The US welfare state and safety net are bigger than you think. But who are they helping?

By James Pethokoukis of AEI.

"

The US runs a massive welfare state. But Big Government is probably bigger than you realize. And it’s mostly not being run for the folks who need it the most, as New York Times reporter Eduardo Porter explains. In his piece, Porter cites new Peterson Institute research that notes government’s direct social spending (at all levels) is 19% of GDP vs. the advanced economy average of 21.5% and 26.3% for the three Nordic nations plus Austria, Belgium, France, and Italy.

But that sort of calculation misses a lot. It misses “tax breaks with a social purpose” such as the Earned Income Tax Credit and the tax exclusion for employer-provided healthcare. Nor does it include how other governments try  to “claw back” benefits by taxing them. Make those adjustments, and the US suddenly looks much less exceptional. Peterson’s Jacob Funk Kirkegaard: “The United States general government in fact spends only a few percentage points of GDP less on social affairs than most of the Scandinavian welfare states.” 

And when you add in private spending, including some mandated by law, you see the US has a pretty massive social safety net. Kirkegaard: “Taking the full effects of tax systems and social spending from both private and public sources into account, the United States is seen to be devoting more resources toward social purposes than is generally acknowledged. In fact, only the French spend more than Americans, while the alleged welfare-addicted Scandinavians and Europeans spend less on average.”


But here’s your trouble: When you combine the distribution of federal benefits and tax expenditures, you find that $32,000 goes to the top 20% versus $24,000 a year to the bottom 20%. And a big reason for that is that wealthier Americans get a lopsided benefit from tax breaks. More than half of the combined benefits of the 10 largest tax expenditures go to that top fifth of households, with 17% going to households in the top 1%.  Porter:

Such spending through the tax code not only offered the false promise of smaller government. Its most insidious effect was to hide what the government does and, notably, to shield from political debate which people it benefits most. That is clearly not those of middle and low income, who don’t earn enough to qualify for many tax deductions and often don’t even claim them. Built in the shadows, protected from democratic accountability, the government developed into a Rube Goldberg contraption that has only a weak claim to a defensible social purpose. It might not be the smallest government in the advanced world, but it can lay claim to being among the least efficient and the most unfair. … 

Interestingly, this suggests that the idea animating most liberal Democrats these days — that government must tax and spend more to provide the generous social insurance that is common among America’s peers — might be wrong. Indeed, looked at this way, the government might actually be big enough. But if the United States is to moderate the extreme inequities thrown up by the market economy and provide a true safety net to people in need, the federal government would have to tax and spend very differently.

My take on how to spend less money on people who need it the least: (a) expand the EITC, (b) better target Social Security, (c) rethink the mortgage interest deduction , (d) phase out and replace with a tax credit the tax exclusion for employer-provided health care. Just for a start …"