. As policymakers increasingly promote tax expenditures to address social problems, the book offers some sobering lessons about how such programs work.

Excerpt

If one had to name a Holy Trinity of U.S. social programs in the late twentieth century, it would consist of Social Security, Medicare, and the home mortgage interest deduction. All three programs are budgetary entitlements, protected from the annual appropriations process. All three are among the largest programs in the entire budget, and the fastest growing. All three have millions of middle- and upper-middle-class beneficiaries and millions more who count on becoming beneficiaries. These people make campaign contributions; these people vote.

Of the three programs, the home mortgage interest deduction has arguably the strongest base of political support. It has existed longer than Social Security or Medicare, thus appearing even more firmly a part of the “natural” political landscape. Like Medicare (and unlike Social Security), it can depend on third-party providers for support. Home builders, building material suppliers, developers, realtors, lenders, and construction unions consider the program essential to their livelihoods; national organizations representing these trades are among the most powerful in Washington and cut across party lines. Their support helps account for the program's impressive growth: between 1967 and 1995, the total cost of the home mortgage interest deduction increased by an average of almost 7 percent per year, adjusted for inflation. Like Social Security (and unlike Medicare), the home mortgage interest deduction has been effectively declared off-limits by Republican members of Congress intent on balancing the budget in the 1990s. At an estimated cost of more than $50 billion in 1995, this is a major omission. If power consists of the ability not only to resist change but also to discourage serious debate over change, then the home mortgage interest deduction is truly powerful.

The puzzle here is how a small wrinkle in the original tax code became, many decades later, a huge and sacrosanct social program. the answer cannot be found in the deliberate actions of program administrators intent on expanding the home mortgage interest deduction. At times Treasury officials have posed one of the few threats to the program. the chairmen of important congressional committees did not develop a special sense of ownership early in the program's history. Interest group lobbying took decades to materialize, and home owners never formed an organization equivalent to the aarp. No conscious effort . . .

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