Rolling Back the Submerged State

If you listened carefully to President Obama’s big policy speech on the national debt yesterday you may have heard this:

“The tax code is also loaded up with spending on things like itemized deductions. And while I agree with the goals of many of these deductions, from homeownership to charitable giving, we can’t ignore the fact that they provide millionaires an average tax break of $75,000 but do nothing for the typical middle-class family that doesn’t itemize. So my budget calls for limiting itemized deductions for the wealthiest 2 percent of Americans – a reform that would reduce the deficit by $320 billion over 10 years.”

This was hardly the most exciting or lofty portion of the speech – those bits came when he contrasted his values with those of Paul Ryan (below) – but in some ways it was one of the most important.

From the very beginning of his Presidency, Obama has sought ways to rein in tax expenditures and other loopholes that disproportionately benefit the wealthy and corporations. These include the home interest deduction and the tax break on charitable giving. Fighting these battles was going to be hard for several reasons, even without some of the unpredictable challenges described by Charlotte in her post last week.

Suzanne Mettler at Cornell is doing some exciting and important work on efforts in the Obama era to rein in the “submerged state” – the elaborate system of tax expenditures that have evolved and expanded over the previous three decades in response to the demands of specific constituencies in the middle and upper class, and have been sustained by corporate interests (such as realtors associations) that benefit from their existence. (See this paper)

As Mettler argues, one challenge in taking on these expenditures is that so few people understood them to be government programs, let alone understand them to be deeply regressive. In a 2008 study, Mettler asked respondents if they had “ever used a government social program, or not.” Later, they were asked whether they had ever benefitted personally from any of 19 federal social policies, ranging from very overt Government programs such as food stamps to less visible programs such as the homeowner tax credit. Very few individuals (less than one third) who had received benefits from “submerged state” programs such as the child and dependent tax credit, the home mortgage interest deduction, and student loans responded affirmatively that they had used a government social program. This highlights the lack of recognition of the government’s role in delivering these hidden benefits of the welfare state.

In fact, when Mettler provided respondents with basic facts about how programs function – and the redistributive consequences – people often changed their support of the programs. She found that individuals decreased their support for regressive programs such as the home interest tax credit, and increased their support for progressive programs such as the Earned Income Tax Credit (EITC). This is somewhat hopeful news for those that want to realign the welfare state, and suggest that if Obama can succeed in delivering basic facts about different programs he can marshall support behind a more progressive budget plan.

That’s a big if however. For one thing, it’s very difficult to educate the American public on basic policy details, even after those issues have been in the headlines for months (recent polling data, for example, shows that Americans know very little about the health reform passed last year, despite it being the most visible policy issue for more than one year). Second, there are vested interests that are mobilized to oppose cutbacks of these programs, but few constituencies that would push in the other direction. The tradeoffs posed by this are not very visible – for example, few Americans realize that programs that are more redistributive are often phased out or replaced by others that are more regressive. A perfect example of this is the subtle transition over time from a large system of need based grants for higher education to a system of student loans, which are much more attractive to middle and upper income individuals. Given the outsized influence that lobbyists for these programs now have in Washington, it was nothing short of remarkable that the Democrats managed to cut back on student loan third party lenders in the passage of health reform last year.

My takeaway lesson from all of this is that the best way for Democrats to beat back the Republican challenge, both on the budget and in the national election, is to talk early and often about the tradeoffs that different economic policies will yield for middle and lower income Americans. We thus find ourselves at a dangerous moment, but also a moment of tremendous opportunity, where it is possible to very concretely and explicitly show which party values more tax cuts and hidden subsidies and which party values health care and social insurance.

About Brendan Saloner

I am a postdoctoral fellow at the University of Pennsylvania in the Robert Wood Johnson Health and Society Scholars Program. I completed a PhD in health policy at Harvard in 2012. My current research focuses on children's health, public programs, racial/ethnic disparities, and mental health. I am also interested in justice and health care.
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