Imagine that the U.S. federal government collected an additional $1.5 trillion every year. Imagine that, instead of a projected budget deficit of $1 trillion, they had a budget surplus of $470 billion this year. Imagine how it could change their political debates. No more spending cuts. No more sequesters. No more shutdowns. Instead of fighting over scraps, Congress might actually work together — spend some of it on Democratic priorities, some on Republican priorities, with more than enough to make both happy. Bipartisanship might not be dead after all.
But there’s a danger to this dream scenario.
Imagine what would happen if special interests got their hands on that money. Imagine if, instead of giving it to people who really need it, they spent most of it on the rich few with the power to hijack the process.
Oh sure, the rest of the country would get some of the money. The American public wouldn’t let them waste all of it. But they would keep it as quiet as possible — a billion here, a billion there, rarely mentioning that it added up to a quarter of the federal budget.
Most Americans probably wouldn’t notice. They might not even realize when some of the money trickled down to them. Slowly, they would lose faith in the government.
Instead of a surplus, they would see a deficit.
Instead of bipartisanship, gridlock.
Instead of abundance, scarcity as far as the eye could see.
You shouldn’t have to strain your imagination too hard because we already live in such a world. Every year, the U.S. federal government spends $1.5 trillion and doesn’t record it. Unlike official spending, this money goes disproportionately to the rich and upper-middle class. The legislation that allocates it has been consistently bipartisan, and much of it has been passed in the last forty years, at a time when Congress has become more divided on almost every other issue.
Most Americans have no idea.
They’re called “tax expenditures,” but you probably know them as “loopholes.” According to the statutory tax rates, the federal government is supposed to collect $6.3 trillion in 2022, but in reality, it will only collect $4.8 trillion. The difference — $1.5 trillion — is made up of deductions, exemptions, and other exceptions for some people simply not to pay their taxes.
So, in a way, the feds already have access to all the money they need to wage a war against inequality. If they wanted to, they could spend $20 trillion more over the next decade without raising a single tax rate.
If this comes as a surprise, you’re not alone. Even the majority of people who benefit from tax expenditures don’t know about them. If they don’t see a check in the mail, people tend not to notice that their income is higher than it would have been without the subsidy. The political scientist Christopher Howard refers to it as “the hidden welfare state.” His colleague Suzanne Mettler calls it “the submerged state.”
The United States is the only industrialized country that operates this way. Most developed economies collect all the taxes first, and then they dole it out. That’s why so many European countries have big “welfare states” where the government spends a lot of money on social needs like health care and housing. Not the U.S. It simply exempts those sectors from paying taxes in the first place.
But economically, of course, it’s the same thing. It doesn’t matter whether the government gives you $100 to buy a house or charges you $100 less in taxes on the house. Either way, your house is getting a $100 subsidy.
So, it’s silly to say that the U.S. has such a small welfare state because tax expenditures don’t count. They clearly do count, and if you add them to the United States’ social spending, its welfare state is nowhere near the bottom. It’s actually pretty high. Relative to the size of its economy, it spends more than any developed country other than France.
But it’s not clear that this is the best way to run a welfare state. Administratively, it’s nice to have the IRS do all the work, but that’s where the advantages end. It matters how the money is spent. A tax deduction may be enough to help you buy a bigger house, but it won’t help you find a job near that house or keep the neighborhood safe and clean around that house. It doesn’t keep the realtor from ripping you off or the bank from mishandling your mortgage. Tax expenditures don’t help people who don’t file tax returns, and even those who do pay taxes don’t know how much they owe until the end of the year, after all their expenses are due.
And as we’ve seen, most tax expenditures go unnoticed, making their recipients feel that the government is ignoring them. They only see the people being helped by direct spending like food stamps or unemployment benefits, even though these programs are less than half the size of the biggest tax expenditures.
This is dangerous for two reasons: It gives people an inaccurate picture of government, and it allows legislators to spend their constituents’ money without much opposition or oversight.
“When government is invisible, it is no surprise that people feel they cannot trust it and that it is ineffective,” says Mettler. “Submerging the state does not foster citizenship: it inculcates passivity and resentment.”
The biggest problem with tax expenditures, though, is that they are most valuable to the people who pay the most taxes. Not only are they huge and hidden, but they’re skewed to the people who already have the most money. The biggest tax expenditures bestow between one-third and two-thirds of all their money on the six-figure incomes that make up the richest 15 percent of the population. Rather than reducing inequality, they increase it. The U.S. may not have the smallest welfare state in the world, but it has one of the least progressive.
Americans have more than enough money to reverse the rise in inequality. They’re just using it for the exact opposite purpose.
This is the third in a series of Substack posts that will show how the United States can raise trillions of dollars in revenues to reduce inequality. Come back next week for Part 4…