Political Representation

The Hidden Side of the American Welfare State Author(s): Christopher Howard Source: Political Science Quarterly, Vol. 108, No. 3 (Autumn, 1993), pp. 403-436 Published by: Oxford University Press Stable URL: https://www.jstor.org/stable/2151697 Accessed: 09-04-2023 16:20 UTC

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The Hidden Side of the

American Welfare State

CHRISTOPHER HOWARD

Students of the American welfare state have regularly in- voked comparisons with European welfare states. These comparisons, seldom flattering, have contributed to a portrait that is by now quite familiar to academics and policy makers. The American welfare state is smaller than most of its European counterparts, based on the per- centage of gross national product (GNP) devoted to social welfare. It is less inclusive, less generous, and more fragmented. Core social programs generally developed later in the United States and in a few notable cases, like national health insurance, never materialized. On any number of counts, the American welfare state appears excep- tional.

Social scientists have been trying to explain the reasons for the pecu- liar structure and development of the American welfare state for the better part of three decades. The number of explanations offered has been impressive, the intensity of scholarly debate often high. Neverthe- less, virtually all of these studies have been hampered by a narrow conception of governmental capacity. By equating the welfare state with direct spending programs like Social Security, scholars have ne- glected indirect tools of social policy such as loans, loan guarantees, and tax expenditures. This oversight has meant that scholars have

CHRISTOPHER HOWARD is an assistant professor of government at the College of William and

Mary.

Political Science Quarterly Volume 108 Number 3 1993 403

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404 | POLITICAL SCIENCE QUARTERLY

ignored dozens of indirect spending programs costing hundreds of

billions of dollars.' The exclusion of indirect spending is impossible to justify. Every

commonly accepted definition of the welfare state makes room for

both direct and indirect social spending. It does not matter whether one defines the welfare state as an instrument of social control or social betterment; as a part of the state or a particular stage in the development of capitalist states; as a minimal safety net for those in need, social insurance for the middle classes, or everything the govern-

ment does to improve the well-being of individuals and families.2 None of these definitions stipulates how these various goals are to be accom-

plished or what form these goods and services must take. Scholarly

convention, not reality, dictates that we equate the welfare state with direct spending. In fact, governments can and do use a variety of direct and indirect tools for promoting social welfare. Some welfare states, notably the United States, rely heavily on indirect spending, and the

vast majority of welfare states rely to some degree on indirect spending. This article explores the implications of indirect social spending for

our understanding of the American welfare state. It is designed to be suggestive and provocative but by no means definitive. It focuses on only one indirect tool, tax expenditures. While tax expenditures are the most important form of indirect social spending in the United States, one can easily imagine parallel studies of loan guarantees for education and housing.3 In particular, this article indicates how tax expenditures alter the size and structure of the American welfare state, and how they challenge widely held beliefs about the origins of U.S.

' This problem is common to comparative policy studies. "Many sophisticated efforts to explain public policy focus far more attention upon the independent variables deemed to cause policy variation than upon the definition and measurement of that which is to be explained." Richard Rose, "Compara- tive Policy Analysis: The Program Approach" in Mattei Dogan, ed., Comparing Pluralist Democra- cies (Boulder, CO: Westview, 1988), 221.

2 For a good discussion of various definitions of the welfare state and the resulting theoretical muddle, see John Carrier and Ian Kendall, "Categories, Categorizations and the Political Economy

of Welfare," Journal of Social Policy 15 (July 1986): 315-35; and Gosta Esping-Andersen, The Three Worlds of Welfare Capitalism (Princeton, NJ: Princeton University Press, 1990), 18-26.

3 Based on figures supplied by the Congressional Budget Office, I calculate that the subsidy costs

of loan and loan guarantee programs with social welfare objectives equalled approximately $8 billion in fiscal year 1990, a small fraction of the cost of tax expenditures. Congressional Budget Office,

Credit Reform: Comparable Budget Costs for Cash and Credit (Washington, DC: U.S. Government Printing Office [hereafter GPO], 1989), 44-45. Still, it is quite possible that loans and loan guarantees

have societal impacts that cannot be measured by their subsidy costs alone.

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THE HIDDEN AMERICAN WELFARE STATE | 405

social programs. If the U.S. case is any indication, modern welfare states are larger and their formation more complex than previously thought.

The first section of this article introduces readers to the concept of tax expenditures and summarizes what little is known about tax

expenditures with social welfare objectives in the United States. Al- though scholars have been aware of the connections between social policy and tax policy for decades, few have chosen to investigate this relationship in any detail. This section is intended to support as expedi-

tiously as possible my claim that indirect social spending is largely

unexplored territory. The second section provides an aerial overview, so to speak, of the

"hidden welfare state" of tax expenditures.4 This broader view of social spending is rather eye-opening. Taking into account conceptual prob- lems of measuring and aggregating tax expenditures, it appears that

the true size of the American welfare state is considerably larger than the sum of direct spending programs. The hidden welfare state is roughly one-third to one-half the size of the visible welfare state of direct spending.

Tax expenditures reinforce some beliefs about the structure of the American welfare state and challenge others. On the one hand, once tax expenditures are included, known strengths in retirement security become more pronounced. Programmatic fragmentation appears more pervasive. The distribution of benefits toward the middle- and upper- middle classes is even more exaggerated. On the other hand, perceived

gaps in housing and family policy begin to disappear. Agencies thought to be irrelevant to social policy, notably the Treasury Department and Internal Revenue Service, emerge and take center stage. The two-tiered image of the American welfare state begins to break down.

The third section compares the origins of tax expenditures with the origins of direct spending programs. What is most surprising is the relative ease with which new tax expenditures are enacted relative to new direct spending programs. The United States, previously known for its numerous barriers to welfare state formation, now appears quite receptive to a certain kind of social program. As soon as we see

I This phrase is from Jeffrey P. Owens, "Tax Expenditures and Direct Expenditures as Instruments of Social Policy" in Sijbren Cnossen, ed., Comparative Tax Studies (Amsterdam: North-Holland,

1983), 171-97.

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406 | POLITICAL SCIENCE QUARTERLY

how often new tax expenditures have been created, we become less interested in determining which barriers are decisive. Instead, we start to search for those features of the American polity that create possibili- ties for programmatic innovation. That search reveals an interesting paradox: some of the key features that inhibit the creation and expan- sion of traditional social programs unintentionally promote the hidden welfare state.

The most important of these features is Congress, which has typically been portrayed as an impediment to the American welfare state. This barrier results partly from the fragmentation of authority within Con- gress and partly from the historical prominence of conservative southern Democrats, who often block or dilute social welfare legisla- tion.5 I plan to argue that Congress has in several respects been better designed to enact new tax expenditures than new direct spending pro- grams, and that the same legislators who have opposed appropriations

often have supported tax expenditures. The structure of Congress has also increased the importance of party competition to the hidden wel- fare state, though party competition is usually considered irrelevant to the development of national social programs in the United States.

While this article focuses principally on the United States, investiga- tion of indirect social spending in other nations could and probably should be undertaken. My hope is that other researchers will be so struck by the implications of tax expenditures for the American welfare state that they will investigate indirect spending in other welfare states. In the fourth and final section of this paper, I suggest a couple of avenues for crossnational research.6

I See the essays by Ann Shola Orloff, Edwin Amenta and Theda Skocpol, Margaret Weir, Kenneth Finegold, and Jill Quadagno in Margaret Weir, Ann Shola Orloff, and Theda Skocpol, eds., The

Politics of Social Policy in the United States (Princeton, NJ: Princeton University Press, 1988). The

power of southern Democrats in Congress for much of the twentieth century was due to their seniority, which was in turn a product of congressional rules and the absence of party competition in the

South.

6 Initial forays include Esping-Andersen, The Three Worlds of Welfare Capitalism, chap. 4; Arthur Gould, "The Salaried Middle Class in the Corporatist Welfare State," Policy and Politics 9 (October 1981): 401-18; Brian Hogwood, "The Hidden Face of Public Expenditure: Trends in Tax Expenditures in Britain," Policy and Politics 17 (1989): 111-30; Michael O'Higgins, "Public/ Private Interaction and Pension Policy" in Martin Rein and Lee Rainwater, Public/Private Interplay

in Social Protection (Armonk, NY: M. E. Sharpe, 1986), 99-148; Owens, "Tax Expenditures and Direct Expenditures as Instruments of Social Policy"; Kenneth Woodside, "The Political Economy of Policy Instruments: Tax Expenditures and Subsidies in Canada" in Michael M. Atkinson and Marsha A. Chandler, eds., The Politics of Canadian Public Policy (Toronto: University of Toronto

Press, 1983), 173-97; Frances Woolley and Julian Le Grand, "The Ackroyds, the Osbornes, and

the Welfare State: The Impact of the Welfare State on Two Hypothetical Families over their Life- times," Policy and Politics 18 (1990): 17-30.

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THE HIDDEN AMERICAN WELFARE STATE | 407

PREVIOUS STUDIES

Tax expenditures, popularly known as tax loopholes, are "departures from the normal tax structure . . . designed to favor a particular in-

dustry, activity, or class of persons."7 They can take the form of tax deductions, tax credits, preferential tax rates, tax deferrals, or outright exclusion of income from taxation. They subsidize a broad range of activities in the United States from oil exploration to the rehabilitation of historic buildings. The focus of this article is tax expenditures with social welfare objectives, meaning those which parallel direct spending for income security, housing, health care, education, employment and training, and social services. Familiar examples include tax deductions for home mortgage interest, child care, and charitable contributions.

Intuitively, it may seem strange to equate the failure to collect taxes with government spending, yet most public finance experts consider tax expenditures to be "conceptually equivalent" to direct spending.8 According to the Senate Budget Committee, tax expenditures "may, in effect, be viewed as the equivalent of a simultaneous collection of revenue and a direct budget outlay of an equal amount to the benefi- ciary taxpayer."9 They "are considered to be analogous to direct expen- diture programs, and the two can be viewed as alternative means of accomplishing similar policy objectives."'0 Policy makers certainly have no trouble understanding the concept of tax expenditures. In the words of Russell Long, then chairman of the Senate Finance Com-

' Stanley S. Surrey and Paul R. McDaniel, TaxExpenditures (Cambridge, MA: Harvard University Press, 1985), 3. Tax expenditures are one of two principal ways in which the tax code is used to

make social policy, the other is tax rates.

8 Woodside, "The Political Economy of Policy Instruments," 175. See also Richard A. Musgrave

and Peggy B. Musgrave, Public Finance in Theory and Practice, 4th ed. (New York: McGraw Hill,

1984); and Joseph A. Pechman, Federal Tax Policy, 5th ed. (Washington, DC: Brookings Institution,

1987). A few people do question the utility of the tax expenditure concept. One argument is that

"the concept of listing uncollected taxes as an expenditure is rooted in the notion that all income

belongs to the government and only the generosity of the government allows us to have the income we produce." See Richard Rahn, chief economist for the Chamber of Commerce, quoted in "Tax

Subsidies: No End to Increases," U.S. News and World Report, 22 March 1982, 84. See also Irving Kristol, Two Cheers for Capitalism (New York: Basic Books, 1978). A second objection is that the

definition of tax expenditures is arbitrary and subject to political manipulation. See Boris I. Bittker, "Accounting for Federal 'Tax Subsidies' in the National Budget," National Tax Journal 22 (June

1969): 244-61; Aaron Wildavsky, "Keeping Kosher: The Epistemology of Tax Expenditures," Journal

of Public Policy 5 (August 1985): 413-31.

9 U.S. Senate, Committee on the Budget, Tax Expenditures: Relationships to Spending Programs and Background Material on Individual Provisions (Washington, DC: GPO, 1986), 1.

10 U.S. Congress, Joint Committee on Taxation [hereafter referred to as JCT] Estimates of Federal Tax Expenditures for Fiscal Years 1992-1996 (Washington, DC: GPO, 1991), 3.

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408 | POLITICAL SCIENCE QUARTERLY

mittee, "that label don't bother me. . . . I've never been confused about it. I've always known that what we're doing was giving government money away.""

Students of U.S. social policy have been slow to appreciate the equiv- alence between direct spending and tax expenditures. The major his- tories of the American welfare state barely mention tax expenditures.'2

The reason for this omission is unclear, since Richard Titmuss, a British sociologist, called attention to the connections between tax policy and social policy as far back as the 1950s. Tax expenditures, in his view, constituted a system of "fiscal welfare." This system was conceptually distinct from the social welfare system of direct public spending and the occupational welfare system of fringe benefits."'

Titmuss's insight was largely ignored until the 1980s, when a few

scholars began to acknowledge the existence of tax expenditures with social welfare objectives and occasionally hint at their importance. According to Peter Flora and Arnold Heidenheimer, tax expenditures constitute "the third and often neglected method" of providing welfare benefits, along with transfer payments and in-kind services.'4 That said, the authors then proceed to omit tax expenditures from their influential explanation of the development of modern welfare states. Edwin Amenta and Theda Skocpol, in their sweeping survey of U.S. social and economic policies, draw a provocative analogy between contemporary tax expenditures and nineteenth-century patronage poli-

1" Quoted in Alan Ehrenhalt, "Senate Finance: The Fiefdom of Russell Long," Congressional

Quarterly Almanac 1977 (Washington, DC: CQ Inc., 1977), 178.

12 Mimi Abramovitz, Regulating the Lives of Women: Social Welfare Policy from Colonial Times

to the Present (Boston: South End Press, 1988); Edward Berkowitz and Kim McQuaid, Creating

the Welfare State: The PoliticalEconomy of Twentieth-centuryReform, 2nd ed. (New York: Praeger,

1988); Robert X. Browning, Politics and Social Welfare Policy in the United States (Knoxville:

University of Tennessee Press, 1986); Michael Katz, In the Shadow of the Poorhouse: A Social

History of Welfare in America (New York: Basic Books, 1986); Roy Lubove, The Struggle for Social

Security 1900-1935 (Cambridge, MA: Harvard University Press, 1968); Theodore R. Marmor, Jerry

L. Mashaw, and Philip L. Harvey, America's Misunderstood Welfare State (New York: Basic Books,

1990); James T. Patterson, America's Struggle Against Poverty, 1900-1985 (Cambridge, MA: Har-

vard University Press, 1986); Theda Skocpol and John Ikenberry, "The Political Formation of the

American Welfare State in Historical and Comparative Perspective," Comparative Social Research

6 (1983): 87-148; Walter I. Trattner, From Poor Law to Welfare State: A History of Social Welfare

in America, 4th ed. (New York: Free Press, 1989).

13 Richard Titmuss, Essays on "The Welfare State" (New Haven: Yale University Press, 1959), 34-55.

14 Peter Flora and Arnold Heidenheimer, "The Historical Core and Changing Boundaries of the Welfare State" in Flora and Heidenheimer, eds., The Development of Welfare States in Europe and

America (New Brunswick, NJ: Transaction Books, 1981), 26.

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THE HIDDEN AMERICAN WELFARE STATE | 409

cies, but do not elaborate on the similarities.'" A few scholars compare aggregate expenditures for direct and indirect social programs without examining concrete examples of tax expenditures or drawing out the full implications of their comparisons.'6 Martin Rein and Lee Rain- water and Neil and Barbara Gilbert have written the best theoretical treatments of tax expenditures.'7 The best empirical work belongs to Beth Stevens, whose study of corporate pensions helped to animate my

own research.'8 None of these studies, however, attempts to generalize about policy making in the hidden welfare state or to compare the politics of tax expenditures and direct spending programs.

Tax expenditures have received closer scrutiny by students of taxa- tion and budgetary politics.'9 Over the past two decades, a small group

Is Edwin Amenta and Theda Skocpol, "Taking Exception: Explaining the Distinctiveness of Amer-

ican Public Policies in the Last Century" in Francis G. Castles, ed., The Comparative History of

Public Policy (London: Polity Press, 1989), 292-333.

16 Mimi Abramovitz, "Everyone Is on Welfare: The Role of Redistribution in Social Policy Revis-

ited," Social Work 28 (November-December 1983): 440-45; P. R. Kaim-Caudle, Comparative Social

Policy and Social Security: A Ten-Country Study (London: Martin Robinson, 1973); Robert J.

Lampman, Social Welfare Spending: Accounting for Changes from 1950 to 1978 (Orlando, FL:

Academic Press, 1984); Wallace C. Peterson, "The U.S. 'Welfare State' and the Conservative Counter-

revolution," Journal of Economic Issues 19 (September 1985): 601-41; Paul Starr and Gosta Esping-

Andersen, "Passive Intervention," Working Papers for a New Society 7 (July/August 1979): 15-

25; and Judy Temple, "Tax Expenditures" in Taxation (Washington, DC: Project on the Federal

Social Role, 1985), 1-44.

17 Martin Rein and Lee Rainwater, "From Welfare State to Welfare Society" in Gosta Esping-

Andersen, Martin Rein, and Lee Rainwater, eds., Stagnation and Renewal in Social Policy (Armonk,

NY: M. E. Sharpe, 1987), 143-59; Martin Rein and Lee Rainwater, "The Public/Private Mix," in

Rein and Rainwater, eds., Public/Private Interplay in Social Protection, 3-24; Neil Gilbert and

Barbara Gilbert, The Enabling State: Modern Welfare Capitalism in America (New York: Oxford

University Press, 1989).

18 Beth Stevens, "Blurring the Boundaries: How the Federal Government Has Influenced Welfare Benefits in the Private Sector," in Weir, Orloff, and Skocpol, eds., The Politics of Social Policy

in the United States, 12348. Two good empirical studies by Daniel M. Fox and Daniel C. Schaffer also deserve mention. See their "Health Policy and ERISA: Interest Groups and Semipreemption," Journal of Health Politics, Policy and Law 14 (Summer 1989): 239-60; and "Tax Policy as Social Policy: Cafeteria Plans, 1978-1985," Journal of Health Politics, Policy and Law 12 (Winter 1987): 609-64.

19 The seminal works are Surrey and McDaniel, Tax Expenditures; Stanley Surrey, Pathways to Tax Reform: The Concept of Tax Expenditures (Cambridge, MA: Harvard University Press, 1973);

and John F. Witte, The Politics and Development of the Federal Income Tax (Madison: University of Wisconsin Press, 1985). See also Ronald F. King, "Tax Expenditures and Systematic Public Policy: An Essay on the Political Economy of the Federal Revenue Code," Public Budgeting & Finance 4

(Spring 1984): 14-31; Paul R. McDaniel, "Tax Expenditures as Tools of Government Action" in Lester M. Salamon, ed., Beyond Privatization: The Tools of Government Action (Washington, DC: Urban Institute Press, 1989), 167-96; Allen Schick, "Controlling Nonconventional Expenditure: Tax Expenditures and Loans," Public Budgeting & Finance 6 (Spring 1986): 3-19; Sven Steinmo, "Rethinking American Exceptionalism" (Prepared for the Conference on The Dynamics of American Politics: Approaches and Interpretations, Boulder, CO, 20-22 February 1992; Stanley S. Surrey, "Tax

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410 | POLITICAL SCIENCE QUARTERLY

of tax lawyers, economists, and political scientists has tried to make tax expenditures more visible, principally to academics and policy makers interested in budgetary reform. These studies enumerate the theoretical advantages and disadvantages of tax expenditures versus direct spending as tools of public policy. High on everyone's list of disadvantages are the ways in which tax expenditures distort market signals, causing taxpayers to overconsume. Furthermore, tax expenditures often confer windfall benefits to taxpayers, rewarding them for actions they would have taken anyway. These studies demonstrate that the benefits of tax expenditures accrue disproportionately to more affluent citizens and powerful corporations. Some chart the impressive growth of tax expenditures over the past quarter century. And some of these studies describe the unusual institutional setting in which tax expenditures are created. The consensus is that tax expenditures are bad public policy: they are economically inefficient; they distort the tax system; their growth is uncontrollable; and, because they are rarely deliberated over or reviewed, they lack the legitimacy of direct spending programs. The message of these studies is clear. If policy makers wish to control the budget deficit and make sound policy decisions, they have to exert tighter control over tax expenditures.20

For our purposes, the tax policy literature is limited in two respects. Most of these studies base their larger claims upon evidence from tax expenditures that favor wealthy individuals, specific companies, specific industries, or business generally.2' To the extent that these exemptions are justified at all, the stated rationale is usually economic growth. The mass media perpetuate this equation of all tax expendi- tures with the rich and powerful, in part because the gyrations required to tailor the tax code to a single firm or a single individual make such good copy.22 Tax bills are often referred to as Christmas tree bills

Incentives as a Device for Implementing Government Policy: A Comparison with Direct Government Expenditures," Harvard Law Review 83 (February 1970): 705-38.

20 The claim that tax expenditures cause taxpayers to overconsume assumes that market distribu- tions of goods and services are somehow natural, appropriate, or fair. Sven Steinmo questions this and other critiques of tax expenditures in "So What's Wrong with Tax Expenditures? A Reevaluation Based on Swedish Experience," Public Budgeting & Finance 6 (Summer 1986): 27-44.

21 The notable exception is Witte, The Politics and Development of the Federal Income Tax. 22 Probably the most notorious and most cited example of such a tax expenditure is the so-called

Mayer amendment of 1951. The language of the amendment "provided capital gains treatment for a lump sum distribution to Louis B. Mayer on his retirement from the movie industry. To avoid identifying him by name, the amendment was worded to apply to a movie executive who had been employed for more than twenty years, held his rights to future profits for twelve years, and had the right to receive a percentage of profits for life or for a period of at least five years after the

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THE HIDDEN AMERICA T WELFARE STATE | 411

because of Congress's habit of decorating them with tax expenditures targeted at their favorite special interests. Nonetheless, the attention devoted to these tax expenditures in the media and in Washington is disproportionate to their size, though certainly important. Many are one-time exemptions, and those which are permanent cost the govern- ment less than one-half the revenues lost through tax expenditures with social welfare objectives. The prevailing wisdom, therefore, rests on an empirical foundation that excludes the bulk of tax expenditures.

Equally important, these authors discuss tax expenditures in the context of tax policy and budgetary reform, not social policy. They are interested in the ways in which tax expenditures complicate and

distort decisions about raising revenue and appropriating funds. They are not interested in investigating how tax expenditures change our understanding of the American welfare state. As a result, the hidden welfare state occupies a sort of no-man's land between the social policy and tax policy literatures.

STRUCTURE OF THE HIDDEN WELFARE STATE

Earlier I argued that tax expenditures and other forms of indirect spending belonged in any comprehensive account of modern welfare states, no matter what definition of welfare state was used. The defini- tion does make a difference, however, in determining the overall size of the hidden welfare state. If one defines the welfare state narrowly as comprising only those programs targeted at the poor, few tax expen- ditures in the United States qualify. On the other hand, such a defini- tion excludes programs like Social Security and Medicare that policy makers, academics, and ordinary citizens routinely include when they discuss U.S. social policy or the American welfare state.

To most people, a welfare state guarantees a minimum standard of living and protects citizens against losses of income beyond their con- trol, especially those caused by retirement, sickness, disability, or un- employment. This welfare state contains a public assistance component and a social insurance component. It serves both the poor and the middle classes.23 Tax expenditures loom large under this standard defi-

termination of his employment." Joseph Pechman, "Tax Reform: Theory and Practice," Journal

of Economic Perspectives 1 (Summer 1987): 14.

23 This definition is similar to that used by Marmor, Mashaw, and Harvey, America's Misunder-

stood Welfare State and by Fred C. Pampel and John B. Williamson, Age, Class, Politics and the

Welfare State (Cambridge, England: Cambridge University Press, 1989).

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412 | POLITICAL SCIENCE QUARTERLY

TABLE 1

Major Programs of the Standard American Welfare State (Billions of dollars- 1990E)

Tax Expenditures

Direct Spending Budget

Budget Outlay

Program Outlay Program Equivalent

INCOME SECURITY $353.1 B INCOME SECURITY $107.9 B

Social Security (OASDI) 248.5 Corporate pensions 60.1

Public employee retirement/disability 31.0 OASDI benefits 19.9

(excluding military) Individual Retirement Accounts 7.8

Unemployment insurance 18.1 EITC 6.6 Food Stamps 15.3

SSI 12.5

AFDC 12.1

HEALTH 154.3 HEALTH 51.7

Medicare 96.6 Corporate health insurance 36.5

Medicaid 40.2 Medicare benefits 7.7

HOUSING 16.3 HOUSING 0.7

SOCIAL SERVICES 9.6 SOCIAL SERVICES 12.0

Charitable contributions 12.0

EMPLOYMENT AND TRAINING 6.3 EMPLOYMENT AND TRAINING 5.9

Child care expenses 5.2

TOTAL $539.6 B TOTAL $178.2 B

Notes: Figures may not total because of rounding. Figure for EITC includes refund. Several minor programs

are not listed but are included in total.

Source: Office of Management and Budget, Budget of the United States Govemment, Fiscal Year 1991, Tables C-1, G-1.

nition of the welfare state, as Table 1 demonstrates. The left side of this table lists the major direct spending programs that are typically equated with the American welfare state. The right side depicts a corre- sponding list of major tax expenditures with social welfare objectives.24 While these tax expenditures may exist for reasons in addition to their ability to increase the economic security of individuals and families, the fact remains that these tax expenditures provide goods and services directly comparable to those provided in the visible welfare state of direct spending.

Note that Table 1 reflects only national spending for social welfare; spending by state governments is excluded because of the difficulty in

24 For a complete listing of tax expenditures with social welfare objectives, see Christopher Howard, "The Hidden Welfare State: Tax Expenditures and Social Policy" (Ph.D. dissertation, Massachusetts Institute of Technology, 1992), app. 1.

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THE HIDDEN AMERICAN WELFARE STATE | 413

finding data concerning state-level tax expenditures.25 Three borderline categories - education, veterans' benefits, and military benefits - are excluded. So, too, are direct spending for mortgage credit and deposit insurance and most tax expenditures for housing; usually housing assis- tance is considered part of the standard welfare state only if it benefits the poor. Many of the items excluded from Table 1 are included below in a more expansive definition of the welfare state.

This simple side-by-side comparison is revealing. Tax expenditures with social welfare objectives cost the national government the equiva- lent of $175 billion in fiscal year 1990. This sum was roughly one-third of what the government spent on traditional social programs. Seen from another angle, the U.S. government paid out an estimated three dollars in tax expenditures with social welfare objectives for every ten dollars it collected in individual and corporate income taxes in 1990.26

The relative importance of tax expenditures varies by function. The United States spends as much or more on social services and on employ- ment and training through the tax code as it does through direct spending. The key provisions are tax expenditures for charitable contri- butions and child care. The government spends approximately one dollar through the tax code on health and on income security for every three dollars of direct spending. Very little is spent on tax expenditures for low-income housing.

In absolute dollars, the most important categories of tax expendi- tures are income security, especially retirement security, and health care. The tax expenditure for corporate retirement pensions ($60 bil- lion) is the third largest social program in the American welfare state after Social Security and Medicare. Tax expenditures for Social Secu- rity benefits and Individual Retirement Accounts (IRAs) add another $28 billion to retirement security. All of these programs benefit the same citizens -workers with long and stable histories of wage-earning who fare best in the visible welfare state.27 The tax expenditure for corporate health insurance ($36 billion) is almost as large as Medicaid.

The extent to which the government subsidizes supposedly private welfare programs -to the tune of $100 billion per year -is one of

25 The available data suggest that indirect forms of social spending are much less important at the state than at the national level.

26 U.S. Congress, Committee on Ways and Means, Overview of the Federal Tax System (Wash- ington, DC: GPO, 1990), 47.

27 Margaret Weir, Ann Shola Orloff, and Theda Skocpol, "Understanding American Social Poli-

tics" in Weir, Orloff, Skocpol, eds., The Politics of Social Policy in the United States, 4.

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414 | POLITICAL SCIENCE QUARTERLY

the more striking implications of this table. The tax expenditures for corporate pensions, health insurance, and other fringe benefits demon- strate that the line separating public and private is not a rigid barrier; Titmuss's fiscal welfare and occupational welfare systems are not as distinct as he portrayed them. Some medium-size and smaller tax ex- penditures subsidize public programs: Social Security, Medicare, workers' compensation, and public assistance benefits all enjoy favor- able tax treatment. These latter subsidies are comparatively modest. Altogether, tax subsidies for corporate welfare programs are three times those for government programs.

Perhaps the other major insight to draw from Table 1 is the role of congressional revenue committees, the Treasury Department, and its Internal Revenue Service, for these authorities oversee and admin- ister the hidden welfare state. Tax expenditures accentuate the impor- tance of the revenue committees (House Ways and Means, Senate Finance), which already have jurisdiction over Social Security, Medi- care, and unemployment insurance. What most distinguishes the vis- ible and hidden welfare states are the agencies responsible for adminis- tering their respective programs. Most direct spending programs are administered by the Department of Health and Human Services. Others are administered by the Departments of Labor, Housing and Urban Development, and Agriculture. The Treasury Department, on the other hand, is responsible for all tax expenditures, whether they are classified as income support, health, housing, employment and training, or social services.28 One could argue that the broad range of tax expenditures makes the Treasury, rather than Health and Human Services, the most comprehensive social welfare agency in the United States. Clearly, the addition of some three dozen tax expenditures and yet another social welfare bureaucracy reinforces the prevailing image of the American welfare state as fragmented and disjointed.29

Tax expenditures become even more important if we adopt a broader definition of the welfare state. Some scholars, especially those who use Scandinavian welfare states as their point of reference, believe that welfare states do more than provide assistance to the poor and social insurance to the middle classes. In their view, a third function

28 The Treasury Department sometimes shares administrative duties with other agencies such as Labor.

29 Katz, In The Shadow of the Poorhouse; David B. Robertson and Dennis R. Judd, The Develop- ment of American Public Policy (Glenview, IL: Scott, Foresman, 1989), chap. 7; Weir, Orloff, and Skocpol, eds., The Politics of Social Policy in the United States.

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THE HIDDEN AMERICAN WELFARE STATE | 415

TABLE 2

Major Programs of the "Expanded"American Welfare State (Billions of dollars - 1990E)

Tax Expenditures

Direct Spending Budget

Budget Outlay

Program Outlay Program Equivalent

INCOME SECURITY $374.6 B INCOME SECURITY $161.6 B

Social Security (OASDI) 248.5 Corporate pensions 60.1

Public employee retirement/disability 52.5 State and local taxes 20.3

(excluding military) OASDI benefits 19.9

Unemployment insurance 18.1 Capital gains at death 18.1

Food Stamps 15.3 Individual Retirement Accounts 7.8

SSI 12.5 EITC 6.6

AFDC 12.1

HEALTH 154.3 HEALTH 51.7

Medicare 96.6 Corporate health insurance 36.5

Medicaid 40.2 Medicare benefits 7.7

HOUSING 32.9 HOUSING 74.2

Mortgage interest 39.8

Capital gains on home sales 12.6

Property taxes 11.2

SOCIAL SERVICES 9.6 SOCIAL SERVICES 12.0

Charitable contributions 12.0

EMPLOYMENT AND TRAINING 6.3 EMPLOYMENT AND TRAINING 5.9

EDUCATION 12.0 EDUCATION 4.0

TOTAL $589.7 B TOTAL $309.4 B

Note: Figures may not total because of rounding. Figure for EITC includes refund. Several minor programs

are not listed but are included in total.

Source: Office of Management and Budget, Budget of the United States Govemment, Fiscal Year 1991,

Tables C-1, G-1.

of welfare states is "ensuring that all citizens without distinction of status or class are offered the best standards available in relation to a certain agreed range of social services."30 This range of services varies over time and crossnationally, but it usually includes education and all housing programs. Laws governing minimum wages, consumer protection, and collective bargaining are sometimes included in this definition, but they are omitted here as borderline cases that are hard to express in terms of dollars spent. Some of these scholars stipulate further that social programs must promote income equality, must re-

30 Asa Briggs, "The Welfare State in Historical Perspective," European Journal of Sociology 2 (1961): 228.

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416 | POLITICAL SCIENCE QUARTERLY

distribute income downward; I do not preserve this restriction.3' Table 2 compares direct spending and tax expenditures using a broader con- ception of the welfare state.

Using this definition, direct spending for social welfare increases from approximately $540 billion to $590 billion. The change in tax expenditures is more dramatic. They increase from roughly $175 billion to over $300 billion. They now exceed one-half of total direct spending for social welfare and one-half of all income tax receipts. Most of this increase is due to the inclusion of middle-class housing programs such

as the home mortgage interest tax deduction. Tax expenditures for housing are far more significant than those for education, the other major category included in Table 2 but not in Table 1. This table suggests that it is misleading to think of U.S. housing programs as

small or targeted at the poor. 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.

Whether one favors a standard or expansive definition of the welfare state, one crucial fact remains: the middle- and upper-income classes are the main beneficiaries of the hidden welfare state. Table 3 shows the distribution of benefits by income class for selected tax expendi- tures. The majority of benefits accrue to taxpayers earning more than $20,000, the chief exception being the Earned Income Tax Credit. Over 80 percent of the tax benefits for home mortgage interest, charitable contributions, and real estate taxes go to those earning more than $50,000.32 Direct spending for social welfare is similarly skewed, but less so. Although comparable data indicating the distribution of bene- fits by income class are unavailable for most direct spending programs, rougher measures are available. For instance, the mix of direct spending in the standard welfare state is roughly one-quarter public assistance and three-quarters social insurance. For every dollar spent on targeted programs like Aid to Families with Dependent Children (AFDC), the United States spends three dollars on inclusive programs

31 Esping-Anderson, Three Worlds of Welfare Capitalism; Norman Furniss and Timothy Tilton, The Case for the Welfare State (Bloomington: Indiana University Press, 1977).

32 A study by the Congressional Budget Office in 1983 found that "88 percent of tax-free employer contributions [for medical insurance premiums and medical care] went to households with annual incomes over $20,000. The median household income that year was $20,885. The tax benefit averaged

$622 per household in the $50,000-$100,000 income range, but $83 per household in the $10,000-

$15,000 range." Alain Enthoven, "Health Tax Policy Mismatch," Health Affairs 4 (Winter 1985): 11.

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THE HIDDEN AMERICAN WELFARE STATE | 417

TABLE 3

Distribution of Selected Tax Expenditures (1991)

Percentage of total dollar amount

No. of Total claimed by income class

Tax Expenditure Taxpayers Amount <$10K 10-20K 20-50K 50-100K 100K+

Home mortgage interest 24.1 M $36.8 B 0.0% 0.1% 17.9% 50.7% 30.6%

Untaxed Social Security (OASDI)

and Railroad Retirement benefits 19.9 22.5 1.6 17.1 67.3 14.1 4.4

Charitable contributions 27.9 15.0 0.0 0.6 13.0 31.2 55.2

Real estate taxes 25.2 10.3 0.0 0.8 16.6 47.9 34.7

EITC 11.4 8.3 31.9 57.0 10.7 0.3 0.0

Child care 7.2 3.1 0.0 12.3 47.9 35.0 4.8

Extraordinary medical expenses 4.6 2.7 0.1 5.0 42.0 33.6 19.3

Notes: Percentages may not total 100 percent because of rounding. Dollar figures reflect revenue losses,

not budget outlay equivalents.

Source: JCT, Estimates of Federal Tax Expenditures for Fiscal Years 1992-1996.

like Social Security. In contrast, only about 5 percent of tax expendi- tures are targeted at people at or near the poverty line. Based on an expansive definition of the welfare state, the fraction of means-tested benefits drops to 20 percent of direct spending and to 3 percent of tax expenditures. This skew in favor of the middle classes, combined with the large fraction of tax expenditures that subsidize corporate fringe benefits, is one reason that some analysts believe that the hidden welfare state undermines support for the visible welfare state, espe- cially for programs targeted at the poor.33

Table 3 also suggests the limits of one of the most common assertions about the American welfare state, namely that it is two-tiered. Many scholars who dispute the origins and function of social welfare pro- grams nevertheless agree that the overall structure is bifurcated.34 The upper tier consists of inclusive social insurance programs like Social

33 Stevens, "Blurring the Boundaries"; Michael Peter Smith, City, State, and Market: The Political Economy of Urban Society (London: Basil Blackwell, 1988), 32.

34 Michael K. Brown, "The Segmented Welfare System: Distributive Conflict and Retrenchment in the United States, 1968-1984" in Brown, ed., Remaking the Welfare State: Retrenchment and Social Policy in America and Europe (Philadelphia: Temple University Press, 1988), 182-210; Linda Gordon, "What Does Welfare Regulate?" Social Research 55 (Winter 1988): 609-30; Russell L. Hanson, "The Expansion and Contraction of the American Welfare State" in Robert Goodin and Julian Le Grand, eds., Not Only the Poor: The Middle Class and the Welfare State (London: George Allen and Unwin, 1987), 169-202; Katz, In the Shadow of the Poorhouse; Jill Quadagno, The Transformation of Old Age Security: Class and Politics in the American Welfare State (Chicago: University of Chicago Press, 1988); Robertson and Judd, The Development of American Public Policy, chap. 7; Weir, Orloff, and Skocpol, eds., The Politics of Social Policy in the United States.

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418 | POLITICAL SCIENCE QUARTERLY

Security. These programs are widely viewed as entitlements and enjoy broad political support. Benefits are financed by contributions from wage earners and are proportional to contributions. While redistribu- tion occurs, it is hard to detect. Beneficiaries are treated fairly well: eligibility criteria are uniform nationwide, receipt of benefits is consid- ered socially legitimate, and bureaucratic discretion is kept to a min- imum. Benefit levels are high enough to lift most recipients out of poverty.

The lower tier consists of means-tested programs like AFDC and Food Stamps. By definition, these programs serve the poorest segment of the population. Benefits are financed out of general revenues rather than through contributions. They are not earned like Social Security benefits. The combination of targeting and visible redistribution ren- ders these programs politically vulnerable. Recipients are treated rela- tively poorly. Eligibility criteria and benefit levels vary considerably from state to state, and administrative hurdles are often high. Receipt

of welfare is stigmatizing and at times dehumanizing. Benefits are seldom indexed for inflation and leave many recipients below the pov- erty line.

Tax expenditures do not conform to either tier. Like means-tested programs, tax expenditures are financed out of general revenues rather than contributory payroll taxes. Yet most tax expenditures are struc- tured as open-ended entitlements; their receipt does not depend on the judgment of caseworkers and does not entail social stigma. While many of the largest tax expenditures go to corporate fringe benefits, benefits are tied more to income than employment. Recipients do not have to earn their tax benefits. They can, for example, use income from trust funds or dividends to pay off their home mortgage and still claim the home mortgage interest deduction. Moreover, no tax expenditure is as inclusive as Social Security or Medicare. The broadest measures such as corporate pensions and home mortgage interest ben- efit less than one-half of taxpayers. Not all tax expenditures that are means-tested are targeted at the poor. Some provisions (charitable contributions, state and local income taxes) are effectively targeted at the rich. Perhaps, then, tax expenditures comprise a third tier of social programs. Perhaps the model of tiers needs to be reexamined.35

In looking at these tables, one senses immediately the potential signif- icance of tax expenditures for the American welfare state. Neverthe-

35 Workers' compensation and unemployment insurance also fit awkwardly in the two-tiered model.

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THE HIDDEN AMERICAN WELFARE STATE | 419

less, before drawing any firm conclusions, one should keep in mind

several limitations of tax expenditure data. For instance, the U.S.

government does not publish one set of numbers. The Treasury Depart- ment and Congress's Joint Committee on Taxation (JCT) issue sepa- rate estimates of the cost of tax expenditures. The Treasury's numbers

are cited in the annual budget submitted by the president; the JCT's numbers are cited by Congress. The discrepancies between their esti-

mates are small in the aggregate, and most are concentrated in tax expenditures with economic growth objectives (for example, corporate depreciation schedules), so this problem is a minor one for us.

More consequential is how one chooses to estimate the cost of tax expenditures. Their cost can be expressed as revenue losses or as budget outlay equivalents. Depending on the tax expenditure, budget outlay equivalents are either equal to or greater than revenue losses.36 For the purpose of comparison with direct spending programs, budget outlay equivalence is the superior method. For any time-series analysis, revenue losses are preferable because they have been estimated since

1967, while outlay equivalents have been estimated only since 1983. Care must be taken when adding tax expenditures. While some ana-

lysts claim that "the differences between an additive summary of tax

expenditures and a summary that controls for interactive effects are not large," others are more cautious.37 Cost estimates of individual tax expenditures assume no interaction effects and no changes in consumer behavior.38 The net effect of eliminating several tax expenditures simul- taneously could be larger or smaller than the sum of individual provi- sions. Nonetheless, cuts in direct spending programs can have similar second-order effects elsewhere in the budget. For instance, cuts in unemployment insurance may prompt more claims for workers' com- pensation.39 A conservative approach would be to consider the sum of tax expenditures as a good ballpark estimate of their overall magni-

36 "Often the outlay equivalent is greater than the revenue loss, because in many cases outlays would have to be included in the taxable income of the beneficiaries of the program." U.S. Congress,

JCT, Estimates of Federal Tax Expenditures for Fiscal Years 1991-1995 (Washington, DC: GPO,

1990), 8.

37 Quotation from Gilbert and Gilbert, The Enabling State, 30, fn. 13. Witte is more cautious.

See his Politics and Development of the Federal Income Tax, 283-84.

38 "If two or more items were to be eliminated simultaneously, the result of the combination of changes might produce a lesser or greater revenue effect than the sum of the amounts shown for each item separately." U.S. Congress, JCT, Estimates of Federal Tax Expenditures for Fiscal Years

1991-1995, 7.

39 King, "Tax Expenditures and Systematic Public Policy," 18; Surrey and McDaniel, TaxExpendi- tures, 52.

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420 | POLITICAL SCIENCE QUARTERLY

tude. Lastly, one must remember that the government does not publish statistics concerning the actual cost of tax expenditures. All figures are estimates based on incomplete data supplied by the Internal Revenue Service.

Despite these caveats, the significance of Tables 1, 2, and 3 is clear: tax expenditures pervade the American welfare state; their inclusion

increases the size of the welfare state by something on the order of

33 to 50 percent; and their exclusion from analysis must lead to major misconceptions.40 The remainder of this article explores certain mis- conceptions concerning the origins of U.S. social programs.

ORIGINS OF THE HIDDEN WELFARE STATE

In the textbook account of the American welfare state, the United States enacted social programs later than most European nations and

failed completely to enact some programs like national health insur- ance -hence the frequent reference to the United States as a welfare

state laggard.41 Scholars have attributed this pattern of delay to a variety of factors that supposedly made (and still make) the American

polity exceptional: cultural values of limited government and individu-

alism; James Madison's "compound republic," which fragments polit- ical authority among different levels of government and among na- tional institutions; the absence of truly programmatic political parties; the absence of a durable socialist or labor party; the peculiar sequence of bureaucratization and democratization; the power of business; the weakness of organized labor; the historic power of the South in na- tional politics, particularly Congress. Although scholars disagree over which of these barriers have been decisive, they all agree that the barriers to new social programs have been high.42

40 It does not follow, however, that if all tax expenditures with social welfare objectives were eliminated, then policy makers would appropriate the equivalent sum to direct social spending.

"' The laggard label also refers to the failure of the United States to spend as large a fraction of its gross domestic product on social welfare as other advanced industrial nations. An early statement

of the laggard thesis can be found in Harold L. Wilensky and Charles N. Lebeaux, Industrial Society

and Social Welfare (New York: Russell Sage, 1958).

42 For good summaries of these alternative explanations, see Edwin Amenta and Theda Skocpol, "States and Social Policies," Annual Review of Sociology 12 (1986): 131-57; Hugh Heclo, "The

Political Foundations of Antipoverty Policy" in Sheldon Danziger and Daniel Weinberg, eds.,

Fighting Poverty: What Works and What Doesn't (Cambridge, MA: Harvard University Press,

1986), 31240; and Jill Quadagno, "Theories of the Welfare State," Annual Review of Sociology

13 (1987): 109-28.

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THE HIDDEN AMERICAN WELFARE STATE | 421

Historically, clearing these hurdles has required an extraordinary

combination of events. This feat has been accomplished only twice in the twentieth century, during the mid-1 930s and mid-1960s - the two big bangs of American welfare state formation.43 The first period wit- nessed passage of the Social Security Act; the second witnessed passage

of Medicare, Medicaid, and a variety of social service, education, and job training programs targeted at the poor. Explanations for each burst of legislation depend, of course, on which hurdles one believes are decisive. For some scholars, the key event was the election of liberal Democrats to the White House (Franklin Roosevelt and Lyndon

Johnson) and Congress. For others, economic crisis, public protest,

the actions of organized labor, or the actions of far-sighted capitalists

provided the impetus for policy innovation. Resolving these debates

is less important than observing that each of these events was in its own way extraordinary.

It follows that if the barriers to enactment are large, attempts to

surmount these barriers will be strenuously opposed. The ensuing struggle will be overt. The key pieces of social welfare legislation have generated significant debate, controversy, and struggle at the time of their enactment. Thus, we would expect that the scope of conflict or the range of government officials and interest groups active in the process of enactment, as well as the intensity of debate, should be quite broad. Passage of the Social Security Act and Medicare bill are two classic examples of these general patterns.

The origins of new tax expenditures have followed a much different pattern. The starkest contrast is the timing of new tax expenditures. Unlike traditional social programs, tax expenditures have been created throughout the twentieth century (see Table 4). At least two have been created in every decade since the 1910s. Some of the largest tax expenditures currently, such as the home mortgage interest deduction, were embedded in the first permanent individual income tax, passed in 1913. Several important measures, including corporate pensions (1926), passed during the late 1910s and 1920s, a period better known for its resistance to social policy initiatives at the national level. The next wave of tax expenditures exempted benefits from public programs created during the New Deal. Several measures passed in the 1940s, 1950s, and early 1960s did indirectly for health care and housing what

43 This oft-used metaphor originated with Christopher Leman, "Patterns of Policy Development:

Social Security in the United States and Canada," Public Policy 25 (1977): 261-91.

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422 POLITICAL SCIENCE QUARTERLY

TABLE 4

Chronology of the Hidden Welfare State

Date Tax Expenditure

1913 Original tax code included deductions for home mortgage interest, property taxes, state and local taxes, interest on life insurance savings, casualty losses, and nonmortgage consumer interest (since eliminated)

1917 Charitable deductions

1918 Workers' compensation benefits

1920 Group term life insurance

1921 Capital gains; capital gains at death

1926 Corporate pensions

1935 Railroad retirement system benefits

1938 Unemployment benefits (since eliminated)

1941 Social Security (then OASI) benefits

1942 Extraordinary medical benefits

1946 Accelerated depreciation on rental housing 1951 Capital gains on home sales

1954 Corporate health benefits; child and dependent care expenses; scholarship and fellowship income 1962 Keogh retirement plans for the self-employed

1964 Capital gains on homes sales for persons age 55 and over 1971 WIN tax credit (later combined with TJTC) 1974 Individual Retirement Accounts (IRAs)

1975 Earned Income Tax Credit

1977 New Jobs Tax Credit (replaced by TJTC)

1978 Targeted Jobs Tax Credit

1981 Employer-provided child care

1986 Low-income housing

1990 Child health insurance; Young Child Tax Credit

Source: U.S. Senate Committee on the Budget, Tax Expenditures: Relationships to Spending Programs and Background Material on Individual Provisions (Washington, DC: Government Printing Office, 1986); Witte, Politics and Development of the Federal Income Tax, 276-82.

the government could not or would not do directly. Since 1960, the major initiatives have offered individuals alternative sources of retire- ment income and targeted a variety of needs of lower-income tax- payers. The Earned Income Tax Credit (EITC) and Targeted Jobs Tax Credit (TJTC) fall in this latter category. Making sense of this overall pattern is beyond the scope of this article and merits further investigation. For now it is sufficient to note that whereas the visible welfare state was built in two short, intense bursts, the hidden welfare state was built steadily over nine decades.

This pattern means that sometimes new tax expenditures coincided with momentous social and political developments; more often they did not. Tax expenditures have been enacted under a variety of political regimes. One can argue that the unusual strength of liberal (or socially

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THE HIDDEN AMERICAN WELFARE STATE | 423

progressive) politicians is associated with creation of new tax expendi- tures in 1913, the late 1930s, and early 1940s. Nevertheless, other combinations of party control also seem conducive to new tax expendi- tures. Although the New Jobs and Targeted Jobs Tax Credits passed under unified Democratic control of government, then president

Jimmy Carter was the most conservative Democrat president of the twentieth century, and his vision of the American welfare state differed sharply from that of Roosevelt and Johnson." Tax expenditures for corporate pensions and corporate health benefits, two of the three largest programs currently, were enacted under unified Republican control for the White House and Congress. The Work Incentive (WIN) tax credit and Earned Income Tax Credit were enacted when Republi- cans controlled the White House and Democrats controlled Congress.

By the same token, the steady pattern of enactment indicates that social movements and mass protest, which occur infrequently, have not been essential to the creation of most tax expenditures. Even during times of social ferment, new tax expenditures have seldom been de- manded. None of the social movements of the 1970s (antiwar, women's environmental), for instance, advocated anything like the EITC or TJTC; the plight of the working poor was not on their agendas.

Interest-group pressure has been evident in only a few cases, most notably the role of the Red Cross and other charities in passage of the tax deduction for charitable contributions (1917).45 Typically, groups representing beneficiaries and service providers appeared only after these programs had been enacted. The same appears true of organized labor, which has become a strong advocate of existing tax expenditures for corporate fringe benefits. The one case I have found in which labor tried to influence the creation of a new tax expenditure (the Targeted Jobs Tax Credit), it failed.

The role of business interests deserves close scrutiny, for both the corporate liberal wing of the social policy literature and the tax policy literature predict that business should be instrumental.46 Here it is

" Carter, after all, favored increasing the work requirements on welfare recipients and augmenting the role of business in job training programs. And his Commission on Pension Policy recommended greater reliance on corporate pensions for retirement security in order to reduce pressures for expan-

sion of Social Security.

4S Jerold L. Waltman, Political Origins of the U.S. Income Tax (Jackson: University Press of Mississippi, 1985), 51.

46 A variety of corporate liberal explanations, some more nuanced than others, are represented by Berkowitz and McQuaid, Creating the Welfare State: The Political Economy of Twentieth-century Reform, 2nd ed.; G. William Domhoff, "Corporate-Liberal Theory and the Social Security Act: A

Chapter in the Sociology of Knowledge," Politics & Society 15 (1986-1987): 297-330; Colin Gordon,

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424 | POLITICAL SCIENCE QUARTERLY

worthwhile to examine a few cases in depth. Each case selected corre-

sponds to a principal mode of social protection in the United States.47 The first case, the tax expenditure for corporate pensions, is an inclu-

sive social insurance program, comparable to Social Security. The Targeted Jobs Tax Credit is a human capital program designed to improve the job skills and job opportunities of disadvantaged workers. The third and final case is the Earned Income Tax Credit, a means- tested income transfer. If business influence is important, these cases

should illustrate that influence, since all three of these tax expenditures function to lower employers' labor costs.

Business influence, to the extent it matters, appears to be less instru- mental and more structural than the social policy and tax policy litera- tures would lead one to believe. The one instance in which employers participated directly, they failed to have much of an impact. Business interests were divided over the New Jobs Tax Credit (NJTC), the imme-

diate predecessor of the Targeted Jobs Tax Credit. Larger, capital- intensive firms favored a bigger increase in the investment tax credit, while smaller, labor-intensive firms favored the NJTC. One year later, the same business interests that pushed for the NJTC failed to prevent Congress from changing it into the Targeted Jobs Tax Credit. The National Federation of Independent Business, a leading representative of small business, argued unsuccessfully that targeting would place too great an administrative burden on small firms and that such firms would be uninterested in hiring the categories of disadvantaged

"New Deal, Old Deck: Business and the Origins of Social Security, 1920-1935," Politics & Society

19 (June 1991): 165-207; Quadagno, The Transformation of Old-Age Security; and James Weinstein,

The Corporate Ideal in the Liberal State, 1900-1918 (Boston: Beacon Press, 1967). Students of tax

policy usually point out that business interests are not alone in seeking tax expenditures; a variety

of special interests do so. Business interests are simply more successful at it. Business influence

results from greater access to the revenue committees, which is in turn a function of money and

expertise in tax matters. Concerning the origins of tax expenditures, see the citations in footnote

19 as well as Jeffrey H. Birnbaum and Alan S. Murray, Showdown at Gucci Gulch (New York:

Vintage Books, 1987); David G. Davies, United States Taxes and Tax Policy (New York: Cambridge

University Press, 1986), 285; JoAnn Klimschot, The Untouchables: A Common Cause Study of the

Federal Tax Expenditure Budget (Washington, DC: Common Cause, 1981); Ralph Nader Congress

Project, The Revenue Committees (New York: Grossman, 1975), 109; Stanley S. Surrey, "The Con-

gress and the Tax Lobbyist -How Special Tax Provisions Get Enacted," Harvard Law Review 70

(May 1957): 1145-82. Witte questions the role of special interests in creating tax expenditures in

Politics and Development of the Federal Income Tax.

47 This typology is similar to that used by Gary Burtless, "Public Spending for the Poor: Trends,

Prospects, and Economic Limits" in Sheldon Danziger and Daniel Weinberg, eds., Fighting Poverty:

What Worksand WhatDoesn't (Cambridge, MA: Harvard University Press, 1986), 18-49. Additional

detail concerning the origins of these programs can be found in Howard, "The Hidden Welfare

State: Tax Expenditures and Social Policy."

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THE HIDDEN AMERICAN WELFARE STATE | 425

workers specified in the legislation. There is little evidence that business leaders lobbied for the Earned Income Tax Credit or the tax expendi- ture for corporate pensions.

In the case of corporate pensions, such direct involvement may have

been unnecessary. The origins of this tax expenditure, a minor political footnote at the time, should be understood in the context of a profound

transformation in tax politics which took place between the 1870s and 1920s. What began as a zero-sum contest over income distribution, fraught with class conflict, became over time a positive-sum game in

which concessions to business were seen as an essential stimulus to investment and economic growth.48 Changes in party control of gov- ernment were central to this transformation. Prior to World War I, a coalition of Democrats and progressive Republicans succeeded in enacting the first permanent income taxes on corporations (1909) and individuals (1913). These legislators and the interests they represented favored using income taxes to redistribute wealth from the urban, industrial Northeast to the more rural, agrarian South and Midwest. After the war, a pro-business coalition led by conservative Republicans

such as Treasury Secretary Andrew Mellon succeeded in reorienting tax policy toward accumulation and investment. Seen in this context, the tax expenditure for occupational pensions was one of several mea- sures designed to lower the tax burdens on capital, thereby solidifying business support for the Republican party. On major issues like low- ering corporate tax rates, conservative Republicans worked in concert with business organizations like the National Industrial Conference Board and the National Tax Association. For a minor matter like the tax treatment of corporate pensions, which only a small fraction of employers offered, Republicans did not need to be instructed what to do. Most likely, they acted in anticipation of business demands.49

Interestingly, the actors who keep surfacing as the builders of the hidden welfare state are moderate and conservative members of Con- gress. This finding runs contrary to the social policy literature, which typically depicts these legislators as antagonistic to new social pro- grams, and to the tax policy literature, which usually portrays them

48 Ronald Frederick King, "From Redistributive to Hegemonic Logic: The Transformation of

American Tax Politics, 1894-1963" Politics & Society 12 (1983): 1-52.

49 Thus, this explanation resembles more the structural arguments of Fred Block and Charles

Lindblom than the corporate liberal arguments of James Weinstein and G. William Domhoff. For

more detail concerning the origins of this program, see Howard, "The Hidden Welfare State,"

chap. 2.

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426 | POLITICAL SCIENCE QUARTERLY

as passive agents of powerful interest groups.50 Although a liberal Democrat, Charles Rangel, helped shepherd the Targeted Jobs Tax Credit through the House, southern Democrats and moderate Republi- cans influenced the structure of both it and its forerunner, the New Jobs Tax Credit. Senator Russell Long (D-LA), architect of the Earned Income Tax Credit, was a vocal critic of AFDC and other welfare programs. The Nixon administration's Family Assistance Plan (FAP) went too far, in his view, in guaranteeing an annual income to the unemployed. His workfare package, including a 10 percent work bonus that eventually became the EITC, was designed to boost the work incentives of the poor and eliminate many of them from the welfare rolls. Representative Al Ullman (D-OR), chairman of the Ways and Means Committee and a moderate Democrat, was the chief sponsor of the EITC in the House. Ullman may not have shared Long's antipathy toward welfare, but he objected to FAP for similar reasons. Ullman also opposed proposals put forward by liberal Democrats to guarantee employment in the public sector to the poor. Senator George McLean (R-CT), who sponsored the key amendment creating the tax expendi- ture for corporate pensions, was of all things a conservative Repub- lican. More recently, Senator Lloyd Bentsen (D-TX), a Finance Com- mittee chairman in the tradition of Russell Long, pushed through a tax credit for child health insurance. Although such individuals have typically been viewed as barriers to expansion of the American welfare state, they are better understood as opponents of direct forms of social spending.

The final distinctive aspect of the origins of these tax expenditures is the scope of conflict. Not surprisingly, given the routine introduction of new tax expenditures, the scope of conflict has been relatively narrow. Although it appears that the process of creating new tax expen- ditures has become more visible and contentious over time - particu- larly after a series of congressional reforms in the late 1960s and early 1970s opened up the process of making tax policy -the scope of con- flict has never reached the level of the Social Security Act or Medicare bill. The tax expenditure for corporate pensions had probably the quietest start of any major social program in the contemporary welfare

so Concerning the role of Congress in blocking or diluting social welfare legislation, see footnote 5. Some students of tax policy portray members of the revenue committees as little more than department store clerks: "Seekers of special tax breaks make a quick congressional shopping trip to the tax-writing committees where tax expenditures are designed" (Klimschot, The Untouchables, ii). Most of the tax policy literature cited above in footnote 46 also applies here.

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state. Members of Congress approved it without debate late one night as they worked out the details of the Revenue Act of 1926. The legisla-

tive sponsor, Senator McLean, offered no explanation or justification for the favorable treatment of corporate pensions. A similar provision passed as part of the Revenue Act of 1921 also failed to trigger anything

approaching a debate or struggle. The same silence characterized Trea-

sury Decision 2090 (1914), which was the earliest official statement regarding the tax treatment of corporate pensions.

The Earned Income Tax Credit did emerge out of highly charged debates over the Family Assistance Plan. Yet the EITC generated little attention between 1972, when Senator Long first proposed the 10 per- cent work bonus, and 1975, when it passed. Instead, advocates of welfare reform debated the wisdom and adequacy of a guaranteed annual income. After FAP died in Congress, Richard Nixon defined welfare reform to mean administrative reform of Aid to Families with Dependent Children, and antipoverty groups fought to increase and standardize AFDC benefit levels. Long singlehandedly kept the EITC alive until he found a way to bury it deep in the Tax Reduction Act of 1975.

There was a noticeable difference between passage of the EITC and passage of the Targeted Jobs Tax Credit a few years later. The New Jobs Tax Credit, forerunner of the TJTC, was one of the more conten- tious provisions the Tax Simplification and Reduction Act of 1977. Representatives of business, labor, government, and academia openly debated the merits of various employment tax credits, including ver- sions that resembled the later TJTC. Because many key actors had registered their preferences in 1977, it was unnecessary to rehash these debates in 1978, and the TJTC passed easily. Few people, however, would compare debate over the New Jobs Tax Credit and tax simplifi- cation in 1977 with Medicare or Social Security; few social scientists, much less attentive citizens, could probably name a single component of the 1977 bill.

All three tax expenditures were appended to larger revenue or tax reform bills. All three were dwarfed by other parts of these bills, both in terms of dollars and the time and energy required to pass them. No separate floor votes were taken on any of these tax expenditures. Hardly anyone at the time trumpeted their passage or predicted that dire consequences would result. Hardly anyone noticed at all.5"

51 Stanley S. Surrey alleges that the quality of debate and deliberation suffers accordingly. "It

can generally be said that less critical analysis is paid to these tax expenditures than to almost any

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We have additional evidence that a narrow scope of conflict and absence of struggle are typical of new tax expenditures. While some tax expenditures (such as charitable contributions) appear to have been the product of conscious lobbying by prospective beneficiaries, they were never seriously debated or contested. They, too, were insignifi- cant parts of larger revenue bills. Most of the tax expenditures em- bedded in the original 1913 tax code - such as those for home mortgage interest, property taxes, and state and local taxes - appear to have been uncontroversial legacies of the Civil War tax codes. Legislators spent far more time and energy debating whether or not to create an income tax and if so what rates to charge on different incomes.52

The reasons why new tax expenditures face lower hurdles than new direct spending programs become clear when we shift the emphasis away from the barriers confronting new social programs and focus more on the possibilities. In fact, these possibilities are often barriers seen from a different angle. Here the tax policy literature provides important insights. Although these scholars have overstated the role of business interests in creating tax expenditures, they have correctly noted that the structure of Congress facilitates passage of tax expendi- tures vis a vis appropriations.53 As Richard Fenno, John Manley, and other scholars have well documented, the revenue committees have been the most prestigious and powerful committees in Congress for much of the twentieth century.54 Their chairmen, men such as Wilbur Mills and Russell Long, have been some of the most powerful single members of Congress. Part of their power resulted from the programs under their jurisdiction, which include all tax matters and since 1935 Social Security. In the House, Democratic members of the Ways and Means Committee gained added clout by virtue of their responsibility for all Democratic committee assignments between the 1910s and

direct expenditure program one can mention. The tax expenditures tumble into law without sup- porting studies, being propelled instead by cliches, debating points, and scraps of data and tables that are passed off as serious evidence" (Pathways to Tax Reform, 6). Similar judgments can be found in Ralph Nader Congress Project, The Revenue Committees, 109.

52 Waltman, Political Origins of the U.S. Income Tax.

S In addition to the citations in footnote 19, see Thomas J. Reese, The Politics of Taxation (Westport, CT: Quorum Books, 1980); Catherine E. Rudder, "Tax Policy: Structure and Choice" in Allen Schick, ed., Making Economic Policy in Congress (Washington, DC: American Enterprise Institute, 1983), 196-220.

S4 Richard F. Fenno, Jr., Congressmen in Committees (Boston: Little, Brown, 1973); John F. Manley, The Politics of Finance (Boston: Little, Brown, 1970); Randall Strahan, New Ways and Means: Reform and Change in a Congressional Committee (Chapel Hill: University of North Carolina Press, 1990).

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THE HIDDEN AMERICAN WELFARE STATE | 429

1970s. Even after the revenue committees lost some of their formal powers in the late 1960s and early 1970s (for example, closed rule consideration of revenue bills), and even after budget deficits in the 1980s limited their options, they remained quite influential. The rev-

enue committees certainly wielded more clout than the education and labor committees, the other major sources of social welfare legislation in Congress, whose members typically favored direct spending. As a

general rule, when the revenue chairs advocate passage of a new tax expenditure - as Russell Long did with the Earned Income Tax Credit and Lloyd Bentsen did with the tax credit for child health insurance - chances of enactment are good.

Whereas direct spending programs require new legislation, which Congress is not obligated to act upon, tax expenditures can be tucked away in must-pass revenue bills, which originate with the revenue com- mittees. These advantages help to explain why Long's work bonus failed as part of various social welfare bills between 1972 and 1974 and succeeded as part of the Tax Reduction Act of 1975. They help to explain why the Targeted Jobs Tax Credit passed as an amendment to the Revenue Act of 1978 after failing as part of President Carter's urban aid package.

Furthermore, although political authority has been highly frag- mented for direct spending programs, it has been somewhat more centralized for tax expenditures. Unlike direct spending programs, which must be authorized by one congressional committee and funded by another (in each house), tax expenditures are authorized and funded by the same committee in each house. The number of possible veto points in Congress is thereby cut in half. More specifically, this struc- ture prevents the appropriations committees from imposing the same fiscal discipline on the revenue committees that they do on the author- izing committees.

The origins of tax expenditures depend heavily, then, on the structure of tax policy making in Congress. This observation suggests that we need to reevaluate the impact of party competition on social programs. Although party competition is commonly cited as a determinant of social spending by state governments, it is not believed to play an important role at the national level." In contrast, party competition

ss The chief exception appears to be veterans' pensions of the late nineteenth and early twentieth

centuries. Theda Skocpol, Protecting Mothers and Soldiers (Cambridge, MA: Harvard University

Press, 1992). Examples of the state policy literature include Charles F. Cnudde and Donald J.

McCrone, "Party Competition and Welfare Policies in the American States," American Political

Science Review 63 (September 1969): 858-66; Edward T. Jennings, "Competition, Constituencies,

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has been central to tax policy; and because tax expenditures are consid- ered tax measures and not appropriations, party competition has af- fected tax expenditures as well.56 During periods of heightened compe- tition, political parties have competed for the support of key blocs of voters by selectively lowering their tax burdens. Party competition, for example, was integral to creation of the tax expenditure for corporate pensions in 1926. This program was part of a larger effort by Republi- cans to reorient tax policy from income redistribution to corporate accumulation and investment. Party competition was associated as well with passage of the Young Child Tax Credit in 1990, as Democrats and Republicans competed to be the pro-family party.57

Some students of tax policy would argue that the structure of Con- gress provides both the opportunity and the motive for creating new tax expenditures.58 In their view, such expenditures provide members of the revenue committees, who have the politically unenviable task of levying taxes, a valuable opportunity to claim credit for spending money on a specific constituency. In the context of weak political parties and frequent elections (at least in the House), individual legisla- tors must regularly provide constituents with divisible benefits if they hope to be reelected. This task is complicated for members of the revenue committees, who cannot distribute pork via the traditional

channels of appropriations. Instead, they try to lower the tax burdens on specific individuals and groups.

The validity of this explanation is debatable. It does not help us understand the creation of the tax expenditure for corporate pensions, since McLean was not a member of the Senate Finance committee. Conceivably, his proposal could have appealed to members of the revenue committees for the reasons cited above, but the lack of debate

and Welfare Policies in American States," American Political Science Review 73 (June 1979): 414- 29; V. 0. Key, Jr., American State Politics: An Introduction (New York: Knopf, 1956); Duane

Lockard, New England State Politics (Princeton, NJ: Princeton University Press, 1959); and Robert D. Plotnick and Richard F. Winters, "Party, Political Liberalism, and Redistribution," American

Politics Quarterly 18 (October 1990): 430-58.

56 Concerning the importance of parties and party competition to tax policy, see Susan B. Hansen, "Partisan Realignment and Tax Policy 1789-1976" in Paul Peretz, ed., The Politics of American

Economic Policy Making (Armonk, NY: M. E. Sharpe, 1987), 233-54; Charles H. Stewart III, "The

Politics of Tax Reform in the 1980s" in Alberto Alesina and Geoffrey Carliner, eds., Politics and

Economics in the Eighties (Chicago: University of Chicago Press, 1991), 143-70; Witte, Politics

and Development of the Federal Income Tax. 57 Party competition can also fuel expansion of existing tax expenditures, as happened with the

Earned Income Tax Credit in the 1980s.

58 See, for example, Steinmo, "Rethinking American Exceptionalism."

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THE HIDDEN AMERICAN WELFARE STATE | 431

at the time and credit-claiming behavior afterward suggest that these considerations were not decisive.

A case can be made that Russell Long used the Earned Income Tax Credit to provide material benefits to low-income workers in his state. In addition, the combination of his opposition to AFDC and support

for the EITC might have conferred symbolic benefits upon voters who feared that the government was doing too much for blacks and

undermining the work ethic. It seems equally plausible that Long be- lieved that the EITC was good public policy - at least relative to AFDC

and guaranteed income proposals - and expected no direct electoral

benefit. The dollar value of the tax credit was not large, those eligible for the credit had low rates of voter participation, and Long was a virtual lock for reelection.

It seems unlikely that architects of the Targeted Jobs Tax Credit were trying to win the support of small business, which after all opposed the TJTC. And the idea that they were vying for the votes of disadvantaged urban youth and the handicapped seems far-fetched. More likely, they thought that the TJTC would make a dent in structural unemployment and was therefore worthwhile.

In short, the reelection motive probably applies less to the creation of tax expenditures with social welfare objectives than it does to the creation of tax expenditures targeted at corporations and wealthy indi- viduals, and to politicians' support for existing tax expenditures.59 One can make the more general claim that tax expenditures enable members of the revenue committees to accomplish their individual goals, what- ever those goals may be, without having to go through the authorizing and appropriations committees.

In addition to the structure of Congress, the structure of tax expendi- tures as a policy tool makes their introduction less controversial than comparable direct spending programs. The most important policy at- tribute of tax expenditures is ambiguity of purpose. The purpose of direct spending programs for social welfare is usually straightforward: to provide assistance to those in need. Tax expenditures are harder to pigeon-hole as welfare or even social insurance. Sometimes they are portrayed as social welfare programs; sometimes they are portrayed as tax relief. The potential to reduce the tax burdens on low-income

59 Moreover, the reelection motive applies only to tax expenditures created by the finance commit-

tees. Some tax expenditures were created by administrative ruling, and others were first proposed

by presidents or members of other congressional committees.

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workers appears to have persuaded House Democrats, many of whom were skeptical of Long's previous workfare bill, to accept the EITC. Tax expenditures can also be portrayed as subsidies to private sector producers, which provide most of the goods and services underwritten by the tax code.

Finally, policy makers may embrace new tax expenditures strategi- cally as a way to constrain the growth of direct spending. Senator Long, for example, evidently hoped that his work bonus would drain support away from the Family Assistance Plan and proposed increases in AFDC benefits. Likewise, Senator Herman Talmadge of Georgia, another conservative Democrat, appears to have initiated the WIN tax credit for employers who hired welfare recipients as an alternative to increased spending for the Job Corps and other Great Society job training programs.60 Using tax expenditures to check the growth of the visible welfare state appears to have become more prevalent since the 1960s. This strategy also helps to account for the persistence and expansion of existing tax expenditures. Senator Robert Packwood (R- OR), a powerful member of the Senate Finance committee, has repeat- edly defended the tax expenditure for corporate health benefits as a means of preventing the introduction of national health insurance.

These various objectives are not mutually exclusive. Policy makers can and probably do support tax expenditures for more than one reason. Such ambiguity helps proponents of new tax expenditures forge broader coalitions of support than proponents of new appropria- tions are typically able to do. Whatever their motivation, elected offi- cials find it easier to support new tax expenditures than new direct spending programs. Ambiguity probably plays a larger role the more public and controversial the proposal. In the case of corporate pen- sions, for example, McLean had no need to frame the issue in different ways. If we are correct in believing that new tax expenditures have become more visible since the early 1970s, then we would likewise expect ambiguity to play an increasingly larger role in recent decades.

In sum, the structure of Congress has facilitated the introduction of new tax expenditures under a variety of circumstances. One cannot point to any set of political, economic, or social developments that is consistently associated with enactment. One cannot state as a general rule that business or any other interest group is the motive force behind

60 Concerning the WIN tax credit, see Congressional Record, 11 November 1969, 35053-55; U.S. Senate, Finance Committee, Revenue Act of 1971, 9 November 1971.

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THE HIDDEN AMERICAN WELFARE STATE | 433

their enactment. One cannot identify any single reason why members of the revenue committees support their enactment. The most one can do for now is create a typology of new programs. My research suggests that many of the earliest tax expenditures, including corporate pen- sions, were "inadvertent outcomes of distributional conflicts over taxa- tion."61 A second type can be understood in relation to direct spending programs. These tax expenditures were created to address needs that proponents believed could not or should not be addressed by direct spending programs. This category would include those tax expendi- tures created immediately after World War II and means-tested pro- grams like the EITC and Young Child Tax Credit created since the early 1970s.

Over time, however, Congress has become somewhat less friendly to new tax expenditures. Since the mid-1970s, Congress has appended a separate tax expenditure budget to the annual budget, thus making the incidence of tax expenditures more visible and reducing the oppor- tunities for covert action. The Budget Enforcement Act of 1990 created additional constraints by requiring any new spending to be offset with new revenues. Although tax expenditures were excluded from such offset requirements under the 1985 Gramm-Rudman-Hollings legisla- tion, they were included in the more recent act. Proponents of new tax expenditures must now specify how they plan to pay for their program. The conditions that facilitated creation of the hidden welfare state have changed, leading one to expect fewer and smaller new pro- grams.

CONCLUSION

This article has tried to demonstrate that a broader conception of governmental capacity can have profound implications for our under- standing of modern welfare states. That understanding is not so much wrong as incomplete, for it excludes indirect social spending. In the United States, inclusion of tax expenditures significantly increases the level of social spending. This finding suggests that while the United States spends proportionately less on traditional social programs than do other advanced industrial democracies, it may be less of a welfare state laggard when all forms of social spending are taken into account. Tax expenditures elevate housing programs, corporate fringe benefits,

61 This phrase was suggested to me by Ellen Immergut (personal correspondence, July 1992).

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middle-class beneficiaries, the Treasury Department, and the Internal Revenue Service to much greater prominence. The origins of tax expen-

ditures indicate that certain kinds of social programs do not require momentous changes in the political landscape in order to be enacted.

What look like barriers to welfare state formation - most importantly

the structure and membership of Congress -appear from a different

angle to facilitate expansion of the welfare state.62 Might tax expenditures present a comparable challenge to our under-

standing of other welfare states? Or, might the United States be as unusual in its reliance on tax expenditures as it is exceptional in its reluctance to appropriate funds directly for social welfare? One of

the leading students of comparative tax politics, Sven Steinmo, sug- gests that the United States is atypical in its reliance on tax expendi- tures. Based on evidence from the United States, Sweden, and Britain, he concludes that "one of the major distinguishing characteristics of

the American tax system is the huge number and amount of tax expen- ditures that complicate the tax code. No other tax system is as particu- laristic, or as complex, as the American."63 Steinmo bases his conclu- sions, however, on highly aggregate data: total tax expenditures as a percentage of total government outlays and as a percentage of total tax revenues. These data include tax expenditures for social welfare, economic growth, and other objectives. It is possible that a crossna- tional comparison including only tax expenditures with social welfare objectives would make the United States appear less exceptional.

The more fundamental problem with Steinmo's or any crossnational study is the inherent difficulty of comparing tax expenditures. The one and only time that the OECD tried to compare tax expenditures among member countries, it essentially gave up. Instead of developing a standard measure of tax expenditures and grouping programs ac- cording to function, the Organization for Economic Cooperation and

62 It is worth noting that the development of tax expenditures follows a different pattern from their origins. As is the case with direct spending programs, beneficiaries and third-party providers

become important advocates of maintaining and expanding tax expenditure programs. However,

the main agency responsible for administering tax expenditures, the Treasury Department, is a

frequent opponent rather than advocate of their expansion. Moreover, government officials have

less direct control over the growth of tax expenditures than of direct social spending. Marginal tax

rates, inflation, collective bargaining agreements, and a variety of other factors influence taxpayers'

decisions to take advantage of these tax breaks and the dollar value of their tax deductions and tax credits. Howard, "The Hidden Welfare State."

63 Sven Steinmo, "Political Institutions and Tax Policy in the United States, Sweden, and Britain," World Politics 41 (July 1989): 505, 510.

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THE HIDDEN AMERICAN WELFARE STATE | 435

Development (OECD) grouped programs by country and made no

explicit comparisons. It found that the chief obstacles to making mean- ingful comparisons were the differences among countries' definitions of their normal tax structure and of deviations from that structure.

Some countries, for instance, exempt certain foods from sales or valued added taxes and count these exemptions as tax expenditures.

Other countries consider only exemptions from income taxes as tax expenditures.6" Thus, it is difficult to compare in absolute dollar terms the magnitude of indirect social spending across countries. Future

studies may therefore need to focus on some subset of OECD countries

with comparable tax systems. Alternatively, one might circumvent these definitional issues by com-

paring the mix of direct and indirect social spending within various welfare states. However countries choose to define tax expenditures, how much do they spend through the tax code versus appropriations?

The aforementioned OECD study indicated enough variation within and across countries to make comparative study worthwhile. Canada, for example, spent almost twice as much on old age and disability programs via tax expenditures as it did via direct transfers in 1979. France, the United Kingdom, and the United States, by contrast,

funded the majority of their old age and disability programs through direct transfers. There are interesting differences within countries as well. Compared with direct spending, tax expenditures were far more important in the area of old age and disability in Canada than in family allowances or unemployment. The chief impediment to comparisons of this sort is old and sometimes partial data. The OECD has not published tax expenditure figures for years after 1980, so researchers must wade through the tax and budget documents of individual coun- tries.

We also know that countries demonstrate enough variation among their institutions to make a different sort of comparison fruitful. We have already seen how the structure of Congress effectively segregates tax expenditures from direct spending in the United States. In contrast, when Canada reformed its budget process in 1979, it grouped direct spending and tax expenditures together in ten policy areas, or enve- lopes. Budget ceilings are set for each envelope, and any proposed increase in tax expenditures must be accompanied by an equal decrease

I Organisation for Economic Cooperation and Development, Tax Expenditures (Paris: OECD, 1984).

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in direct spending within that same envelope. This system is designed to force policy makers to make explicit trade-offs between equivalent forms of spending.65 In Britain, however, the lack of coordination is even more pronounced than in the United States. There, "decisions about totals for public expenditure programmes for the next financial year are announced in the Autumn Statement in November of the previous year. Tax changes, including changes effecting tax expendi- tures, are announced in the Budget in March or April as a result of a quite separate process of decision-making."" One might investigate how three welfare states that are usually grouped together in the litera- ture have developed such different procedures for choosing between direct and indirect social spending. And then one might try to deter- mine what effect these differing institutions have on patterns of spending. Only by asking such questions will students of social policy discover how much is missing from our current conceptions of welfare states. Without an appreciation of government's multiple tools of so- cial welfare, scholars will continue to generalize about welfare states when they really mean direct spending.*

65 Congressional Budget Office, TaxExpenditures: Budget Control OptionsandFive-YearBudget Projections for Fiscal years 1983-1987 (Washington, DC: Congressional Budget Office, 1982).

1 Hogwood, "The Hidden Face of Public Expenditures: Trends in Tax Expenditures in Britain," 114.

* Earlier versions of this paper were presented at the annual meeting of the American Political Science Association, Chicago, 3-6 September 1992 and at the Harvard University Workshop on American Political Development, Cambridge, MA, 18 November 1992. Special thanks are due David

Hart, Ellen Immergut, Michael Lipsky, Gary Mucciaroni, Michael Paris, Paul Pierson, David Sicilia, Theda Skocpol, and Rick Valelly for their encouragement and constructive criticism.

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