Remaking America: Democracy and Public Policy in an Age of Inequality

2. Constricting the Welfare State: Tax Policy and the Political Movement Against Government

Kimberly]. Morgan Chapter 2 Constricting the Welfare State: Tax Policy and the Political Movement Against Government The redistributive programs of the welfare state cannot exist without a politically secure and stable source of finance. All public programs have to be paid for by someone, yet people often want more public spending than they are willing to pay for through taxes. The resulting dilemma for policymakers has been to figure out how to raise the necessary funds to pay for the welfare state without antagonizing the public. Some scholars argue that the form of taxation may affect the ability to raise funds, because some kinds of taxes are less visible or irksome to taxpayers than others. In this view, income and property taxes are highly visible and much resented, particularly by more powerful groups in society , such as the wealthy and the rich. Payroll and sales taxes, by contrast, are either less visible or benefit from greater legitimacy when earmarked for popular social programs, making them a more acceptable source of funding to the public, even though they are less progressive than the income tax. In fact, many countries with large welfare states rely heavily on payroll and value-added taxes to finance them. Thus, different modes of taxation may have feedback effects on the politics of social spending. This chapter explores this thesis for the American case and finds that there is no inevitable feedback effect of tax systems on social policy outcomes; instead, this relationship is mediated by the behavior of political elites, who choose whether or not to use taxes and other public policies as a resource in their political fights. In the postwar period, the American tax system consisted of steeply progressive income taxes, high taxes on capital and corporate incomes, and a small but growing payroll tax. Yet taxation was not a source of partisan acrimony in this period, nor were there serious disputes about the modestly sized welfare state that was emerging. Political elites were generally in agreement about the size and shape of the welfare state and the way it would be financed, precluding fundamental challenges to either tax or spending policy. Programs such as Social Security had wide support and there were other limited expansions of direct social spending . Otherwise, tax policy was used to encourage the growth of private forms of social provision, such as employer-funded health insurance, thereby bolstering income security for many people but obscuring the role of the federal government in providing this. By the 1970s, however, bipartisan agreement on fiscal policy began to collapse, and the existing matrix of tax and spending policies offered crucial resources to conservative activists and politicians seeking to build a broad-based political movement against taxation . The combination of a highly visible tax system and a less visible welfare state fueled mass discontent over increasing federal, state, and local tax burdens, particularly in a time of high inflation that increased property assessments and pushed people into higher tax 28 Remaking America brackets. Rising property and income taxes helped spark tax backlashes and anger at "big government," while the growing tax load seemed not to have brought much return in the form of economic security, especially for non-seniors, who relied heavily on the private sector for their social welfare needs. Conservatives successfully tapped these popular frustrations to build a political movement centered on rolling back the size of government, which put liberals on the defensive. Democrats could shield popular programs, such as Social Security, but could not draw upon evidence of the success of universal programs for the non-elderly to justify high tax rates. Partisan conflict over taxes and spending has produced a constrained environment for social programs. Conservatives have drawn on popular sympathies for tax cuts as a way to contain federal spending, whereas Democrats have fought to defend existing programs . Not only did deficits grow as a result, but proposed expansions of social programs were repeatedly stymied by the lack of funding and opposition to tax increases. One result has been the continuing transfer of burdens onto states-itself a form of retrenchment as cash-strapped state governments struggle to pay for increasing burdens and responsibilities . Although the tax-cutting drive has reduced tax burdens on the poor, this has neither substantially reduced poverty rates nor mitigated one of the most significant trends since the 1970s-growing income inequality. PUBLIC POLICY AS A POLITICAL RESOURCE The idea that politicians employ public policy as a tool in political conflict and...