The Hidden Welfare State Is Regressive

Christopher Howard, a professor of government at William and Mary, coined the term "hidden welfare state" to refer to spending on entitlements and welfare that is administered through the tax code. The idea is that tax credits, deductions, or preferences can function as government spending for all purposes. In other words, the government cutting your tax liability by $10,000 to buy a house is the same as the government writing you a $10,000 check to buy a house. Nevertheless, such tax expenditures aren't generally considered to be part of the welfare state.

Today the Congressional Budget Office issued a report examining the impact of such tax expenditures. The CBO tallied the revenues forgone by excluding employer-provided health care insurance, deducting income spent on mortgages, giving credits to families with children, and so on. What it found was that the big winners in the hidden welfare state are wealthier households:

As the CBO makes clear, this is a big deal. The aggregated tax expenditures that make up the hidden welfare state account for more spending (implicitly) than Social Security or defense spending does:

Why is the government sending so many dollars back to households in the top quintile? The report makes clear that just a few programs are responsible. Tax exclusions for employer-provided health insurance and retirement plan contributions are important. So are deductions for state and local taxes, charity, and mortgage payments. Preferential tax rates on capital gains and dividends are also a major factor:

In other words (words that leave out a lot of complexities about the purpose and value of many tax expenditures), the federal government is forgoing vast sums of money every year to get high-earning Americans to purchase gold-plated health insurance plans, save up for retirement, and buy bigger houses.

One caveat: The net effect of the system of federal tax expenditures is to boost the incomes of the lowest-earning quintile of Americans more than any other quintile:

Nevertheless, the fact that the majority of the benefits of the hidden welfare state accrue to the highest-earning Americans is an important one.