The Political and Policy Implications of the Divided Social Welfare State

One of the main goals of this book was to create and test a partisan theory of social policy that accounts for polarization and policy tools. The American public has long understood that a vote for the Democratic Party is a vote for increased government social spending targeted toward historically disadvantaged populations. However, a vote for the Republican Party is not necessarily a vote for smaller government. While the Republican Party has steadfastly over the years supported the private market, this support goes beyond cutting government spending and reducing income tax rates. The Republican Party actively promotes private market policy solutions through the use of tax subsidies and other forms of off-budget spending. These forms of spending have the same characteristics as public spending in that they change the incentives of private actors in the economy, result in the government picking winners and losers, and are paid for by increasing taxes, reducing spending, increasing borrowing, or higher deficits. Tax expenditures help the Republican Party solve an important puzzle for their particular form of distributive politics. In particular, Republicans can use tax expenditures to distribute federal money to unpopular but important constituencies such as large corporations and the rich. For example, the 529 college savings account is portrayed by some as an important tax expenditure program that helps middle-class families send their children to college. However, around 70 percent of the total benefits from this program are distributed to households making over $200,000 a year and will cost the federal government $1 billion over the next ten years. The coupling of a tax subsidy with the goal of financing college (both wildly popular with the public) hides the program's target group (rich families who are unpopular).

It is hard to overstate the importance of tax policy and tax expenditures to understanding Republican activism. The metrics used by political scientists and the media to gauge policy and government activism are a byproduct of the mid-twentieth century and narrowly focus on large, government-run social programs and appropriations spending. The policy activism of modern Republicans occurs on the revenue side of the budget process in the tax code. President George W. Bush along with a Republican Congress passed into law a number of tax bills that created tax expenditure programs for the following policy areas: economic development, natural disaster relief, energy production, national defense, unemployment, housing, education, and prescription drugs. The use of tax expenditures for private programs helps the Republican Party coordinate different factions within their coalition (such as small government conservatives, supporters who favor government support of religious activity, and businesses who want government assistance). For example, the Supreme Court's ruling in Arizona Christian School Tuition Organization v. Winn et al. claimed that tax expenditures are not a form of government spending and therefore could be used by governments to subsidize religious schools without violating the separation of church and state.

Next, the government’s substantial financial commitment to subsidizing social insurance for the rich is another data point supporting the notion that economic elites hold sway over United States’ politics (Bartels Reference Bartels2008, Gilens Reference Gilens2012). The result of more Republican power is less spending for the poor and increased benefits for the rich. In turn, the Democratic Party when in power increases the tax burden on the rich to pay for increased spending for its multiple constituencies. While any close observer of Washington politics understands these patterns of partisan distribution to be true, my examination here conceptualizes and demonstrates the spending mechanisms used by the two parties to alter the direction of income inequality. The influence of elite public opinion and business interest groups may help explain why the United States spends more on both social tax expenditures and private welfare than any other modern nation in the world. If policymakers give more weight to the policy preferences of the rich over the middle and working classes then we would expect social policy to move in the direction of increased tax subsidies at the expense of broad-based public programs. It could also be that as the U.S. Congress becomes comprised disproportionately of wealthy professionals then the social policy agenda tilts toward the preferences of economic elites (Carnes Reference Carnes2013). In addition, the creation of tax subsidies for private social welfare allows policymakers to cut banking, finance, and health care interest groups into the federal subsidy apparatus while being able to meet the mass public's demand for social insurance (Morgan and Campbell Reference Morgan and Campbell2011). Finally, since tax expenditures offer more money to the rich they contribute to the public impression that both the tax system, specifically, and the federal government, more generally, are abused by the wealthiest Americans for their economic self-interests.

The divided social system distorts the national discussion about the relationship between class and public policy. The most visible aspects of the American public policy infrastructure are the progressive federal income tax system and regressive public social welfare programs such as welfare, and Medicaid. These two overemphasized features of the policy system result in the commonly held perception that the rich pay for government and the poor take from it. Yet this misguided view undercounts both how much the middle and working classes pay in federal taxes and how many benefits the rich receive as a result of federal tax expenditures and subsidies. The federal tax system is only slightly progressive (once payroll and other taxes are included) and social benefits are much less regressive once tax expenditures are included in calculating government welfare.

At the height of the 2012 Presidential election campaign, a video was released of Republican candidate Mitt Romney speaking at a private fundraising event in which Governor Romney said,

In 2013, 86 percent of the population paid federal taxes and the majority of these taxpayers paid more in payroll taxes than they did in income taxes (Williams Reference Williams2013). Additionally, the vast majority of state governments have regressive tax systems so taking into account all taxes – federal, state, and local – paints a much different picture of which groups bear the burden of financing government programs. And not only does most of the population pay federal taxes, but 96 percent of the public has recently received some government benefit either through the use of public programs or federal tax expenditures (Mettler and Sides Reference Mettler and Sides2012). The reality is that everyone pays (through federal, state, and local taxes) and everyone takes in America, whether it is through a direct government check or a tax subsidy.

Relatedly, a social state that divides beneficiaries by socioeconomic class reinforces the inequities that exist in the private economy. As an example, the working class relies almost entirely on Social Security and Medicare for their retirement security while the wealthy use these public programs as supplements to their assets, capital income, private investments, 401ks, and employment-sponsored health insurance, all of which are subsidized by the federal government. So for wealthier retirees the progressive structure of public programs is integrated and offset with the regressive nature of social tax expenditures, while poorer retirees are wholly dependent upon the continued solvability and largesse of public programs. The hundreds of billions spent annually on providing economic security to the richest Americans could be better spent on national defense, tax cuts for the middle class, updating an outdated social safety net, or adding solvency to Social Security or Medicare. Not only are the distributional patterns of social tax expenditures illogical in an era of runaway inequality, many of these programs would never survive an open debate on the floor of the House of Representatives.

Consider the following example: a Congress member walks onto the floor of the House and offers the following proposal. The proposal is for a new retirement savings plan that would cost over $100 billion a year and allocate $80 billion of the program's benefits to families making more than $105,000 while the remaining $20 billion would be distributed among the middle class and no money from the program would be given to the poor. Even the casual student of American politics knows that this bill has no chance of passing into law. Yet this program already exists in the tax code in the form of a tax expenditure program that excludes contributions to employer-provided pension plans. And while most Americans are supportive of government funding for specific social programs, it is hard to envision a majority of the public favoring a government-run social welfare program that distributes more money to the wealthiest 20 percent of households than all other households combined. The ability of legislators to frame these programs as universal subsidies for popular social goals or tax relief hides the highly regressive distribution of federal dollars that we know from surveys is unpopular with the public. The cumulative result is that the media and public exaggerates the amount of taxes the wealthy pay and minimizes the amount of benefits the rich receive from the federal government. Overall, the mass public does not have an accurate picture of who pays and who benefits from the federal government.

There are also important policy effects that stem from the politics of the divided social system. First, the divided social welfare state is ineffective at assuaging the growth of income inequality. This ineffectiveness is because of both the limited impact of public social programs and the relative size of the private social system. Traditional welfare states produce large redistributive effects that reduce income inequality. And while many industrial nations have experienced sharp increases in national income inequality, no nation's social safety net has done less to stem the rising tide of income inequality than that of the United States. The public side of the social system is relatively small with limited benefits and therefore does not create much of an income floor for most Americans. The public system primarily assists the elderly, the unemployed, the poor, and veterans. In 2012, around 14 percent of the U.S. population was over 65 and an additional 14 percent was below the poverty line (and obviously there is some overlap). If we consider these two groups as the main beneficiaries of public social welfare then only a relatively small percentage of the U.S. population has access to public income assistance in any given year. In short, a mildly progressive federal income tax system combined with limited public benefits does not produce large enough income redistributive effects to counter the hypergrowth of rising inequality.

Next, the large U.S. private social system reinforces the inequities that exist in the private economy, where the quality of social benefits is often related to an individual's income. In addition, the number and value of social tax expenditures greatly reduce the progressivity of the federal tax system with the implication being that wealthier citizens have a lower effective tax rate in large part due to their use of all the deductions, exclusions, and exemptions available in the tax code. Therefore, the hundreds of tax expenditure programs in the tax code and the increased value of these programs have helped erode the progressive features of the income tax system, resulting in the federal government having a smaller impact on reducing post-tax and transfer income inequality over time. The result is that the federal government collects less revenue for public social programs (and everything else). In addition, the level of social tax expenditures in the United States negates a significant portion of the redistributive effects of public social spending. Historically, social spending has been disproportionately targeted at society's most vulnerable populations as a means to reduce inequality. However, I have shown here that an increase in tax expenditures at the expense of traditional social spending drives up income inequality. So not only do U.S. public social programs do less than those of most other countries to reduce market inequality, but the size and growth of social tax expenditures for private welfare increase inequality. This is increasingly not just an American story. The austerity movements in Europe and the increased use of tax expenditures by all types of governments have moved more welfare states toward reliance on private markets.

Next, for all the money both public and private that the country spends on social services and insurance, the government's financial commitment has not produced better outcomes for American citizens in reducing health risks, gaining access to high quality education, lowering poverty rates, or achieving a higher level of overall economic security. The divided social system creates a world-class health care, pension, and education system for the wealthy and a patchwork of public and private programs, with varying effectiveness, for the middle and working classes. In short, for a country that spends one out of every four dollars on social welfare programs, there is not a lot to show for it. The divided American welfare state just may be one of the most inefficient social systems in the world. In 2012, the federal government spent a combined (traditional spending plus tax expenditures) $1 trillion dollars on health care but according to the think tank Commonwealth Fund, the U.S. health system is one of the worst in the world in terms of efficiency and access. In fact, as the costs of employer-based health care and pension tax expenditures has gone up the percentage of workers covered under these programs have gone down and businesses have passed more of the risk to the individual worker (Hacker Reference Hacker2004).Footnote ¹ Proponents of social tax expenditures would argue that these programs are designed to encourage citizens to save and plan for their own economic security. However, the stagnation of wages, the rise of household debt, and the recent collapse of the housing market decimated the general public's ability to build up their savings and take advantage of these programs. As more individual tax expenditures have been added to the tax code; the savings rate in the United States has gone down. The federal tax code is comprised of programs that reward the rich for saving disposable income that they were already saving to begin with and these same programs have had no measurable effect on the behavior of the middle- and working-class citizens in saving for their own retirement, health care, and education.

Next, policymakers’ utilization of “off-budget” subsidies distorts the politics surrounding national debates about the size of government and the national debt. During the Obama administration, there have been numerous partisan debates about whether or not to raise the country's debt ceiling, resulting in a federal government shutdown in 2013. The use of “off-budget” spending allows Republican legislators to call for cuts in government spending and deficit reduction (i.e., budgetary spending for the poor) without having to stop their distribution of federal funds to supporters through the tax code. Furthermore, the Republican pattern of increasing social tax expenditures while lowering discretionary social spending provides public credibility to Republicans’ distorted claim that they are shrinking the size of government and taking action to address the national debt. A political strategy to control the national deficit that relies mainly on cuts in federal social spending disproportionately hits the poor since the majority of social programs aimed at the poor are part of the appropriations process. It is easier for Republicans to call for deficit reform and action on the national debt because their party's electoral coalition does not feel the pinch in their pocketbooks from cuts to discretionary spending. Since the Republican Party is considered to be more fiscally disciplined and better at reducing the national debt by the mass public, the party can run deficits through the tax code when they are in the majority and then turn around and call for deficit reduction when they are the minority party.

Democrats and Republicans are both responsible for adding to the size of the national debt. Since the Tax Reform Act of 1986, tax expenditures have grown in number and value every year and there has been no serious effort at tax reform. The most widely publicized effort at deficit reform came from The National Commission on Fiscal Responsibility and Reform, otherwise known as the Simpson-Bowles group. The Simpson-Bowles plan includes a “Zero Plan,” which eliminated all tax expenditures except for the child tax credit and the EITC. The revenue generated from these cuts would be dedicated to deficit reduction and reductions in tax rates. In 2011, The Committee for a Responsible Federal Budget conducted a side-by-side analysis of thirty-two proposals for deficit and debt reduction. The only plans that did not call for a massive elimination or reduction of tax expenditures were Grover Norquist's Americans for Tax Reform, the National Taxpayers Union, Senator Rand Paul's 2011 Budget, the CATO Institute, and the highly conservative Republican Study Committee. Any political debate about reducing the national debt that does not address reducing and eliminating tax expenditures alongside entitlement reform is not a serious discussion about controlling the nation's debt.

Implications for Theories of the Welfare States and Public Policy

How does the analysis here contribute to existing theories of social welfare policy? The partisan division over public social spending and private subsidies has implications for understanding the U.S. welfare regime in a comparative perspective. In Esping-Andersen's seminal work (1990) he develops a typology of welfare states ranging from liberal to corporatist to social-democratic. The United States has long been considered a liberal welfare state that promotes individualism and where the social system is dominated by the free market. Liberal welfare states are known to provide minimal government-funded social benefits to citizens (especially the poor) and therefore produce small redistribution effects. The analysis here shows that the degree to which the U.S. is a liberal welfare regime at any one point in time is, in part, a function of political party power. Democrats and Republicans push and pull the social system toward more or less reliance on the state or the market. So while the U.S. welfare regime is liberal, the degree to which it is liberal ebbs and flows over time with changes in party control of government. However, Republicans have been more successful in pulling the divided social system toward the private sector than the Democrats have been with pushing it back toward the public side. This trend is in part a function of Republicans being more concerned with how benefits are delivered and Democrats being motivated by who benefits from social programs. The cumulative result has been a deepening of the liberal welfare regime over time punctuated by some efforts to extend popular public programs (i.e., the Medicaid expansion under the ACA).

Second, the liberal typology is defined by a government's lack of reliance on pubic programs, which restricts its ability to assist the poor. In the United States, the sharp increase in refundable tax credits has been a mechanism for policymakers to distribute federal money to the poor. The use of tax expenditures such as the EITC could make government assistance to the poor more palatable to the mass public and therefore politically sustainable over time. The bipartisan growth of the earned income tax credit (EITC) along with the Democrats’ expansion of Medicaid as part of ACA has greatly expanded the role of the federal government in financially supporting poor families in America. The EITC is now one of the largest poverty assistance programs in the United States, costing around $60 billion in 2013. The EITC is credited with pulling over 6 million citizens out of poverty, half of whom are children (Jones Reference Jones2014). And while the increased federal spending on the poor has not lowered the poverty level, it has softened the effects of stagnant income growth for working class families. While the two parties support the EITC program for different reasons, future expansions of the EITC seem to be the most likely federal effort at reducing poverty. The EITC has been and will continue to be the politically preferred mode of poverty assistance since the program includes work incentives and most of the spending for the programs occurs outside the budget. It is possible that the success of the EITC paves the way for a broader system of negative income taxes that would function as a basic guaranteed income in exchange for reforms or the elimination of Temporary Aid to Needy Families (TANF).

The analysis here also has implications for studies of welfare state retrenchment. The literature on social welfare retrenchment examines how high-profile, conservative efforts to reduce the welfare state largely failed (e.g., Pierson Reference Pierson1994, Reference Pierson1996). Pierson, for example, argues that the welfare's state resilience was primarily due to widespread public support for specific public social programs and institutional inertia. The cornerstones of the public American welfare state are undoubtedly popular with the general public. However, the inclusion of social tax expenditures changes some of the story surrounding welfare state retrenchment (see Hacker Reference Hacker2004). While the Republican Party was not successful in its attempts to scale back Social Security and Medicare, the analysis here shows that Republicans were able to expand large existing social tax expenditure programs and add new ones that grew the private social system while cutting discretionary social spending.

The government's role in subsidizing the growth of the private social state has a number of implications for retrenchment theories. First, while the popularity of public social programs has contributed to their resilience, so too has the popularity of social tax expenditure programs contributed to their protection and expansion. A majority of working-aged Americans today are enrolled in employment-based retirement and health care plans and the social tax expenditures that finance them are popular with the mass public (Faricy and Ellis Reference Faricy and Ellis2014). These programs have grown substantially over time. The three main tax expenditure programs for employment-based benefits cost the U.S. government over $1.2 trillion dollars from 2010 to 2014. Moreover, the perception among policymakers is that certain social tax expenditure programs are politically untouchable, such as tax provisions for employment-based health care, 401ks, and charitable contributions. It is no coincidence that during the last major tax reform in 1986, many of the largest individual social tax expenditures were saved from the chopping block while business tax breaks were eliminated. Not only are the major social tax expenditures perceived as popular with the public, but they are also protected by powerful interests both within the industries they subsidize and by party leaders on the tax-writing committees. Finally, many of the same veto points that protect public programs protect social tax expenditures. Altogether, the tax expenditures that subsidize the private social state have been just as resilient as major public programs. The current divided social welfare state represents a stalemate between two retrenched and government supported systems that are popular for different reasons and with different constituencies.

Next, the increased “layering” of social tax expenditures onto the divided social system puts public social welfare programs at risk in the long run. First, the addition of tax expenditure programs for health care, pensions, and education reduces the demand for expansions to existing programs or new public social benefits. Studies have shown that passage of market-based social welfare reforms in health care and welfare reduced the saliency of these issues for the mass public, and therefore removed the possibility of expanding public welfare from the policy agenda (Morgan and Campbell Reference Morgan and Campbell2011). Next, the addition of new tax expenditures for private programs expands the private social system and might one day make it easier to eliminate Social Security and Medicare. The stated goal of many conservative reformers is to use tax subsidies to transfer more public money to private programs so that the elimination of public benefits is politically possible. However, recent Republican attempts to use social tax expenditures as a way to convert Social Security and Medicare to more market-based programs have failed. Finally, increased tax expenditures permanently reduce federal revenues now and into the future, putting fiscal strain on public programs. This strategy is, in essence, the “starve the beast” theory in action. The purposeful creation of higher deficits and more debt allows the Republican Party to call for fiscal constraint and spending cuts when Democrats are in power. Therefore, as long as tax expenditures remain “hidden,” any attempts at controlling the budget or calls to cut appropriations spending will fall disproportionately on public social programs.

Next, existing theories of public policy could be improved by including tax expenditures and other off-budget policy tools as part of the policy spectrum. As argued here and elsewhere (Bartels Reference Bartels2008, Grossmann and Hopkins Reference Grossmann and Hopkins2014), Republicans and Democrats govern in different ways. In an excellent critique of existing policy theories Grossmann and Hopkins (Reference Grossmann and Hopkins2014) argue that the traditional theories of public policy either deemphasize the role of parties or treat party effects as symmetrical. These omissions are problematic given the rise of political polarization and especially the Republican Party's move to the far right (Grossmann and Hopkins Reference Grossmann and Hopkins2014). The authors go on to claim, “Republicans view policymaking as a terrain for pursuing the broad goal of limiting government power – an objective shared in principle by most of the electorate – while Democrats champion particular government initiatives, programs, and regulations that also tend to command majority support among voters” (Grossmann and Hopkins Reference Grossmann and Hopkins2014, p. 2). The authors show that the two political parties address the paradox of Ameican public opinion (a majority favoring small government and specific social spending) in different ways. Republicans united around small government conservatism try to thwart legislation and Democrats supported by a collection of interests deliver tangible benefits.

While I agree that extant public policy theories do not account for polarization and important changes to political parties in the American context, the Republican Party's conservatism does not stop their policy activism. I have argued here that Republicans and Democrats respond to calls for smaller government and increased spending by substituting one form of spending for another. In particular, Republicans thread their ideological needle by increasing the level of tax expenditures, which allows policymakers to claim that they are reducing federal revenues, while passing out federal subsidies to specialized interests. Second, the tools of public policy exist along an ideological spectrum and while traditional tools can be considered liberal since they expand the scope of government there is also a collection of conservative policy mechanisms. The exclusion of off-budget spending, grants, loans, and contingent liabilities neglects the main policy tools of the Republican Party. The fact is extant theories of political behavior and political institutions overrepresent liberal policymaking while ignoring the conservative side of the policy spectrum. Not only do public policy theories need to be updated to reflect important political changes, so too do conceptions of what is public policy. The Republican Party cannot hope to stay in power just by reducing the size of the federal government. While citizens may like the idea of smaller government in the abstract, the mass public (including a majority of Republicans) also demands government assistance, especially in the form of social benefits and services. Therefore, the Republican Party must balance reducing the size of government with other goals such as subsidizing business interests, providing tangible goods to their special interests, and implementing “conservative” policy solutions.

Finally, the partisan difference over public spending and tax subsidies for private welfare has implications for issue ownership. The two major political parties select different ratios of tax expenditures to public social spending in ways that reinforce each political party's comparative advantage. Petrocik (Reference Petrocik1996) presents a theory of issue ownership arguing that political parties in campaigns will emphasize issues on which they are advantaged and their opponents are disadvantaged. Egan (Reference Egan2013) has shown that a political party in power will create more ideologically extreme policies in areas that they “own” in the eyes of the mass public. The mass public has continually reported higher levels of trust for the Democratic Party in handling issues such as health care, Social Security, Medicare, education, and assistance to the poor (Egan Reference Egan2013). In essence, the Democratic Party owns not only social policy but also the larger concept of using government power to address economic insecurity. While the public has accepted and supported Social Security and Medicare, the Democratic Party has had a harder time creating sustainable public programs in education, health care, and poverty assistance. The Democratic Party's challenge has been to increase federal spending for social welfare without expanding programs so much that they open themselves up to accusations of swelling the size of the federal government. The Democrats’ focus has been more on creating and extending benefits to poorer populations through public means if they can, (e.g., Medicaid expansion, federalizing student loans) but also agreeing to tax expenditures during periods of divided government, especially for programs targeted at the working poor.

The Republican Party faces the challenge of having to create social policies in a political environment where Democrats own all the social policy areas. The Republican strategy has been to diminish the importance of social welfare issues by passing private alternatives so as to reduce the saliency of social policy to voters in future elections. The Republican Party will never be trusted more than Democrats to protect large government social programs. Therefore, the Republicans’ best political option is to shift the conversation to issues areas they do own, such as taxes and controlling the deficit (Egan Reference Egan2013). The ownership of these two issues fits well with the party's “starve the beast” strategy. The use of social tax expenditures combines popular policy goals (cheaper health care insurance, tuition support, etc.) with a popular policy tool, tax breaks. If government money for public programs is redirected to promote subsidies for private alternatives or expand the private sector (such as Medicare Part D), then the line that voters can draw between protecting public benefits and the Democratic Party may become weaker over time. As an example, Morgan and Campbell (Reference Morgan and Campbell2011) showed that while the passage of Medicare Part D did not hurt the Democrats’ issue ownership of Medicare it did cause a decrease in public demand for a publicly administered prescription drug program. The political implications of Medicare Part D were that the Republican Party was able to create a popular government program that gave money to private pharmaceutical companies while taking away an issue that the Democrats may have used in the future to build their issue ownership advantage in Medicare.

Next, the Republicans’ ownership of being trusted to lower the national deficit allows the party to call for cuts in social spending in the name of fiscal responsibility while increasing tax subsidies for private welfare. Since the public trusts the Republican Party to cut spending and keep a lid on the national debt, it allows Republicans to highlight their reductions to budgetary social spending, which assists Democratic constituencies, while their favored form of government patronage can be increased out of the spotlight. If the Republican Party cuts federal revenues through both marginal income rate cuts and more tax breaks without cutting social spending, then it allows their members to criticize the size of government during periods of Democratic control and try to force reductions in appropriations spending. In total, the Democratic Party favors public social programs, in part, as a way to play to their issue advantages and Republicans promote the use of tax subsidies for private welfare for the same reasons.

The Partisan Theory of the Divided Social State and Health Care Reform

In 2010, President Obama and the Democrats in Congress passed sweeping health care reform formally known as the Patient Protection and Affordable Care Act (PPACA) and informally referred to it as Obamacare. The PPACA is a series of complex arrangements that attempts to reform the existing health care system through extending health care coverage to over 30 million Americans and decelerate health care costs. In this book, I've argued and demonstrated that Democrats, when in power, will alter the balance of power in the divided social system toward the public side as a means to target working-class voters and then pass on these new costs to wealthier voters. This theoretical argument captures the major elements of the Democratic Party's attempts to reform the national health care system. At the core of Obamacare is an effort to increase the number of poorer citizens with health care insurance by expanding Medicaid and revamping the private health insurance market while paying for it with tax increases on the rich and private health care organizations. Since over 80 percent of the country (mostly middle- and upper-income citizens) already had health care insurance in 2009, the federal government's efforts to finance increased health care insurance access disproportionately assisted uninsured groups – constituted mainly of working class citizens, minorities, young adults, and single-parent families (again, all groups that traditionally align with the Democratic Party). The increased costs that accompanied the ACA were targeted at wealthy families and businesses. In the following sections, I apply the partisan theory of the divided social state to the politics of health care reform, which shows the theory's explanatory power as well as revealing some of its limitations.

The Democratic Party's preference for using the public sector as a means to redistribute income and reduce inequality was evident in both its proposals and the final legislation. First, liberal Democrats pushed hard for the inclusion of a “public option” (a Medicare-type program for citizens under 65) that would have competed with private insurance plans. Progressive Democrats understood that their first preference of a single-payer government system would never pass through the legislature so they coalesced around the position of demanding a “public option.”Footnote ² While President Obama had campaigned on including a public option as part of health care reform, he realized soon after being elected that including this provision would alienate moderate Democrats and Republicans in the Senate and threaten the White House deals with the American Medical Association (AMA) and the pharmaceutical industry. Many of the Democrats who fought for the public option viewed the idea as much more than a legislative provision. The public option was part of a broader battle to demonstrate to the mass public that the federal government can be effective in assuaging economic insecurity, and, therefore, increase future confidence in the ability of the federal government through public programs to address societal problems. Congressional Republicans organized uniform opposition to the legislation in an effort to make Obamacare a national symbol of big government intrusion, which could be used against the Democrats in the 2010 midterm elections.

While much of the discussion around the health care debate focused on individual mandates, insurance exchanges, and even death panels, the federal government passed a massive expansion to Medicaid. The primary means through which the ACA increased access to health insurance was an expansion of the public health care program for the poor, Medicaid (16 out of the 30 million uninsured).Footnote ³ Prior to ACA, Medicaid was restricted to specific poor populations such as the elderly, disabled citizens, pregnant women, and some families with children. The ACA expanded health care access by standardizing and upping the income level to 138 percent of the federal poverty line ($24,344 for a family of three in 2012) and allowing childless adults and all families who means tested into the Medicaid program. In addition, PPACA closes the doughnut hole in Medicare Part D by helping seniors pay for their prescription drugs and this is partially offset by reducing the tax expenditures that go to private health care companies through the Medicare Advantage Plan. Young people, who overwhelmingly supported President Obama in the 2008 election, are allowed to stay on their parents’ insurance until they are twenty-six and can qualify for Medicaid for the first time. The combined effect of these programs was to tilt the divided health care system a little more toward the public side.

Not only did the ACA expand health care access to the working and middle classes, but it was paid for by eliminating tax deductions and raising taxes on the rich and businesses that profit from the health industry. The ACA included the following revenue-raising measures to help offset the increased cost of federally funded health care: an additional 0.9 percent tax increase on income over $250,000, capital gains tax increase, increased taxes on insurance companies, a new tax on the manufacturing of nongeneric drugs, a new tax on medical device manufacturers, large employers (over 50) being required to insure employees or pay a fee, tax increases on Blue Cross/Blue Shield, elimination of the tax expenditure for the Medicare Part D doughnut hole, a new tax on tanning salons, and establishment of a 40 percent excise tax on “Cadillac” health insurance plans. In addition, there were changes to medical deduction thresholds that limit the amount citizens may deduct from a number of health tax expenditure programs. Altogether, the Democratic Party used social policy as a means to allocate monetary and health benefits to demographic groups that are traditional party supporters at the expense of higher taxes to wealthier groups that vote for and support the Republican Party. Obamacare will allocate close to $900 billion dollars in direct spending and subsidies for the purpose of helping people and companies pay for new insurance; it tilts the balance of the insurance market in ways that equalize access between white-collar workers in large companies and blue-collar workers in smaller businesses and it constructs a federal regulatory scaffold that allows for the possibility of a more centralized health system in the future.

While Democrats did expand Medicaid and raised taxes on the rich, they also increased the number of tax expenditures for private health care. The ACA was designed to use the Medicaid expansion to provide health insurance to those families closest to the poverty line and then use tax subsidies for those families with income between 133 and 400 percent above the federal poverty line. A citizen or family that buys health insurance through the new exchanges will have a subsidy paid directly to their new provider so as to reduce their premium and out-of-pocket costs. The inclusion of subsidies for health care in the bill demonstrates that while Democrats may have a preference for public spending, it is a soft preference when tax expenditures can be used to assist working-class constituencies and gain some support from conservative interests.

There were a number of strategic reasons that President Obama and the Democrats used new tax expenditures for expanding access to the health care market. First, President Obama campaigned on bipartisanship and wanted to reach out to Republican legislators and conservative interests by designing a bill that heavily subsidized private health industries. Second, the White House promised various health care lobbies that in exchange for tighter regulation, the industry would have access to new customers. Therefore, President Obama included the individual mandate along with substantial tax subsidies for employers, employees, and citizens buying on the individual market in the final bill. The support (or lack of a coordinated attack) for Obamacare from private health care organizations was gained, in part, through the promise that the federal reform would use the tax code to subsidize millions of new customers through the employment-based system and not move the divided health system too far in the public direction. Third, Democrats were very concerned about putting forth health care reform that could be directly attacked as a massive increase in the size and scope of government, especially coming after an $800 billion stimulus package passed one year earlier. The inclusion of tax expenditures guarded the President and Congressional Democrats against Republican attacks that they were drastically expanding the reach of government into the health care market or laying a foundation for a single-payer system. Yet, the rise of the Tea Party movement showed that even the reliance on tax expenditures did not stop some groups from treating Obamacare as a massive increase in the public sector. Finally, President Obama and the Congressional Democrats also used new tax expenditure programs to increase low-income worker access to the health care system. As was discussed previously, prior to the individual mandate the workers who were most likely to be offered and enrolled in the employment-based plans were wealthier professionals in large companies. The extension of tax subsidies to both small businesses and the working poor was an effort by the federal government to level the private health insurance field between blue-collar and white-collar workers.

In 2011, the Republican Party offered a health care plan designed to counter the PPACA called the “Path to Prosperity,” which was authored by Representative Paul Ryan. The Ryan Plan would reduce federal spending on Medicare, Medicaid, and the State Children's Health Insurance Program (SCHIP) as a means to balance the budget by 2040. The biggest savings would come from changes to Medicare. First, the Ryan Plan changes the basic structure of Medicare from a defined benefits program to a federal subsidy system that would be used by the elderly to buy private health care insurance. Starting in 2022, new Medicare beneficiaries would have the federal government make direct payments to private health insurance companies for around $8,000 (this amount is capped over time and adjusted for age and income). These vouchers serve the same interests as tax expenditures, which is to use federal spending to support and subsidize the private market. The Congressional Budget Office (CBO) predicts that under the Ryan Plan the average out-of-pocket expenses for the elderly would more than double. For example, a current Medicare beneficiary pays about 22 percent of his or her Social Security income toward medical expenses; under the Ryan Plan the expectation is that a Medicare beneficiary would have to pay 49 percent of his or her Social Security income toward health care – a 27-point increase in personal costs for the elderly. In addition, the CBO estimates that under the Ryan Plan federal spending on Medicaid, SCHIP, and other federal medical subsidies would be cut by more than 75 percent relative to the current baseline projections (Congressional Budget Office 2011). Altogether, the Ryan Plan drastically reduces the direct role of the federal government in health care while using federal subsidies to grow the private health care market.

The current partisan politics of social policy are a result of both political parties having reached their long-term goals over taxes and social spending. Republicans want to lower federal taxes and Democrats want an American social welfare state. They both have won. The effective tax rate for the wealthiest Americans has never been so low and the level of social spending has never been so high. Democrats and Republicans have given the public what it has demanded for half of a century, which is more government spending and lower taxes. However, Republicans will not be able to substantially reduce federal taxes in the future unless there are major changes in the structure of Social Security, Medicare, and Medicaid. Similarly, Democrats will not be able to add programs to the social welfare state without serious changes to the federal tax system. The important issue going forward is not how to break the partisan stalemate or the degree to which the divided welfare state tilts toward the private versus the public sector, but whether the United States government can create a social safety net that meets the income security needs of its people in a modern and globalized economy.

The analysis here suggests a number of changes that would result in a more open policy process and potentially more representative social policy outcomes. First, one method for restraining federal government spending would be to formally place tax expenditures alongside direct spending in a portfolio for each policy area. This procedure would allow policymakers to identify redundancies and better evaluate the efficiency and efficacy of all government spending. Former Federal Reserve Chairman Alan Greenspan, representatives from the General Accounting Office (GAO), and representatives of the CBO have all appeared before Congress and requested that tax expenditures be included in the formal budgeting process as a way both to reduce government spending and to achieve more efficiency. There have been numerous legislative attempts to operationally equalize tax expenditures to direct spending measures in the budget process. Some examples include the Congressional Budget and Impoundment Act of 1974, which required the annual reporting of tax expenditures, and the Budget Enforcement Act of 1990 (BEA), which mandated that direct spending and tax expenditures be treated as equivalent for the purpose of setting spending limits under the pay-as-you-go requirement (PAYGO). If tax expenditures were placed alongside public spending in policy portfolios then when the federal government annually determined spending on old-age pensions, for example, policymakers would examine Social Security alongside the numerous tax expenditure programs for private pensions. If policymakers traded off expanded social tax expenditures at the expense of public social spending, at least in this system it would be in light of day.

Second, a proposal that has floated around think tanks for decades would have the federal government send each household each year an itemized list of their taxes paid and benefits received, including tax subsidies. We know that information can help people better understand their self-interests and therefore make better personal decisions. The American voter, armed with a household cost-benefit ratio of federal services and programs, would be more likely to connect his or her economic interests to candidates and policies. In short, a better conversation at the national level about the costs and benefits of public policy might start with a more honest accounting provided to voters about their real contributions to and benefits from the federal system. Finally, the U.S. federal government could reform the tax system so that there is a more visible line between the taxes that citizens pay and the goods and services they receive. The average voter suffers from myopia and misconceptions about the distributive effects of social policy and tax policy that at times result in perplexing policy outcomes, such as public support for eliminating the estate tax (Bartels Reference Bartels2008). If, for example, payroll taxes were tied to the costs of Medicare this policy arrangement would provide valuable information to voters about the relationship between health care costs and government revenue.Footnote ⁴ This type of tax system would not only help citizens learn about the workings of public policy but potentially control health care spending by making the costs of insurance visible to the average voter. Another alternative put forward by Robert Shiller is indexing income tax rates to the rate of income inequality so that when inequality rises so too would the top marginal income tax rates.

The pace and level of income inequality in the United States is at an all-time high. The rise of inequality is producing inequities in education levels, health outcomes, wages, and reducing the nation's economic growth. Therefore, the reduction of income inequality is increasingly becoming a public good in and of itself. And while the federal government is not able to stop globalization or stem the tide of technological advancement there are sensible steps that can be taken to reduce the amount of welfare given to the wealthy and provide a stronger safety net to America's most vulnerable populations.