Don’t Believe the Myth

Most people believe that that America has less social programs than other developed countries.

This is a myth. We are about average.

But the myth can be, and is, supported with hard data. This is one of those cases where you can be mislead into believing something that’s false with selective use of the data.

The reason this comes about is that other countries support their social programs more with spending, while the U.S. supports them relatively more with tax breaks.

In order to get the full picture you have to look at both. But many people just focus on the spending part, which makes the U.S. look … cheap.

This is covered in Eduardo Porter’s March 31 column in The New York Times entitled “The False Hope of a Limited Government, Based On Tax Breaks”. The article looks at what are called “tax expenditures”. These are basically tax deductions, often given to promote desirable private behavior. But they are also a substitute for actual public expenditures: give people a break if they pay for something themselves, rather than having the government spend the money to provide it for them.

The biggest tax expenditure for households is the mortgage interest deduction, which encourages private home ownership. The biggest tax expenditure for firms is that ability to write off employee healthcare expenses as a cost.

My opinion is that the author is solidly progressive. So it’s a big deal for him to say that while political constraints limit the size of the U.S. government more or less explicitly, we’ve got this system of stealth government through tax expenditures that implicitly broadens our government:

Such spending through the tax code not only offered the false promise of smaller government. Its most insidious effect was to hide what the government does and, notably, to shield from political debate which people it benefits most. That is clearly not those of middle and low income, who don’t earn enough to qualify for many tax deductions and often don’t even claim them.

You can see his progressiveness in the (correct) position that most of the benefits of tax expenditures go to the rich.

Check out the chart (sorry, I had to do a screen capture of a small image, and then scale it up to fit):

The large gray bar is what people see when they focus on spending only. The darker bar is what is spent after accounting for some tax expenditures.* When using the dark bar, America is actually just above the OECD average.

* The excluded tax expenditures — the mortgage interest deduction, and public spending in education — are pretty big too, and would tend to make the U.S. government look relatively larger.