The Republican Party, Tax Expenditures, and the Privatization of Social Welfare

Subsidies, and particularly tax expenditures, are important components of the Republican Party's legislative strategy to privatize the public social welfare state. In the subsequent section, I examine some of the recent studies of the Republican Party's privatization efforts at the federal level. The political logic of using tax subsidies for private welfare benefits is as follows. Republican Party elites (including members of Congress, big donors, and conservative lobbyists) argue that popular social programs passed by the Democratic Party (i.e., Social Security, Medicare) are a primary reason for why voters support Democratic candidates for office. Using this logic, there are a significant number of voters who receive (or plan to receive) public social benefits and, therefore, vote for Democratic candidates to both protect and expand these government programs. In addition, the Republicans’ main legislative priority of cutting taxes is restricted as long as large social programs remain popular with the public. Republican Party leaders, beginning with conservative think tanks, argued to their members that if they were able to successfully dismantle public social programs then electoral support for the Democratic Party would erode over time (Teles Reference Teles2007). Starting in the 1970s, Republican legislators, especially the influential Jack Kemp, began to subscribe to the “Two-Santa Theory.” Here is the theory as described by its author, Jude Wanniski: “The Democrats, the party of income redistribution, are best suited for the role of Spending Santa Claus. The Republicans, traditionally the party of income growth, should be the Santa Claus of Tax Reduction. It has been the failure of the GOP to stick to this traditional role that has caused much of the nation's economic misery. Only the shrewdness of the Democrats, who have kindly agreed to play both Santa Clauses during critical periods, has saved the nation from even greater misery” (Wanniski Reference Wanniski1976). Wanniski's argument is that Republicans’ concern with balanced budgets and controlling inflation resulted in Republican tax increases during times of inflation and spending cuts during recessions. These policy changes were not popular with voters and consequently hurt the Republican Party at the ballot box. The Republican Party had to counter the Democrats’ spending with spending of their own – spending through the tax code.

Tax expenditures not only help the Republican Party play Santa Claus to the voters but are also part of another popular conservative theory, commonly referred to as “starve the beast.” The proponents of this theory argue that Republicans should cut taxes and increase tax expenditures so as to reduce federal revenues for public social programs now and into the future – so that government can be small enough to “drown it in a bathtub.” In addition, some Republican leaders argue that the best strategy to replace traditional public social programs is to create and promote comparable private alternatives. If social spending is diverted from popular programs to government subsidies for private alternatives, then citizens could be untethered from associating the Democratic Party with the social safety net (Smith, Reference Smith2000, Reference Smith2007). For example, one study argues that the Republican Party designed an attack on Social Security that required two steps: first, a weakening of public confidence in the future guarantee of retirement benefits from the federal government, and second, increasing citizens’ reliance on and familiarity with private alternatives (Teles Reference Teles2007). This study highlighted the importance of tax expenditure programs for private pension plans in efforts to privatize Social Security. Steven Teles argues “instead of describing an abstract idea, widespread use of IRAs would allow conservatives to point to something a wide range of individuals were already using and encourage them to compare their returns from Social Security and their IRA” (p. 170). A recent example of this strategy was President George W. Bush's attempt to legislate private alternatives to Social Security at the beginning of his second term in 2005 as part of an overall privatization strategy called the “ownership society.”

When President George W. Bush was reelected in 2004, he promised to spend his new political capital on social policies through ushering in the ownership society, which would introduce new federal subsidy programs to encourage Americans to save on their own for education, health care, unemployment, and retirement. The ownership society was an overarching governing philosophy that called for public programs to be replaced by more federal support for savings accounts, which would foster greater personal responsibility among citizens. Former Bush advisor Jay Lefkowitz described the ownership philosophy this way: “government's job has to become to help people become self-reliant” (Swindell et al. Reference Swindell, Schueler and Bettelheim2004). President Bush during his reelection campaign proposed a number of new tax expenditure programs such as health savings accounts, college tuition savings, unemployment savings accounts, and private retirement plans. Democrats opposed reducing the direct role of government in providing economic security to people and described the proposed tax expenditure programs as follows: “their major effect is to provide tax breaks for saving that high-income households would have done anyway” (Swindell et al. Reference Swindell, Schueler and Bettelheim2004). The Republican Party had just implemented a successful change to the Medicare program in 2003 that created federal subsidies for private prescription drug plans. Republican leaders wanted to build on this momentum to transform the other large, popular public social program Social Security into a federal subsidy program for private investments.

The foundation of this ambitious plan was rolled out right after President Bush took his second oath of office and centered on transferring a portion of Social Security into newly created “personal investment” accounts. The personal investment account proposal involved two new tax expenditure programs: one program would collapse the three existing tax expenditure programs for IRAs into one new IRA program but without tax restrictions on withdrawals, and the second proposed combining the various tax expenditure programs for employment-provided retirement plans (401ks) into one tax expenditure program for employment-based retirement and increasing the contribution limits. These plans would be phased in gradually by allowing younger workers to divert 2 to 4 percent of their payroll taxes (which are currently dedicated to Social Security) into these new accounts or having workers make contributions to the new programs that would be matched by the federal government. The opposition to the proposed tax expenditure programs came mostly from the Democratic Party. Democrats wanted to protect their signature policy achievement, Social Security, and called the proposals risky since trillions of dollars would be moved from the guarantee of Social Security into private accounts that were dependent on the performance of the stock market and by extension placed more risk on individual retirees. The financial industry, although nervous at first about collapsing the numerous existing tax subsidies into just two programs for private retirement investments, was assuaged by the promise to divert Social Security money into new investments. The financial industry has long promoted the idea of diverting the billions that go into Social Security into private retirement products – in a sense it is the political Holy Grail for investment firms.

President Bush was so committed to the idea of replacing part of Social Security with new tax expenditure programs he went on a national campaign, called “60 stops in 60 days,” to sell the idea to the public. Peter Wehner, White House director of strategic initiatives, argued in an email to Republicans that “the Social Security battle is one we can win – and in doing so, we can help transform the political and philosophical landscape of the country” (Warshaw Reference Warshaw2009). Republican leaders viewed the tax expenditures for private investments not only as good policy but also as a political necessity to sever the link between popular social programs and support for the Democratic Party. The implied message from the party is that the more citizens who are invested in the private market, the better the political environment would be for Republicans in future elections. Bush's national campaign for private accounts, while succeeding in convincing Americans that there were big problems with the solvency of Social Security, did not persuade the mass public that private investment accounts were the best solution. A Pew poll taken during Bush's national campaign showed that people with the most knowledge of the plan were also the least supportive of it and the reasons given most often for their opposition were that the plan would cut Social Security benefits and expose people to new risks. Andrew Kohut, president of the Pew Center, discussed the public opinion problem with President Bush's proposals this way: “people have multiple values: they believe in the free market and an ownership society, but they also believe in a social safety net, and in the role of government providing it” (Nather and Bettelheim 2004).

In Congress, there was a split over the plan between the few moderate Republicans left and the increasing number of conservative Republicans motivated to make history by privatizing Social Security, the cornerstone of the New Deal. One moderate Republican, Sherwood Boehlert, said that he did not “want to engage in a crap shoot with retiree benefits” so close to the midterm election (Nather and Bettelheim 2004). A real hurdle in the Republican efforts to transform Social Security came from the estimated transition costs of diverting federal money from public programs into new tax expenditure programs or vouchers. The estimated transition cost of the Bush private investment proposal was over $1 trillion and provided obstacles to persuading some Republicans concerned about the national debt. Bush was in a partisan bind on the pension reform since the component that drew the most support from conservatives in Congress, diverting Social Security funds into a new tax expenditure program, alienated the most Democrats. As the 2006 midterm elections approached, vulnerable Republicans in Congress became nervous over Bush's reform efforts, especially after the AARP lobby started a visible and well-funded campaign against the plan. Ultimately, there was never a vote on the plans in Congress given the unpopularity of the proposals with the American public, the unified Democratic opposition, the opposition of AARP, and the potential for some Republican house members to lose their seats if they had to debate and vote on the proposals so close to an election.

While this attempt at major social policy reform was not successful, the Bush administration was successful in getting other social tax expenditures passed and paved the way for future Republican efforts at privatization. The passage of Medicare Part D by a unified Republican government demonstrated how the privatization movement could be used to create wholly new private programs under the guise of a popular public program. Morgan and Campbell (Reference Morgan and Campbell2011) described this process as “delegated governance”: when the government uses indirect policy tools (such as tax expenditures) and private institutions to provide social welfare or other public goods. Medicare Part D is a federal program that provides subsidies to seniors to offset private insurance premiums and costs for prescription drugs. The passage of Medicare Part D was made possible by including a new tax expenditure program that the more conservative members of the Republican Party supported. The tax expenditure sweetener for conservatives was a long-sought-after Republican program for health savings accounts that allowed taxpayers with high deductibles for health insurance to save and withdraw tax-free money to pay for personal medical expenses. The new feature of the health savings accounts (HSAs), which differed from most other social tax expenditure programs, was that both contributions and withdrawals to the program were tax free. It was the HSA tax expenditure program that brought conservative Republicans aboard the President's plan for Medicare reform.

Morgan and Campbell (Reference Morgan and Campbell2011) argue that three factors usually bring about delegated governance in the area of social policy: conflicted public opinion about social spending, special interests with investments in the provision of private social benefits, and the difficulty of passing changes to public programs through a legislative body with multiple veto points. Morgan and Campbell (Reference Morgan and Campbell2011) document in The Delegated Welfare State how Newt Gingrich, as the Republican Speaker of the House in 1995, designed a legislative strategy that would push private-sector health care reforms as an indirect attack on the popular Medicare program (pp. 84–85). They further argue that the Republicans in Congress proposed Medicare Part D as a political strategy to alleviate public pressure for social spending, initiate a market-based reform that benefited private drug companies, and take away a potential issue from the Democratic Party (Morgan and Campbell Reference Morgan and Campbell2011, pp. 107–109). Paul Ryan's 2012 House Budget proposal, more recently, included a plan to change Medicare into a program that offers federal government grants to the elderly so they can purchase private health care insurance. In short, the Republican Party has proposed a parade of policy alternatives to Social Security and Medicare that have the common denominator of using federal money to support and subsidize the private provision and administration of social welfare benefits and services. So whether a Republican lawmaker is playing Santa Claus, starving the beast, or promoting an ownership society, it all results in a legislative strategy of increasing social tax expenditures.

A Model of Political Parties and the Divided Social System

I argue – in the partisan theory of the divided social system – that both political parties confront public demand for federal social welfare spending and respond in ways that distribute government benefits to their constituencies and shift the ideological direction of public policy. In Chapter 3, I examined the theory and found that the election of a Democratic president results in an immediate increase in public social spending. These results align with the argument that Democrats, when in power, will increase federal social spending that supports the public administration of social welfare and progressively redistributes federal resources to their electorally important constituencies. In this chapter, I turn to examining the relationship between Republican Party power and changes in both the level of tax expenditures for private social welfare and the proportion of tax expenditures to overall federal social spending.

Figure 5.1 shows how the partisan theory of the divided social system will be operationalized and tested in this chapter. I represent political party power in government through measurements of political party control of both the executive and legislative branches. There is evidence from past studies that party control of both branches can influence changes in government spending. Next, I expect that not only will political party control result in changes to direct spending and tax expenditures as individual categories of spending but will also produce predictable changes in the ratio of tax expenditures and discretionary spending plus tax expenditures (referred to here as total social spending). A change in the ratio reflects a political party's desire to pay for increases in social benefits targeted to its constituency with cuts in spending going to the opposing party's supporters.

Figure 5.1. A model of the politics of the divided social state.

My theoretical argument represented in the model in Figure 5.1 generates two hypotheses about the relationship between Republican Party power and the divided social system. First, I hypothesize that Republican Party control of the federal government results in higher annual levels of tax expenditures for social programs. Tax expenditures for private social benefits can be considered a form of conservative social policy given that it is a subsidy executed through the tax code, it regressively distributes federal money up the income ladder, and it is designed to encourage the private administration of social services and consumption of social benefits. However, my primary argument is that the Republican Party desires not only to increase tax expenditures but also to decrease or hold constant federal spending for public social programs. The second hypothesis tests the relationship between greater Republican control of the federal government and higher ratios of tax expenditures to overall social spending. The subsequent tests of these two hypotheses will demonstrate that there are clear empirical differences between the Democratic and Republican parties over how to finance social welfare and which socioeconomic groups should receive government assistance. In the next sections, I discuss the variables and time-series model that are used to empirically evaluate the partisan theory of the divided social welfare state.

The Relationship between Political Parties and Social Tax Expenditures

I test the partisan theory of the divided social system using new measurements of federal social spending in a dynamic model. First, I have created a new set of variables that measure the federal government's annual efforts to subsidize private social benefits and services through the tax code. The first dependent variable of interest, the annual level of social tax expenditures, is constructed using an original data set of federal tax expenditures for social programs. The Congressional JCT estimates annual tax expenditures in terms of revenues lost to the U.S. Treasury for each special tax provision included in the U.S. tax code. Each tax estimate is a function of subtracting predicted revenues under the current law from predicted revenue under new and expanded tax provisions. A tax provision has traditionally been listed as a tax expenditure if it deviates from the normal income tax structure and it results in more than a de minimis revenue loss ($50 million). The normal tax structure for individuals, according to the JCT, includes the following: a personal exemption and one for each dependent, the standard deduction, deductions for certain business expenses, and the current tax schedule. While there are some disagreements among economists over what constitutes a tax expenditure, most tax breaks for social purposes are safely classified as exceptions to the normal income tax law.Footnote ¹ According to the JCT and the Tax Policy Center (TPC), these estimates have been excellent predictions of actual changes in government tax receipts as calculated by IRS returns or modeled estimates (Joint Committee on Taxation 2008, Burman et al. Reference Burman, Geissler and Toder2008a).

The JCT methodology reflects certain assumptions about taxpayer behavior, and bases its estimations on federal government projections of revenue baselines and gross income.Footnote ² A tax expenditure is estimated separately, under the assumption that all other tax expenditures remain constant by measuring the revenue loss under the existing law with revenue that would be raised if the tax expenditure program did not exist, assuming constant taxpayer behavior and no changes to the normal tax structure. As an example, revisions of tax expenditure estimates reflect changes to tax law and changes that alter the baseline or normal income tax structure (e.g., tax rate schedule, standard deduction). Tax expenditures are reported and organized using budgetary categories identical to those used by the Office of Management and Budget (OMB) for the appropriations budget. In order to remain consistent between analyzing the public and private social systems, I match the budget categories previously used to measure public social spending to my newly constructed variables for social tax expenditures. There are six budget categories that qualify as federal social expenditures: education, training, employment and social services; health; Medicare; income security; Social Security and railroad retirement, and veterans' benefits and services.Footnote ³ I matched the budget categories from the OMB and the JCT to construct both the individual measure of social tax expenditures and the ratio of tax expenditures to all federal social spending. All of the social expenditure variables are adjusted for annual changes to inflation and per capita to account for any increase in spending that is attributable to overall price levels and population growth.Footnote ⁴

I constructed the following dependent variables for social spending using tax expenditures data from the JCT. The first is a measurement of federal tax expenditures for private welfare, which excludes the two programs that supplement public programs (Social Security and Medicare).Footnote ⁵ The second dependent variable is a measurement of social tax expenditures for private welfare that have regressive distributive effects and therefore subtracts out the earned income tax credit (EITC).Footnote ⁶ I expect that increases in Republican Party power at the federal level will result in large and positive changes to the annual level of social tax expenditures for both variables, with a stronger relationship between Republican control and changes to regressive social tax expenditures.

In the second set of models, I introduce a new variable, the social expenditure ratio, which represents the political and policy trade off between federal spending for public social programs and tax subsidies for private welfare benefits. The social expenditure ratio variable measures annual social tax expenditures for private welfare as a proportion of aggregate social spending, which sums yearly discretionary spending plus yearly tax expenditures.Footnote ⁷ Again, there are two measurements of federal social spending: one variable with the EITC, and a second metric without the EITC so as to capture the differences in spending and distribution effects. A higher proportion of social tax expenditures to aggregate social spending signifies years in which tax expenditures grew at a faster pace than direct social spending. All total, I expect that greater levels of Republican Party control of the federal government will produce increased social tax expenditures and a higher social expenditure ratio.

Political Party Control and Social Spending in the United States, 1970–2012

Since the relationship between Republican Party control and social tax expenditures is at the core of my analysis, I begin with some descriptive statistics on political party control of the White House and changes to the average level of social tax expenditures. In Figure 5.2, I examine the change in social tax expenditures by presidential administration from 1970 through 2012. After President Carter, who presided over a period of hyperinflation, the next largest increases in social tax subsidies were under presidents Reagan, Nixon, Ford, and George W. Bush.Footnote ¹⁰ The largest yearly increases under Republican presidents, not surprisingly, occurred in years where Republicans controlled one or both chambers of Congress. For example, the five largest one-year increases in social tax expenditures over the last thirty years were in 1983 (48.8%), 1981 (36.1%), 2008 (22.9%), 2004 (21.4%), and 2003 (18.4%). The Republican Party had unified control of government in 2003 and 2004, and controlled the White House and the Senate in 1981 and 1983. In contrast, the only decrease in annual social tax expenditures across presidential administrations occurred during President Obama's first term. Surprisingly, President Clinton – considered to be a moderate Democrat with a proclivity for social spending through the tax code – presided over a modest increase of around 7 percent.

Figure 5.2. Percentage change in social tax expenditures by president, 1970–2012.

Source: JCT data along with author's calculation.

Over the last forty years, Republican presidents have produced – on average – a 12 percent annual increase in social tax expenditures (compared to 9 percent for Democratic leaders) and Republican-controlled Senates have produced a 14 percent increase in annual social tax expenditures (compared to 9 percent for their Democratic counterparts). Only the House of Representatives experienced a reverse partisan relationship with Democratic control resulting in more social tax subsidies. While these partisan patterns of spending are suggestive of a relationship between Republican Party control and increases in social tax expenditures they do not account for changes over time or control for other economic and societal explanations for changes in federal tax expenditures.

While the previous figure shows that Republican administrations result in the faster growth of social tax expenditures, it does not speak to whether this is due to the addition of new programs or the expansion of existing ones. In Figure 5.3, I chart the growth of social tax expenditure programs over time. The largest increases in the number of programs occurred under Republican executives – President Ford and President George W. Bush. Overall, the number of programs grew exponentially from just 29 in 1970 to 81 in 2011, a 179-percent increase. I have included in the Appendix to this chapter a table that shows the expansion and addition of major tax expenditure programs through the years. Many of the large and older social tax expenditure programs expanded their eligibility, expanded their contribution limits, had caps removed, or were indexed to inflation during years of Republican Party control of the federal government. President George W. Bush alone presided over the passage of 14 significant tax bills during his tenure in office.Footnote ¹¹

Figure 5.3. Change in the number of social tax expenditure programs, 1970–2012.

Source: Author's calculation using JCT data.

Here, I examine the relationship between political party control of government and tax expenditures for private social programs across two models. The first model examines the relationship between Republican control of the federal government and changes to social tax expenditures for private social welfare programs. The second model reports the results from testing the relationship between Republican power and changes in the annual level of social tax expenditures for private social welfare excluding the most progressively redistributive program. I claim that one reason Republicans support social tax expenditures is that this type of spending distributes federal dollars up the income ladder toward wealthier voters, who tend to vote Republican. If this claim is correct, then the results should strengthen when excluding the progressively structured earned income tax credit (EITC).

The results from the two models in Table 5.1 confirm the hypotheses that increased Republican Party control of the federal government produces higher levels of tax expenditures for social programs even when controlling for economic and policy factors. The Republican welfare state is run through the tax code and directed at private social programs and their wealthier beneficiaries. Specifically, a Republican executive in the White House results in significant expansions of federal tax subsidies for private social welfare. First, a switch from a Democratic to Republican president causes an immediate increase in the level of social tax expenditures of over $100 million. This amount of change represented one-fifth of the average yearly value of social tax expenditures during this entire period. In the long run, the impact of a Republican president is even larger (over $120 million). These results are a function of designing tax expenditure benefits to rise with expected inflation and the entitlement nature of some tax expenditure programs that grow gradually over time. An increase in Republican control of the legislature, although positive in the short run, is negatively signed in the long term and both coefficients are not statistically significant from zero. The second test of Republican control and changes to regressively structured social tax expenditures again produce positively signed and statistically significant coefficients. The election of a Republican to the White House results in an immediate growth of more regressive social tax expenditures and additional long-term effects. As predicted, the election of a Republican president actually produces larger changes to the measure of regressive social tax expenditures (since a change of $84 million is larger than one fifth of the total value of social tax expenditures once the EITC is subtracted out). In addition, a changeover to a Republican executive results in an overall $200 million annual change in social tax expenditures as represented by the long-term multiplier effect and an additional $140 million long-run effect. In total, Republican presidents favor higher social spending for private welfare and especially for private welfare with upwardly distributive effects.

The economic and political controls all impact changes in social tax expenditures in the expected direction, although some take effect in the short run and others more over time. In the short term, as inflation increases – and pushes taxpayers into higher brackets – there is a corresponding increase in social tax expenditures. In the long term, a rise in economic production results in higher levels of social tax expenditures. This result could be due to a number of factors, such as increased charitable giving, more employment-based benefits, or individuals buying more health and retirement products. Next, an increase in the marginal tax rates for the richest citizens also produces an increase in social tax expenditures. As income taxes grow higher, social tax expenditures become more valuable, especially to wealthier households. These control variables perform similarly across both models. The results here show that a Republican in the White House produces substantial increases in social tax expenditures, regardless of how they are measured.Footnote ¹² The following analysis examines if the Republican Party pays for increases to tax subsidies for private welfare with cuts to public social spending for more vulnerable populations.

Republican Party Control and Changes to the Social Expenditure Ratio

Up to this point, I have shown that Democratic control of the federal government results in increased social spending for public programs and that Republican power results in higher levels of social tax expenditures for private welfare. Yet I argue in the partisan theory of the divided social system that a political party in power not only increases its preferred form of social spending but pays for it with cuts or slowdowns in the opposing party's desired form of social spending. This political trade off in preferred social spending types can be represented by the social expenditure ratio.

Figure 5.4 shows the change in the ratio of social tax expenditures to total federal social spending across the period of study. As the social tax expenditure ratio grows, so, too, does the proportion of federal social spending conducted through the tax code. In 1970, tax expenditures were just 5 percent of the government's efforts to provide social services and benefits. By 2011, social tax expenditures had risen as a proportion of total social spending to over 30 percent – a six-fold increase over forty years. More importantly, the social expenditure ratio has not grown linearly over time. The ebbs and flows in the trend line are a function of the political and policy decisions made by parties in power. For example, there was a sharp rise in the ratio starting in the mid-1970s and continuing through the late 1980s when social tax expenditures topped out at 20 percent of federal social spending. The Tax Reform Act of 1986 dropped the level of tax expenditures, but then tax expenditures consistently increased again over the next decade. The sharpest rise in social tax expenditures took place during the early George W. Bush administration, reaching a global high of 32 percent of all social expenditures in 2008. However, this ratio is driven not only by changes in social tax expenditures but also by social spending for public programs. President Reagan presided over an average decrease in discretionary social spending of −1.36 percent during his eight-year presidency. In comparison, President Obama – due mainly to the stimulus – increased discretionary social spending by 12.8 percent during his first term. The following analysis evaluates the political, economic, and policy factors that determine changes to the trade off between social tax expenditures for private welfare and federal social spending for public programs.

Figure 5.4. Changes to the annual ratio of social tax expenditures to federal social spending, 1970–2012.

Source: Author's calculation using JCT and PAP data.

Table 5.2 examines the relationship between Republican Party control of the federal government and ratio of social tax expenditures to aggregate federal social spending. The expectation is that as Republicans gain power there will be corresponding increases in the level of social tax expenditures while the growth of discretionary social spending for public programs is cut back or held constant. I import the political variables of interest from the previous analysis using a dummy variable for Republican control of the White House and an ordinal measure of Republican control of Congress. Additionally, I carry over the control variables that exercised the most influence in determining changes in social tax expenditures (the inflation rate and marginal tax rates) and discretionary social spending (households below the poverty line). The expectation for the following tests is that as Republicans gain more institutional control at the federal level, they will increase social tax expenditures for private welfare at the expense of public social spending, resulting in a higher social expenditure ratio in both the short and the long run.

The election of a Republican president in the short term and the increased power of legislative Republicans in the long term results in a higher ratio of social tax expenditures to overall federal social spending. The first model shows that a switch to a Republican President moves the ratio around six points toward more tax expenditures at the expense of stagnant or less public social spending. This impact, similar to the previous model of just social tax expenditures, occurs soon after the president takes office. Recent Republican presidents have enjoyed both high levels of public approval and legislative environments favorable to making these types of social spending trade offs in their first few years. The impact of a Republican executive grows larger in the second model when the social expenditure ratio reflects just regressively redistributive tax expenditure programs. A Republican Congress increases the social expenditure ratio in the long run. The long-run multiplier indicates that increased Republican power in the legislature results in a ten-point shift toward tax expenditures in the ratio. Again, the relationship between Republican power and changes in the ratio are stronger in the second model, which isolates more regressive social tax expenditure programs. There were actual increases in the size of the long-term multiplier coefficient in 1983, 1986, 2003, and 2004 all years of majority Republican control of the federal government. These results point to significant social expenditure trade offs being made during the first term of President Reagan and during the period of unified Republican control under President George W. Bush. Altogether, Republican power at the federal level produces a social policy trade off with increased subsidies for private social welfare coming at the cost of stationary or reduced public social spending.Footnote ¹³

The economic and societal control variables had minimal and somewhat surprising effects on changes in the ratio. Most surprisingly, an increase in the number of poor families corresponds with an increased social expenditure ratio. In Chapter 3, the empirical results indicated that changes in families below the poverty line negatively correlated with public spending. Recent research (Bartels Reference Bartels2008, Gilens 2012) has shown that policymakers tend to systemically ignore the public preferences of the poor. An increase in inflation produces negative changes in the ratio in the long term. The negative relationship between inflation and spending could be due to decreased overall government spending after periods of high price levels.Footnote ¹⁴

In conclusion, the Republican Party uses federal money to finance an American social welfare state. However, this unique welfare state is one that is subsidized through the tax code, is administered by private entities – mainly businesses through employment-based social programs – and benefits more economically secure citizens. Not only is there evidence of Republican control resulting in higher levels of tax subsidies for private welfare but these increases in tax expenditures come at the expense of discretionary public programs that serve the poor, veterans, and schoolchildren. However, the aforementioned set of analysis treats political party control the same over the years so that Republican control of the White House in the 1970s is operationalized the same as Republican control in the 2000s. Republican party leaders have become more conservative over time and Democratic leaders more liberal. I would, therefore, expect a larger shift in the social expenditure ratio between a liberal Democrat and conservative Republican than between moderates from different parties. In the next section, I examine how changes in the political ideology of political party leaders in government determine changes to the social expenditure ratio.

Testing Alternative Explanations for Changes to Federal Social Spending

While the previous analysis found that political party control of the federal government determines both the modality and degree of social spending, there are other possible explanations for changes in social expenditures. For one, it is possible that social tax expenditures are not just the preferred spending mechanism of the Republican Party but rather a compromise policy position in an era of increased polarization and divided government. Tax expenditures may represent a compromise policy position that attracts Democratic support as a form of government financing for popular social goals and appeals to Republicans as a way to reduce citizens’ tax burden. For example, if the president's party does not control Congress, resulting in divided government, then it makes passing sizeable changes to traditional public social spending more difficult for Democrats and large-scale tax cuts harder to achieve for Republicans. Therefore, it could be the case that the two political parties negotiate an increase to social tax expenditures as a politically acceptable, although not preferred, policy outcome. If I find that either divided government or party polarization is responsible for changes to the social expenditure ratio (and not Republican control of the federal government) then the idea that political party control determines social spending changes must be modified. The following sections review the extant literature on polarization, divided government, and social spending.

There has been a dramatic rise in the ideological polarization between the two major political parties since the 1970s, whether it is measured by interest group scores (Groseclose et al. Reference Groseclose, Levitt and Synder1999) or roll call votes (Poole and Rosenthal Reference Poole and Rosenthal1997, McCarty et al. Reference McCarty, Poole and Rosenthal1997). Political polarization is the increased intraparty preference homogenization as evidenced by the ideological position of each party's members moving closer together in space and time (Poole and Rosenthal Reference Poole and Rosenthal1984, McCarty et al. Reference McCarty, Poole and Rosenthal1997). In plain language, Democrats have become more liberal and Republicans much more conservative over time. As the two major political parties pull apart ideologically, they are also becoming more uniform internally as measured by the decreased variance of each party's voting coalition in the legislature. Since 1990, more than half of congressional votes have featured a majority of one party opposing a majority of the other (McCarty et al. Reference McCarty, Poole and Rosenthal2006). The major implication of party polarization for policymaking is that it makes bipartisan legislation more difficult to pass. McCarty, Poole, and Rosenthal (Reference McCarty, Poole and Rosenthal2006) in their study of party polarization and income inequality reveal that party polarization in Congress is associated with diminished social spending. If polarization has caused less public social spending then it may incentivize Democrats to compromise with Republicans to increase the use of social tax expenditures. And although both political parties have polarized, they have not polarized equally. While the Democratic Party has moved to the center-left, Republicans have become much more conservative (Hetherington Reference Hetherington2001, Mann and Ornstein 2012, McCarty et al. Reference McCarty, Poole and Rosenthal2006). The unequal polarization of the two parties may favor the use of tax expenditures as a compromise position, as that position has moved from the ideological center to a center-right position.

Political party polarization also has consequences for the creation of new social tax expenditure programs. Howard (Reference Howard1997) finds that, historically, more moderate members of Congress sponsored important new tax expenditures. So besides making compromise across the legislative aisle more difficult, party polarization also signals a decrease in the amount of moderate legislators. The replacement of moderate legislators with more ideologically extreme members has repercussions for changes to social policy. If moderate members of both political parties have been responsible for doing the heavy lifting of creating and shepherding new social tax expenditures through the legislature then the decrease in moderate members may reduce the use of a potentially moderate policy tool – social tax expenditures. In addition, as more ideologically extreme members dominate the internal party negotiations it has become more difficult for a majority party leader to design social policy that attracts members of the minority party without alienating the most ideologically extreme members of his or her own coalition. Jones (2001) argues that party polarization results in legislative gridlock. He concludes that by including party polarization and party seat division in a model along with divided government, the divided government effects on legislative gridlock go away while polarization and seat division are highly correlated with gridlock. If polarization makes legislative compromise more difficult between the two parties then social tax expenditures are less likely to increase.

In the following model, I place political party polarization alongside political party control of the federal government in testing the political causes to changes in social spending. I represent political polarization using the Congressional difference of party means measure. This measure is created by scaling the DW-NOMINATE scores that allow the House and Senate to be compared across time and space, with higher values signaling more party polarization (Poole Reference Poole1998). I use the overall Congressional measure of party polarization instead of using the separate measure for the House and Senate since the two chamber measurements correlate so highly with the overall measure. There are two possible outcomes with party polarization included as an independent variable. If tax expenditures are a moderate compromise position, then polarization should make compromise less likely and reduce the level of tax expenditures. A second possibility is that as the Republican Party has moved to the far right the compromise policy position between the two parties has moved from the center to center right, which would cause more tax expenditures to be passed by the legislature.

Conclusion

The analysis in this chapter provides evidence for the partisan theory of the divided social state. In particular, I show that political party control of government determines which type of social spending is utilized and, by extension, who administers social services and who receives social benefits. Republican Party control of the federal government produces decreases in direct discretionary social spending, increases in social tax expenditures for private benefits, and higher ratios of tax expenditures to total social spending. Therefore, a shift in political power to the Republican Party at the federal level moves resources and financial support from public programs that serve more disadvantaged populations to private benefits and services, which primarily benefit wealthier households. These results give empirical support to Lowi's theory of interest-group liberalism. Lowi (Reference Lowi1969) argued that the American style of pluralist government was liberal in that it offered a positive view of the power and ability of government to shape societal outcomes. Therefore, the overall level of government activity and spending does not dramatically change with changes in political party power but rather the real change is the perception of the public good and this is determined by the majority party's special interest coalition. Specifically, the public good of economic security oscillates back and forth between Democratic support for working-class constituencies and Republicans’ use of federal subsidies for private welfare benefits.

There are a number of important implications that can be drawn from the analysis in this chapter. First, the changes documented here mean that for many Americans, federal support for their social insurance is not stable and fluctuates with party power in Washington, D.C. Interestingly, while the political rhetoric from both parties is mainly about helping the middle class, the main financial beneficiaries of federal social programs are either the working poor or the rich. Next, the empirical analysis here provides evidence that the Republican Party has embraced the “Two-Santa Theory” and distributes government goods and services through the tax code as a way to counter the Democrats’ spending Santa. Republican presidents increase the level of social tax expenditures in the short run and Republican legislatures in the long run, signaling a real commitment by the party to practice distributive politics. Finally, the Republican Party has been successful in not only building a private social system through increases in tax expenditures but reducing the scope of public programs by cutting or slowing discretionary spending. The Republican increase in social tax expenditures along with cuts in marginal income tax rates have increased the nation's debt level. In short, the relationship between Republican power and increases in the social expenditure ratio provide tangible support for the “starve the beast” strategy being more than a theory.

The primary test in this chapter was between Republican Party strength and changes in federal subsidies for private social welfare as represented by social tax expenditures, yet this is only one part of the partisan theory of the divided social state. I have argued that political parties distribute both financial support for social programs and monetary benefits through altering the direction of national redistribution. In the next chapter, I examine the relationship between the modality of federal social spending and changes in the level of income inequality in America. In a previous chapter, I alluded to the fact that direct spending and tax expenditures are known to distribute federal money in opposing directions. Direct spending for public programs is collected from various taxes and allocated more to working-class populations. In contrast, even though the wealthy pay a large share of federal taxes, this same group enjoys an even larger share of the total benefits from social tax expenditure programs, producing a regressive distribution of income (and for some programs regressive redistribution). It's possible that changes in social spending determine citizens’ economic security not only through the financing of social insurance but also through changes in the government's role in influencing the national income distribution.

Appendix to Chapter 5