Hidden Welfare State - Structure of The Hidden Welfare State

Structure of The Hidden Welfare State

The hidden welfare state is almost half the size of the visible welfare state. In 1995, the government spent 900 billion dollars on the visible welfare state and 400 billion dollars on tax expenditures via corporate welfare, military welfare, and social welfare. The hidden welfare state provides goods and services directly comparable to those provided in the visible welfare state of direct spending. Similar to public assistance and social insurance programs of the visible welfare state, there are tax expenditures for corporations, military contractors, Wall Street, income security, health, employment and training, housing, education, and social services. The United States government spends as much, or more, on social services and on employment training through the tax code as it does through direct spending.

The Earned Income Tax Credit is an example of when the Treasury provides cash directly to individual taxpayers with no restrictions concerning the type of good or service individuals can purchase or when they can use the cash. In general, the government uses the tax code to entice market actors to consume in socially desirable ways. Tax expenditures include financial incentives to encourage employers and individuals to purchase goods like health care, housing and child care. Tax expenditures also subsidize public programs, such as Social Security, which basically benefit all citizens, although the Social Security Administration notes that poorly-paid workers benefit the most from this particular program, Social Security.

As David A. Rochefort, a Northeastern University professor, points outs, “the most significant function in the hidden welfare state is income security, accounting for roughly half of all expenditures, and the single most important program of this tax supports employer-provided pensions. Exclusion of employers' health insurance contributions from corporate taxation represents another leading area of expenditure that when combined with retirement initiatives, adds up to an enormous public subsidy for employers and their workers." These large subsidies on employer benefits are one reason affluent citizens tend to benefit from the hidden welfare state the most. These plans and benefits are usually available in larger companies, unionized companies, and better paying occupations. Also, tax expenditures often benefit activities that the less affluent can not afford to engage in, such as owning a home. The majority of tax expenditures go to people who earn more than the median income. Who benefits from the visible welfare state seems to be more equal; most benefits of the visible welfare state go to people with average income. Christopher Howard's research reveals that one quarter of direct spending goes to public assistance and three-quarter goes to social insurance and that the visible welfare state serves a far greater proportion of individuals below the poverty line than does the hidden welfare. Only about 5 percent of tax expenditures are targeted at people at or near the poverty line. Many Americans are aware of the national housing policies that help the poor through subsidized rent or public housing, however, it is misleading to think of U.S. housing programs as small and only targeted at the poor. Many middle and upper-class people benefit from housing programs because most housing programs are administered through the tax code rather than appropriations. The U.S. government spends twice as much on housing tax expenditures as on traditional housing programs. As Thomas Shapiro, author of The Hidden Cost of Being African-American, points out, the fact that most Americans are not aware of the many housing tax expenditures that the government provides shows that these programs are "ingrained and taken for granted by home owner subsidies have become, as opposed to the intense annual scrutiny programs assisting needy families receive."