Myth: The poor receive the most welfare.

Fact: Corporations receive the most welfare.



Summary

Entitlement spending on households is surprisingly "flat" in the U.S. -- the spending is distributed proportionately among the various income groups. However, federal spending tilts in favor of the rich when you add corporate welfare to the mix. And this pro-wealthy favoritism becomes more pronounced when you consider who is paying for it: over the last few decades, the tax rates for the rich have sharply fallen, both in personal income and corporate taxes.



Argument

The following chart shows how entitlement spending is distributed in the U.S.:

Distributions of Federal Funds by Income Bracket, Compared to Distribution 
of Households by Income Bracket, CY 1991 (1)

                    Percent of       Percent of
Income              all households   all benefits
-----------------------------------------------
Under $10,000          16.4%           17.8%
$10,000 - $20,000      18.8            21.7
$20,000 - $30,000      17.0            17.2
$30,000 - $50,000      23.6            21.8
$50,000 - $100,000     19.1            15.9
Over $100,000           5.1             5.6

As you can see, federal entitlements are distributed proportionately among the income groups (with insignificant shifts towards the poor and the very rich). If taxes were flat as well under this distribution system, then Uncle Sam would simply be returning everyone's money to them -- a pointless and wasteful exercise, everyone would agree. It's only when taxes are more progressive that income is shifted downward under the above system. For this reason, the loss of tax progressivity over the last several decades means that less income is being redistributed to the poor, and Uncle Sam is increasingly engaging in a pointless exercise:

The Loss of Tax Progressivity 
Effective Family Federal Tax Rate (Income and FICA) (2) 

Year    Median    Millionaire or Top 1%
---------------------------------------
1948     5.3%     76.9%
1955     9.1      85.5
1960    12.4      85.5
1965    11.6      66.9
1970    16.1      68.6
1975    20.0       --
1977     --       35.5
1980    23.7      31.7
1985    24.4      24.9
1989    24.4      26.7

Keep in mind the first column is for median families; poorer families pay even less, so there is still some downward distribution. But there is less downward distribution than in previous decades, namely, the 50s and 60s.

That's a critique from the tax angle; another is possible from the spending angle. The first chart is a strong argument for means-testing federal entitlements. The rich do not need the money; they've already got the most of it. Perhaps an argument exists for helping the rich out in times of dire emergency, but to give them non-emergency funds like Social Security begs a defense. Others might argue from a "trickle-down" philosophy that enriching the rich will increase investment in jobs and business, but, as statistics from the 80s reveal, the rich can enjoy exploding incomes and still invest less than ever before. The trickle-down proposal can thus be rejected on historical grounds alone.

However, the above discussion only concerns households. What happens when corporate welfare is thrown into the mix? To answer this, we must first answer three questions: what is corporate welfare? How much of it is there? And whom does it benefit?

The definition of corporate welfare

Corporate welfare can be defined as pork-barrel spending, unjustified government subsidies, and unjustified tax breaks. They qualify as welfare for the following reasons:

The difference between pork and legitimate government contracting is their corresponding value to society. When Eisenhower paved the nation with highways, the economic benefits were obvious, and few if any begrudged the highway construction companies their good fortune. But when Congress spends $500,000 to build and run a Lawrence Welk museum, the result is a waste of the taxpayer's money and a needless diversion of our nation's limited resources. And the reason such a diversion occurs is not because market forces or market signals compel such a project. It occurs because a corporate lobbyist makes a campaign contribution to a certain influential member of Congress, who returns the favor by giving him this package of squealing bacon. The result is a happy businessman who is given something for nothing. True, his project creates jobs -- but they are not economically justified. It's as if the government gave a welfare check to a poor person and said: "You have to earn this check -- go find ten of your friends and have them stand on their heads, and then pay them 50 percent of this check for doing so." It's even worse than that, because the pork contractor is consuming our nation's finite resources.

Government subsidies are judged by the same criteria. Presently the government is subsidizing the Genome Project, which is too expensive and long-term for private enterprise to invest in. Yet there is reason to believe it will probably eliminate most genetic diseases in the human race, and its social benefits and economic promise are obvious. This is not the case for the Texas wool and mohair subsidies, which cost Uncle Sam about $100 million a year for a product the Defense Department no longer wants or needs. Again, these suppliers could not make the same money on the free market, so any profits they realize are the equivalent of a welfare check. In this case, subsidy programs resemble pork -- indeed, many are pork.

Unjustified tax breaks are also welfare. Most companies pay taxes, and they receive a number of public goods and services in return. These include police and fire protection, national security, public roads, utilities, government economic data, publicly funded research and development, educated workers, etc. If a corporate lobbyist can win a $5,000 tax break, this means that the company is funding less of the government's goods and services, even though it's drawing on them just as heavily as before. In other words, society is carrying this company to a greater degree. Now, there may be good reasons for doing so; Uncle Sam may want to give tax breaks to the companies building the information superhighway, because of the enormous economic promise it holds. But most of the time, tax breaks are not given out for justified economic reasons like this. Essentially, any company with a lobbyist can bribe a tax break out of a member of Congress. Which means that the rest of society has to pick up the slack; they might as well be paying these "legal tax cheats" a welfare check.

Notice that subsidies and tax breaks are opposite sides of the same coin. No matter which a company receives, the effects are the same.

The costs of corporate welfare

The estimates vary on how much pork, unjustified subsidies and tax breaks are really out there, but moderate estimates run from $100 to $150 billion a year. Here are what various think tanks and policy groups estimate:

• According to the conservative Heritage Foundation (which is basically in bed with corporate America), government could save $20 billion a year by eliminating just three dozen corporate giveaways. This is almost one year's worth of AFDC.

• The Office of Management and Budget and Congress's Joint Committee on Taxation report that taxpayers pay businesses $51 billion in direct subsidies and lose another $53.3 billion in corporate tax breaks, for a total of $104.3 billion a year.

• In a three-part series on corporate welfare (7/7/96), the Boston Globe writes: "The $150 billion for corporate subsidies and tax benefits eclipses the annual budget deficit of $130 billion. It's more than the $145 billion paid out annually for the core programs of the social welfare state: Aid to Families with Dependent Children (AFDC), student aid, housing, food and nutrition, and all direct public assistance (excluding Social Security and medical care)."

• Ralph Nader's Center for the Study of Responsive Law has identified $167 billion in corporate tax breaks and handouts given away in 1994.

• The Progressive Policy Institute, a moderate Democratic think tank, has identified $225 billion worth of questionable, special-interest spending and tax subsidies that Congress should reevaluate. It has also called for Congress to save $265 billion over 5 years by eliminating or scaling back 120 specific programs.

• The Cato Institute, a Libertarian think tank, estimates that federal aid to corporations ranges from $250 to $350 billion a year. It has specifically identified 125 federal programs subsidizing private businesses that would save taxpayers $85 billion if cut.

• The House Progressive Caucus, which is mostly comprised of Democratic members of Congress, has called for the elimination of $800 billion in tax subsidies and other benefits for corporations and the rich.

Source of funds for Federal Spending (3) 

        Personal     Corporate    Payroll   Excise/    
Decade  Income Tax   Income Tax   Tax       Estate     Borrowing
----------------------------------------------------------------
1950s   42.0%         26.9%       11.5%      17.2%      2.5%
1960s   42.0          20.4        18.4       14.9       4.4
1970s   40.3          13.3        27.7       11.3      11.1
1980s   38.0          7.7         29.2        8.2      17.7

The share paid by corporations has fallen to less than a third of its former level, whereas that of the heavily regressive payroll taxes (Social Security, Medicare) has nearly tripled. Who's collecting more welfare from whom?

Who benefits from corporate welfare

Corporate welfare increases a company's profits. Lobbyists argue that this helps everybody, because those profits go to create jobs, invest in businesses, promote research and development, etc. However, none of these alleged benefits have been happening since corporate welfare began rising in 1975.

There were 24 million new jobs created in the relatively low corporate-welfare 70s. In the 80s, when corporate welfare reached full steam, only 18 million new jobs were created. (4)

Investment also fell in the 80s. Between 1970 and 1979, the rate of private investment was 18.6 percent; between 1980 and 1992, it fell to 17.4 percent. (5)

Workers have not been benefiting either -- the average hourly wage has been falling:

Average Hourly Wages (Total private industry, 1982 dollars) (6)

1978    8.40
1979    8.17
1980    7.78
1981    7.69
1982    7.68
1983    7.79
1984    7.80
1985    7.77
1986    7.81
1987    7.73
1988    7.69
1989    7.64
1990    7.52
1991    7.45
1992    7.41
1993    7.39
1994    7.40
1995    7.40

So if corporate welfare hasn't been going to jobs, investment or blue-collar wages, where has it been going? The answer: the soaring incomes of the rich. CEO pay nearly achieved orbital velocity in the last few decades:

Salaries and benefits of corporate CEOs as a multiple of the average
factory worker's (7) 

1980   30 times
1991   130-140
1996   187

And that's just a snapshot of a much larger trend. Here's how much income for different income groups grew during the 80s:

Percent Increase of Combined Salaries by Income Bracket, unadjusted
for inflation (1980s) (8)

Income Bracket       Percent Increase
-------------------------------------
$20,000 - 50,000           44%
200,000 - 1 million       697
Over $1 million         2,184

Inflation over the decade was roughly over 50 percent, so the income growth for the middle class didn't even keep pace with inflation. (Household income statistics, which show a rise for all income groups in the 80s, are deceptive because wives were joining their husbands in the workforce. The above measure corrects for this statistical glitch.)

Pretty clearly, corporate welfare increases the profitability of companies, thus allowing them to pay the exploding owner and management pay for which the last few decades have become notorious. Essentially, corporate welfare is a welfare check for rich individuals.

By contrast, individual welfare payments for the poor have been falling. Between 1970 and 1991, the purchasing power of benefits for the typical AFDC family fell 42 percent, primarily as a result of state and federal cuts. (9) The following chart shows just how small -- and growing smaller -- welfare payments for the poor really are:

Average Monthly Benefits (Constant Dollars, CPI-U) (10)

Program                   1980   1993
-------------------------------------
AFDC (per family)         $350    261
Food Stamps (per person)    42     47

Keep in mind that AFDC and food stamps are by far the largest welfare programs for the poor. (Medicare is technically larger, but 75 percent of that goes to the blind, the elderly and the otherwise disabled.)

In conclusion, the rich have been paying lower and lower rates on personal income and corporate taxes. But they receive a proportional share of personal entitlements, and they are outright favored when it comes to corporate welfare. For them to criticize welfare programs for the poor is therefore misleading at best, and hypocritical at worst.

Return to Overview

Endnotes:

1. Benefit distributions by income bracket are based on unpublished CBO analysis of Current Population Survey (Census) and Statistics of Income (IRS) income data. Benefit payments tabulated here (a total of $534 billion) represent the 81 percent of federal entitlement outlays in 1991 that could be allocated by income bracket. They include Social Security (OASDI), Railroad Retirement, civil service and military retirement, veterans' cash benefits, Medicare, Unemployment Insurance, workers' compensation, Food Stamps, AFDC, SSI, and the Earned Income Tax Credit. Although consistent data on the other 19 percent of federal benefit payments are not available, it is unlikely that inclusion of the remaining entitlement programs (ranging from Medicaid to farm price supports)would significantly alter the overall benefit distribution. Source: Neil Howe, How to Control the Cost of Federal Entitlements: The Argument for Comprehensive "Means-Testing" (National Taxpayers Union Foundation; 1991).

2. The data in the median column originates as follows: the 1948 figure comes from The Statistical History of the United States, 1976; the figures for 1955 to 1983 come from Alan Lerman of the U.S. Department of the Treasury Office of Tax Analysis. The calculations after 1983 come from Eugene Steuerle and John Bakija, Right Ways and Wrong Ways to Reform Social Security (Washington, D.C.: Urban Institute Press, 1993). Figures from the millionaire column for 1948 to 1970 represent the effective tax rates for those earning $1 million a year and come from the U.S. Treasury Department unpublished data set forth on page 1112 of The Statistical History of the United States, 1976. FICA is not included, but the rates would not be affected by a percentage point. The rates from 1977 onward are for the top 1% of families as computed by the Congressional Budget Office tax simulation model and include all federal taxes. Source: the 1992 Greenbook of the House Ways and Means Committee, p. 1510. The effective rate on millionaires would be close to the rate on the top 1 percent.

3. Robert J. Shapiro, "Paying for Progress," Progressive Policy Institute, February 1991. Calculations derived by the author from Budget of the United States Government, fiscal year 1991, "Historical Tables," Tables 1.1 and 2.2.

4. U.S. Bureau of Labor Statistics, Bulletin 2307.

5. Paul Krugman, Peddling Prosperity, (New York: W.W. Norton & Company, 1994), pp.126-127.

6. U.S. Bureau of Labor Statistics, Series ID: eeu00500049.

7. Kevin Phillips, Boiling Point (New York: HarperPerennial, 1993), p. 251.

8. Internal Revenue Service.

9. Paul Taylor, "When Safety Nets Leave the Needy in Free Fall," Washington Post National Weekly Edition, September 9-11, 1991.

10. AFDC figures from U.S. Social Security Administration. Food Stamp figures from U.S. Department of Agriculture, "Annual Historical Review of FNS Programs" and unpublished data. Current dollars converted to constant dollars from CPI-U.