Invisible Handouts and Anti-Government Conservatives

By James Kwak

Ezra Klein wrote a column for Bloomberg discussing research by political scientist Suzanne Mettler and some of her collaborators. Mettler studies what she calls the “submerged state”—the growing tendency of government programs to provide benefits in ways that mask the fact that they come from the government—and its implications for perceptions of government and ultimately for democracy.

There are several important lessons to draw from Mettler’s work. The most obvious, which was highlighted by Bruce Bartlett a year ago (and that I wrote about here), is that Americans are hypocrites: many people benefit from government programs, ranging from the mortgage interest deduction to Medicare, yet deny receiving help from any “government social programs.”*

Klein focuses on a different point. For him, the main problem with invisible benefit programs is that they are politically difficult to eliminate. He writes, “If Americans who either rent or own their homes outright were asked to accept a tax increase of $150 billion in order to subsidize the mortgage payments of their indebted friends, it seems unlikely they would find that appealing.” Now, I hate tax expenditures as much as the next policy wonk, but I’m not entirely convinced by this. First of all, every tax expenditure was passed at some point by some elected legislature. More importantly, the mortgage interest deduction, for example, is actually quite popular. This particular deduction isn’t hidden in the sense that no one knows about it; it’s hidden in the sense that people think of it as a natural feature of the income tax that they are entitled to, not as a government spending program.

In fact, simply telling people about the mortgage interest deduction doesn’t make it any less popular. In an experiment by Mettler and Matt Guardino (which is described in chapter 4 in Mettler’s book, The Submerged State, and which I also discussed here), subjects were first asked whether they supported the mortgage interest deduction; later they were given some information about the deduction and again asked if they supported it. Among people who were simply told what the deduction is, opinions shifted from 65-7 in favor to 81-6 in favor; that is, more information made it more popular, not less. Among people who were told what the deduction is and that most of its benefits go to high-income households, opinions shifted from 55-7 in favor to 40-41 against. In other words, it’s learning about the distributional effects of the policy that makes it unpopular, not simply learning that it exists or what it is.

But the most important implication of this research, I think, has to do with how these invisible handouts undermine attitudes toward government. As Mettler says (quoted by Klein), “I think one of the drivers of the kind of polarization we have today is policy design and delivery, because we have these policies where people can benefit a lot from the government but become more anti- government because they’re paying higher taxes and don’t think they’re getting benefits.”

One of the key themes we discuss in White House Burning is the rise to power of the conservative anti-tax, anti-government movement over the past half century. Government tax and spending policy is largely about distributional issues. When the poor are (indirectly) in power, they take their winnings in the form of benefit programs, since they don’t have a lot of taxes to cut. When the rich are in power, they take their winnings in the form of tax breaks. (For the most part: there are also sweetheart no-bid contracts, subsidies for non-commercial airports, and so on.)

What’s great about this for the rich is that those tax breaks only strengthen their political position. Tax breaks—say, preferred rates on dividends—mean either higher taxes on everyone else or larger deficits, both of which are unpopular. Since no one can see what the government is doing, it becomes less popular. Higher taxes make people think they’re not getting their money’s worth; larger deficits make them think the government is incompetent. Either way, they get mad at the parts of government they can see, not the tax breaks that the rich benefit from. Increasing anti-government sentiment leads to what you saw in 2010 and today: the Tea Party, demonization of the federal government, and a mad race among Republicans to see who can cut rich people’s taxes by the most.

Whether this is a conscious goal of the anti-tax movement or simply a nice side benefit , it really works. In chapter 2 of The Submerged State, Mettler describes a study showing that people who benefit from visible government programs (those that are transparently delivered by government agencies, such as food stamps) are more likely to have positive views of government and its impact on their lives than people who benefit from invisible programs, even after controlling for the usual things. So you can have a program like the mortgage interest deduction that mainly helps the well-off but also helps the middle class a little—and it helps turn its middle-class beneficiaries against the federal government. If you’re Grover Norquist, what could be better than that?

* As I said at the time, I think this is a bit of a trick question, since the researchers first asked people if they benefited from “government social programs” and then asked them if they benefited from a list of government programs like the mortgage interest deduction. I think you can know that the mortgage interest deduction is a government program (how could it not be a government program) yet legitimately not think of it as a “social program.”

28 responses to “Invisible Handouts and Anti-Government Conservatives

  1. This post by Mr. Kwak reinforces how silly the Tea Party was, is, or will always be, co-opted by billionaires, now, or not.

    So many Teabaggers were on the receiving end of Tricare, Civil Service Retirement Benefits, FERS, Social Security, Medicare, and a ton of other benefit programs, yet so many were decrying extended unemployment benefits and “food stamps”, along with WIC and those targeting poor children.

    Talk about un-Christian worldview and narrowly defined hypocrisy…..sheeesh. So many seemed to manage squeezing out a cushy existence pursuant to these government benefit programs, followed by the middle finger to everyone else. Well, what do we expect from the conservative MOVEMENT? One big movement at that.

    Maybe this post by Mr. Qwak will serve to wake up a few of these screaming hyenas…..don’t be on it, however.

  2. It seems the confusion is the sum of the parts, is greater than the whole. its either that or Warner Express wants everything.

  3. “Among people who were told what the deduction is and that most of its benefits go to high-income households”

    Two points. A) I thought the poor valued $1 more than the rich valued $1. If so you need to take this into account when comparing the rich person that gets $1k back vs the poorer person that gets $100 back because of mortgage interest deduction. B) You are only measuring the direct benefits. Poor people are disproportionally renters. Landlords will pass on some (we can argue about elasticity of supply and demand for rentals all you want) of the mortgage interest deduction onto the renters. Given the landlords are disproportionately well-off you need to reduce the amount of mortgage interest deduction benefits that goes to the rich and increase the mortgage interest deduction benefits that accrue to the poor.

    I know most people cannot handle nuance. If you wrote an article about something as wonkish as this comment your readership would be 99% below the number of people that will read your polemic.

  4. @Jay – “Landlords will pass on some (we can argue about elasticity of supply and demand for rentals all you want) of the mortgage interest deduction onto the renters.”

    Does the home mortgage interest deduction apply to the owners of multi-unit commercial properties (as opposed to owners of units)?

  5. Isn’t quantitative easing a government entitlement for the market manipulators to speculate in the marketplace casino.Winners then with their loot aid politicians win election who in turn will help perpetuate and sustain this unproductive(and a ponzi) scheme on the unsuspecting rest of us.We such as tea partyers are just those gullible and brain washed enough folks who will do the bidding for the unscrupulous manipulators.

  6. @ Mark, it’s not qualified residence interest, as defined in IRC 163(h), and is absent of the restrictions on $1,000,000 on acquisition indebtedness, and another subsection limiting equity borrowing to $100,000.

    You can generate deductible losses with the interest expense provision relating to commercial or rental property, subject to at-risk limits,
    PAL’s etc. But claiming status as a “real estate professional” may remove some earlier restrictions.

    It’s a massive tax expenditure, as James makes mention of in this post. I like calling it the gravy train, it’s so yummy, with carry-forward provisions making it the gift the keeps on giving. Another huge bias in the law favoring a particular group or demographic.

  7. Of course in the case of rental properties you come up against the general bais in the tax code in favor of debt. i.e interest on corp debt is deductible while dividends are not, the rental area is just one of these, as pointed out by Woop in terms of passive investments. It is interesting that buried in the 999 plan was ending the favored treatment of interest payments and favoring dividends. Imagine how this would change the way business is done.

  8. tigger nitro

    the Fed gov’t giving me back the tax money I paid is not a benefit. and it is not redsitribution. its my money given back to me, or not taken in the first place if I plan ahead. Phrasing is half the battle with you guys.

  9. But tigger nitro, if the government gives you money in form of a tax break or an outright check, in order to subsidize one of your activities, its a government benefit, plain and simple. You can get all libertarian if you want to and claim the government never had a right to your money in the first place, but seriously, the federal government does need to collect at least some taxes in order to function.

  10. Are social security and medicare “beenfits” or are they insurance polices that are bought and paid for by the recipients? And Social Security taxes are often called contributions.

    http://www.nytimes.com/2010/11/05/business/05norris.html?_r=1&adxnnl=1&pagewanted=all&adxnnlx=1331029025-1PiAFwOM9NWHyYIPncVxaQ

    But maybe we should remember what was said about social security by the guy who initiated it:
    http://www.ssa.gov/history/fdrstmts.html#exec
    Three principles should be observed in legislation on this subject. First, the system adopted, except for the money necessary to initiate it, should be self-sustaining in the sense that funds for the payment of insurance benefits should not come from the proceeds of general taxation. Second, excepting in old-age insurance, actual management should be left to the States subject to standards established by the Federal Government. Third, sound financial management of the funds and the reserves, and protection of the credit structure of the Nation should be assured by retaining Federal control over all funds through trustees in the Treasury of the United States.

    Maybe the people getting government “benefits” are getting back, as they were told, just what they paid in…
    So, what is it? Government can manage funds in an actuarily sound manner and dispense them efficiently??? – or, government just redistributes as it likes and those rubes out in the hinderlands just don’t get it?

  11. I agree with trigger nitro. Tax deductions are not government social programs. Period. The poll data indicate that most Americans do not consider tax deductions as social programs. I would suggest that the spin artists try another tactic. We all speak English and we spot the con game of redefining the meaning of words to “win” an argument.

  12. Social Security is a transfer-payment system, not an insurance system. Always has been. Fresno Dan, as you know very well, FDR was capable of being politic in his speeches, and he was selling the system to a public which wanted desperately both to have the system and not admit that it was a transfer-payment system.

    Which point, come to think of it, applies very well to social-policy-through-tax-break. People can both claim that the money was theirs to begin with and at the same time claim feel satisfied that they are getting a break. Some decades ago, when Jackson wrote Crabgrass Frontier, the “deserved” mortgage interest deduction was worth about five times the much-resented housing subsidies to the poor.

    “Help! Help! I’m being repressed!”

  13. the Fed gov’t giving me back the tax money I paid is not a benefit. and it is not redsitribution. its my money given back to me, or not taken in the first place if I plan ahead.

    That’s only true of people who actually do real work in the real economy. It’s not true of unproductive parasites (which include pretty much all upper income extractors). On the contrary, they and their incomes exist only on account of Big Government corporate welfare and thuggery.

    (Not to mention the fact that the dollar itself is a command currency impsoed by government and banks.)

  14. @denim,
    You are correct that a tax break is not a “social program” the same way Medicare is a social program. Bu a tax break is a government program that requires the government to to not receive that money in the first place. Just as Medicare takes government receipts (taxes) and makes them unavailable for other government functions (defense) tax breaks take potential government receipts and makes them unavailable for government functions.

    And that’s the problem – if government is spending more then it takes in – and it is – then you have to take in more or spend less. The problem is that we can’t spend enough less to cover the current gap without closing the entire federal government, or getting rid of much of the “social program” infrastructure that is necessary to keep our most in need citizens from sliding into destitution.

  15. Another very important example of the “submerged state” is the bailout activities of the federal government in the financial crisis. Very few bank executives are even willing to admit to themselves that the government saved their skin and continue to decry the government that saved them. Similarly, my experience with a lot of hedge fund friends is that they fantasize about how great it would have been for them economically if the whole system had collapsed because they believe they would have been able to buy assets for next to nothing. Yet they are totally unwilling to acknowledge that their own counter-parties, investors, and custody banks/prime brokers would have defaulted in that scenario, thus likely putting them out of business before they could have profited from the chaos.

  16. Yep … and borrowing at ZIRP at the Fed discount window (whatever that is) and relending it to the gubmint at +1 to 3% is absolutely not a gubmint subsidy. Nope. It’s TBTF helping out an inefficient bureaucracy in vast need of dismantling to improve competition.

  17. The government mortgage deduction handout. The government could 1) issue me a check or 2) give me a tax deduction. What is the economic difference? Answer: There is none. Yet, according to conservatives, it is the form of the transaction, not the substance of the transaction that controls whether it is or is not a handout.

  18. Have government run a controlled experiment with a few energy issues!

    Poll people on their level of satisfaction with gasoline prices this month (non-summer blend gasoline) when oil is greater than $100 a barrel at present levels of subsidies.

    Then remove all subsidies to the oil and refinery industries while enforcing environmental regulations and see what happens to the price of gasoline when oil trades in a 75 – 85 per barrel range. And then poll the same folks on their level of satisfaction!

    I can bet they will be pissed because they will see the $ flying from their wallets – while they are unaware of the same $ being given to the oil companies via taxes!!!

    This is why violent crime commands so much attention in the media but white collar crime is so boring to most Americans and does not sell… the dumbing down of America! Americans think sticking up a 7-11 for $100 is a terrible crime but paying politicians for oil subsidies worth billions is just fine as long as gas is cheap!

    Pure Redneck 101 economics – what I can’t see can’t no hurt me!

    Poll Republicans in Georgia how they feel about bailouts and tax subsidies to banks? to oil companies? to the nuclear power industry?

    Then ask them if they are aware of the government subsidies to these individual entities?

    The reason I say Georgia Republicans is because they are the most ardent advocates of “drill baby drill” and “nuclear power” yet they are also the most ardent critics of bailouts and subsidies to wind and solar (Solyndra comes to mind – whose subsidy was about 14 times less that just one of the two gov. backed loans for new nuclear plants in Georgia!)

    If Wall St. will not touch nuclear power investment, why do Georgia Republicans think it is OK to privatize the profits of the Nuclear Power industry and socialize the risk? Which is what government loans do… they socialize the risk of the loan!!!

    Geeezzz…

  19. Teabaggers is hate speech and fighting words. If used in my presence my reaction will be the same as most of the NBA if you use the “N” word. You had better stay out of the Red States.

  20. @trigger nitro & @denim

    I don’t get a mortgage deduction, because I rent; I don’t get a child deduction, because I don’t have any. What’s the difference between my paying more taxes than you in order to subsidize your house and kids, and your taxes going to support people who pay less tax than you? Maybe I’m starting to agree with Limbaugh – I should get the use of your house for a few days a year for parties, and your kids should do my dishes.

  21. James, once again, spot on. It is my view that what you have written and described relating to the effects of the current make up of the tax code on taxation generally and the vast public ignorance regarding its effect tends to explain the reason for the lack of discussion of and outright support of the deficit reduction work offered to curb the current system and increase effective taxation and reduce actual spending by the three major fora to have offered solutions. Few Americans are exposed to the facts regarding the nuances and overall effects of the current 70,000 page US tax code, such that this makes it easy, as you point out, for the simplistic “cut the tax” views espoused by the neoconservative populists (a factor which can be laid at the feet of the popular media, beginning with FOX, but including virtually all of those with serious viewership). Few people are even vaguely aware of the massive subsidies, both outright legislated, and as a result of the tax code and tax policy. Of course, I believe that the central takeaway from what you wrote is the desperate need for massive tax reform. To clean up the tax code would take a nearly complete abrogation and repeal of the majority of its content. Only when, and if (a real longshot at best), it is done, can we have an honest discussion about just how to actually work on deficit reduction and appropriate taxation and expenditure on any meaningful and rational basis.

    There are lots of reasons why such a reform is unlikely to happen, and most of those relate to the political power of the plutocracy, now firmly in place to derail any such efforts. The real reform necessary to move this country forward in any acceptable way is to find a means to reduce this grip of wealth on government by reforming elections, lobbying, and how legislation is produced (rules, filibusters, term limits, etc.). Both you and Simon have written about this core issue, and for cogent citizens this is the prime issue facing the country and its future.

  22. @ Phillip H. Please understand that what you say is an utter oversimplification that simply begs the question. We don’t need to tax more, we need to tax more effectively. And, yes, we need to spend less, but that includes removing vast actual subsidies, removing most tax subsidies, if not all, and curbing the MIC and national security spending (about 80% of “discretionary spending) by cutting it at least by 50%. The federal budget is a disgusting, confiscatory and idiotic display of plutocracy at work. Neither party or its supporters have offered any true rational and meaningful solutions. The issue is super complicated only because there is such a vast amount of corruption and inequity built into every budget. And because those who support the budgets offered (both parties) are not offering these or legislating them for the benefit of the country generally, but almost exclusively for the benefit of those who pay there election bills and support their candidacies and policies. Let’s face facts. Most legislation is written by lobbyists. Most lobbyists are hired directly from the very Congress that they lobby. Nearly all lobbyists with serious influence work for the wealthiest among us. End of story.

    In fhe future, take your simplicity elsewhere. This blog is for serious people with supportable opinions and pithy comments to add to the debate. I don’t advocate you not coming to talk, but only that you offer more than the comment you made.

  23. @ cosmicinsight I love your comment, something that we hear little about. The “Quantitative Easing” program of the FED is the most disgusting subsidization of the power elite ever divised. Absolutely beyond the pale.

    1) It is given by the FED to member banks, i.e. the right to get endless money virtually free of cost (a 1/4% rate is as free as it gets, folks.)
    2) Ultimately, we know that pumping vast quantities of such free money will dilute the dollar’s value and someday create massive inflation.
    3) This funding enables the biggest banks to “churn” by endless trading of stocks (the sole reason why the Dow has “recovered” so “amazingly” to 13,000 — especially considering that, GDP puny growth aside, for 90% of America the recession continues unabated), as well as driving up the price of commodities thru speculative investing (the biggest reason for the high and rising gas prices, as well as the driving force behind Middle East unrest, because the denizens can’t afford food to eat owing to massive increases in the cost of agricultural products based upon this).

    These are the factors beyond what you cite, which is completely correct, that with so much “free money” given them by Bernanke, they have lots of spare “change” to place their election bets throught Super PACs. Any one who doesn’t see how our national fiscal debate has been corrupted is just not paying attention.

  24. Get used too more of it. I just heard that the new “sterilized” QE3 was going to hit the markets soon. The price of gas is scheduled to increase signifiicantly for not paying the beduoins their just due, and they have little to lose.

  25. George DeMarse

    I think Mr. Kwak is right here. The anti-government craze is popular, the rich keep benefiting from tax cuts and their power base increases. The media parrots the anti-government, pro- market fundamentalism and the cycle goes on. This “cycle” is coming to an end, however. The popularity of the anti-government mantra only works when the large middle class is successful under market fundamentalism. Much of the data today on social mobility, job creation, wages and benefits are negative compared to even the 1970s–when the middle class began to lose considerable economic ground. The middle class is beginning to realize this–hence OWS and other counter movements to the Tea Party, which blamed government for their problems, are blaming Wall Street, hence “the market,” for their problems. They are beginning to get it right. The bigger the safety nets, the better.

  26. Fora? Someone actually used the word(?) fora. The plural of forum? Latin lives. Yikes. Yikes is Latin for eureka. Quo usque tandem abutere Cantilina…

  27. Jim Buslepp

    Jay is incorrect about landlords passing on part of their mortgage interest deduction. The mortgage interest deduction comes on schedule A, personal deductions. Most landlords write off mortgage interest (and credit card interest, depreciation and many other things not deductible on sched. A) on schedule C, profit and loss from business. The deduction people take on personal residences is irrelevant to rental properties.

  28. David Lynch added to it today…

    http://www.bloomberg.com/news/2012-03-12/mississippi-whites-not-used-to-help-back-republican-aid-cutters.html

    It’s a racial issue. I know someone (family friend) in precisely this situation – single mom in Ohio, on medicaid, food stamps, child care benefits, partial disability – rabid anti-government conservative.

    IMHO, this just strenthens the case for federalism. Do you know how much better off Massachusetts would be without funding Mississippi? The net federal transfer is insane. Even without the programs, just the fact that cost of living is not factored into the progressive tax rates…

    I suspect the same explanation as to why whites on welfare are anti-government also explains why poor whites fought for wealthy plantation owners in the Civil War.