Prof: Both parties contribute equally to social spending

 

 

 

 

 

PULLMAN, Wash. – Though “common knowledge” says otherwise, it turns out that Republicans and Democrats spend equally on social welfare programs. The main difference, says Christopher Faricy, Washington State University assistant professor of political science, is that Republican-backed spending tends to favor wealthier Americans, while spending programs pushed through by Democrats are more likely to benefit low-income Americans.

 

In several papers in peer reviewed journals, and in a book manuscript based on his 2010 Ph.D. dissertation, Faricy argues that total social spending does not change with who controls Congress or the White House and, in fact, the amount has steadily increased since Nixon’s presidency.

 

Tentatively titled, “The Two American Welfare States: How Both Parties Increase Social Spending and Affect Income Inequality,” the book argues that while both parties increase spending on social programs, one party decreases income inequality while the other party increases it.

 

Faricy’s research goes to the heart of long-simmering debates over government spending and tax reform, as well as several overlapping hot-button issues that are much in the news right now, including healthcare reform, the federal budget deficit and the Occupy Wall Street Movement.

 

Government social programs were created to help people with few economic resources meet their minimum needs for food, housing and healthcare, Faricy says. But over the last 40 years, changes to the tax code have created a new class of beneficiaries.

 

“In the name of providing a safety net for vulnerable families,” he says, “these programs are moving a huge amount of money to the wealthiest Americans.”

 

To understand Faricy’s argument, you need to get your head around two ideas that are common currency among policy wonks and academics, but haven’t gained traction in popular discussions of government spending. The first is that, from an accounting perspective, creating a tax break is the same as creating a new spending program. They both cost the government money.

 

The second is that the United States has a divided social system that delivers welfare to one segment of the population through the public sector (i.e. Social Security and Medicaid) and to another segment of the population through tax breaks for private social programs that benefit wealthier individuals and businesses.

 

According to Faricy, when the government creates tax breaks to encourage both employees and employers to use private health plans or private retirement accounts, it is spending money so that one segment of the population has an improved standard of living – no different than conventional welfare programs. Put more simply, providing tax breaks for investing in private pension plans means the government is bankrolling retirement savings for wealthy Americans and the wealthiest Americans receive the largest benefit.

 

Come again? Well, it might help to know that Faricy first became interested in public sector welfare versus private sector welfare when, as a graduate student, he studied the way in which the Catholic Church and the Mexican government used competing social programs to earn the loyalty of the Mexican populace.

 

In the U.S., he says, the competition is between the Republicans and the Democrats.

 

 

Average increases in social spending.

Both Republicans and Democrats use government spending to deliver benefits to their perceived constituency, Faricy says. When Democrats are in power, he says, they typically prefer direct government spending on programs such as Medicare, Medicaid and Social Security, all of which show up as major expenses in the federal budget.

 

When the Republicans are in power, he says, they prefer indirect government spending, which means, primarily, tax breaks. As Faricy argues in one article, “an increase in tax expenditures for private health care insurance that costs the U.S. Treasury $100 million dollars has the exact same effect on the budget deficit as a newly proposed public health insurance option that is projected at $100 million dollars.”

 

When activists complain about government spending, they focus on direct spending, Faricy says, but that is only part of the story.

 

In 2010, direct government spending on Social Security, Medicaid and Medicare totaled about $1.43 trillion. But indirect spending in the form of tax expenditures added another $1.7 trillion to the cost of the federal government.

 

In general, Faricy says, direct spending redistributes wealth from middle class and wealthy citizens to those at the bottom of the economic pyramid.

 

For instance, a family of four making about $23,000 per year (the poverty level in 2011) receives about $7.50 in Social Security benefits for every $1 in contributions. For those making 300 percent of the poverty level, or about $70,000 for a family of four, the return is only .26 cents for every dollar contributed.

 

On the other hand, indirect spending – the spending largely hidden from public scrutiny – redistributes wealth from those who have less and gives it to those who have more.

 

In an analysis of who benefits most from tax breaks for private pensions, Faricy shows that those in the top 20 percent of income reap nearly 80 percent of the benefits. The government “spends” $200 billion on those tax breaks, he says, which can boost the after tax income of wealthy Americans as much as 4 percent.

 

Faricy’s is a simple idea with far-reaching implications, especially for those interested in the causes and effects of income inequality.

 

Frank R. Baumgartner, the Richard J. Richardson Distinguished Professor of Political Science at the University of North Carolina at Chapel Hill, says it is unusual for a graduate dissertation to hit on an idea that is not only novel, but extremely relevant to important ongoing policy debates. Faricy’s research succeeds on both counts, he says.

 

Using the tax code to deliver benefits has a huge social impact, Baumgartner says. Since the federal tax code is progressive, when a taxpayer claims a tax deduction, the benefit is also progressive, he says. More simply, the wealthier you are, the more you benefit from tax breaks.

 

For instance, Baumgartner says, if you are taxed at 25 percent and claim a tax deduction for health insurance, you get a 25 percent benefit. But if you are taxed at 35 percent and take a deduction, your benefit is 40 percent more than the person taxed at 25 percent. Moreover, if your employer doesn’t offer a health plan, or you can’t afford to take advantage of it, you get no benefit at all.

 

“That’s where this is a brilliant strategy,” he says.

 

Although the first tax breaks were created at the turn of the 20th century, it wasn’t until the late 1960s that economists and policy analysts started thinking of them as expenditures. Stanley Surrey, former assistant secretary of the U.S. Treasury, developed the concept of tax expenditures in 1967 and argued that members of Congress were using tax policy to reward favored constituencies.

 

Despite his efforts to reduce tax breaks by exposing the costs, the number of tax breaks has grown over the years. There are 191 different deductions or exemptions that benefit some people – homeowners, parents of college students, people who make significant income through capital investments – and not others.

 

By adding up all government spending on social programs, both direct and indirect expenditures, Faricy shows that in 2010 the United States was an average European welfare state.

 

“The United States is often thought to be a welfare laggard by international standards,” says Virginia Gray, the Robert Watson Winston Distinguished Professor of Political Science at the University of North Carolina at Chapel Hill. “But when you measure it the way Chris does, we’re in the middle of the pack.”

 

Gray, who served as Faricy’s dissertation advisor, says his research highlights the fact that while the United States spends less on welfare programs for the poor through direct payments, it spends more on tax expenditures than other Western nations.

 

When politicians try to work out a budget compromise, she says, they need to think about which part of the government they cut – programs that provide relief to the poor or programs that provide more cushion for the wealthy.

 

Faricy argues that all government spending should be evaluated by the same criteria: Is it accomplishing a public good that the public supports? Is it fair?