A conglomeration of tax incentives and subsidies masks federal benefits

Posted: Thursday, March 03, 2011

Ask not what your country can do for you. Ask what your country has done for you lately.

With apologies to John F. Kennedy, that’s what concerned citizens should be doing to get their heads around the debate in Washington about the appropriate size and role of government.

Despite how riveted we are by Washington blood sports, average citizens don’t always understand what “government” means. That’s not because they’re dumb; it’s because the nature of government — especially the programs it pays for that affect most Americans — has changed drastically.

Once upon a time, average Americans got most of their payback from government directly, in the form of Social Security, public assistance or the GI Bill. Since the 1970s, however, a growing share of federal social largess has been hidden in what Cornell University political scientist Suzanne Mettler provocatively labels “the submerged state” — a conglomeration of tax incentives and subsidies.

Three programs make up most of this “hidden welfare state,” as another scholar calls it. The first is employer-based health insurance, which is subsidized by the ability of businesses to deduct some of the costs from their taxes. The second is the home mortgage interest deduction for individuals, and the third is the creation of tax-free retirement accounts, into which employers and employees can contribute. Yale political scientist Jacob Hacker calculates that such “tax-advantaged” programs make up almost a third of America’s social welfare spending.

Yet a lot of citizens simply don’t recognize these as government benefits. We don’t get U.S. Treasury checks for mortgage interest deductions (the deduction just lowers our tax bill). Nor do we directly see the hand of the government in our health care; we deal with a private insurer, private doctors and our employers’ benefits representatives, not a national health service. And our 401(k) plans just seem like savings accounts, not a government benefit. The way we’ve set it all up has, in Mettler’s words, “shrouded the state’s role, making it largely invisible to ordinary citizens.”

In fact, according to a 2008 survey by the Cornell Survey Research Institute, 60 percent of respondents who received a home loan interest deduction told surveyors that they had never used a federal social program, not realizing that the tax break was the result of the government intentionally forgoing revenue to further the social goal of home ownership.

Likewise, respondents who benefited from tax-advantaged education savings accounts, such as 529 plans, were even more likely (64.3 percent) to say that they had not used a government program.

Not surprisingly, this lack of recognition that government is helping us pay for college or a new home affects people’s view of how useful Washington is. In the 2008 survey, respondents who had benefited from direct, visible programs — such as those who received unemployment benefits — were significantly more likely than those who benefited from the “submerged state” to report that they paid their fair share of taxes.

The submerged-state problem plagued President Barack Obama’s 2009 stimulus. Mettler points out that 1 out of 3 stimulus dollars was “tucked into tax breaks (for individuals) rather than in more obvious forms of social welfare such as relief payments or (direct) job creation.” It should be no surprise, then, that a CBS poll found that twice as many Americans thought Obama had raised their taxes as thought he had reduced them, or that, according to a CNN/Opinion Research Corp. poll, more than 50 percent of Americans thought the stimulus helped Wall Street and only a quarter thought it helped the middle class.

The costs of the hidden social programs are not just political. Last year’s National Commission on Fiscal Responsibility and Reform found that providing for government programs through tax breaks prevents us from fully acknowledging exactly how the government is spending its money. It called for closing off many tax breaks to provide “accountability and transparency to the federal budget process.”

Of course, tax codes tend to make peoples’ eyes glaze over. We do battle over abortion rights or illegal immigration, rather than get a grip on the submerged state. Yet it affects more Americans’ lives than those issues combined, and we barely have a clue.

• Rodriguez is a columnist for the Los Angeles Times. Readers may send him e-mail at grodriguez@latimescolumnists.com.



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