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Probing the Depths of the ‘Submerged State’

• February 08, 2011 • 5:00 AM

A welter of tax credits, breaks and incentives help Americans out in ways they don’t understand or appreciate. This ignorance could have real consequences in debates about tax reform and deficit reduction.

In 2009, when President Obama negotiated a stimulus bill that included $288 billion in tax cuts, his advisers decided to structure their “Making Work Pay” tax credits so that workers’ regular paychecks were a little bit bigger, and the money would flow back into circulation gradually, rather than all at once. They believed it would have a greater economic impact that way.

Without running the counterfactual, it’s hard to know whether the tax credits had the desired economic impact. But one thing is clear: It was just about the worst-advertised tax cut ever. One year later, just 12 percent of respondents knew that their taxes had been reduced. Twice as many (24 percent) thought that their taxes had actually increased.

In its subterranean nature, “Making Work Pay” resembles an astonishingly large collection of other tax credits, benefits, breaks and other sundry market-structuring incentives that direct economic activity and redistribute wealth in ways that are quite hidden from most citizens. Collectively they make up a substantial “submerged state” — a term coined by Cornell political scientist Suzanne Mettler and explored in an article in the September issue of Perspectives on Politics. (Mettler is now working on a book on the subject.)

“The average person is quite unaware of them, how they work and what their effects are,” Mettler said in an interview. “They are submerged. Ordinary people look at it and see private organizations and actors doing things.”

Which means many people fail to appreciate the role of government in helping them because that role is frequently oblique. That potentially leads them to an unjustifiably negative attitude toward both the tax code and the federal government, frustrating possibilities for reform.

Submerged state policies exist in many sectors of the economy. For example, mortgage deductions, student loan programs and child tax credits are all government programs that shape individuals’ behaviors through incentives. Yet in Mettler’s survey, 60 percent of individuals claiming the home mortgage interest deduction, 53 percent of people using student loan programs and 52 percent of people claiming the child and dependent care tax credit said that “no, I have not used a government social program.”

Perhaps more remarkably, Mettler’s survey found that 44 percent of Social Security recipients, 40 percent of people receiving veterans’ benefits and 40 percent of Medicare recipients also pronounced themselves not to be users of government programs. While these are visible programs (and not technically part of the “submerged state”), they are either administered privately or through a dedicated agency, and certainly these benefits come with very little advertising that they are, in fact, government-provided benefits.

One of the reasons that the submerged state has expanded is because such programs make good political compromises between Democrats who want a more activist state, and Republicans who want to do things through the private market with incentives.

“You often have folks who wanted to create new visible programs but didn’t have the votes,” Mettler said. “So, for example, you have the provisions that gave health insurance companies their ability to be the source of health coverage for most Americans signed into law under Eisenhower.”

And yet when it came time to debate health care reform six decades later, angry conservative activists railed about the creation of new government programs. What they failed to appreciate was that the existing health care system was as much a product of government intervention in the marketplace as were any proposed reforms.

One reason for the ignorance is that politicians do a poor job explaining these programs. For example: Mettler tracked Obama’s statements on health care reform. A little more than half (38 out of 68) made reference to submerged state programs, but mostly it was just a passing reference. “What elected officials say is one way to make policy more visible,” she said.

Another way to increase visibility is through policy design. Mettler thinks that simple statements explaining the benefits people are receiving through different programs could also go a long way toward making the consequences of the submerged state more apparent, which could have big consequences for attitudes toward tax fairness.

“I’ve found that people who have benefited from visible programs have different attitudes than those who haven’t. They are more likely to feel that government is responsive to people like them, and that taxes are fair, whereas people who have benefited more from submerged state programs are more likely to feel that the tax system is unfair.”

In other words, if federal interventions are masked as hidden tax incentives and credits, individuals are much less likely to perceive them as social benefits and fail to appreciate them accordingly, potentially leading to anti-government, anti-tax anger.

One consequence of this ignorance is that it makes it difficult to have an intelligent conversation about issues like tax reform and deficit reduction, which are likely to dominate politics in 2011.

For example, the deficit commission has proposed reducing the mortgage deduction, which is part of the submerged state. A majority of Americans say they want to keep the deduction and oppose cutting it (55 percent in Mettler’s poll, 56 percent in a recent Pew poll). But when told a simple fact about the credit’s distributive nature (that “the people who benefit most from this policy are those who have the highest incomes”) and shown a graph revealing that 69 percent of the benefits go to those making $100,000 or more, support for the program drops 15 points, to 40 percent.

Of course, there are lobbying groups that have an interest in keeping things as they are — in this case homebuilders and Realtors, who are well organized in Washington. Such is the case with many of the submerged state programs — and which is one reason why they often remain submerged.

“Each of these tax expenditures is defended by well-organized interests that have benefited from them for a long time and have a lot of political capacity to make the case,” Mettler said. “And ordinary citizens are not aware of them, so public opinion polls don’t show you much that’s meaningful.”

Certainly, this is not the only set of issues on which American voters are largely unaware. Americans’ inabilities to answer basic questions about politics are well-known.

But what makes the submerged state unique is the extent to which these policies are masked from comprehension by design. More significantly, as we attempt to have a national conversation about the tax code and the national deficit, these issues become increasingly important. Hard choices are ahead, but the choices become even harder politically if the majority of Americans fail to understand both the benefits that they receive through the submerged state and the cost that the federal government bears.

 

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Lee Drutman
Lee Drutman, Ph.D., teaches at the University of California Washington D.C. Semester Program. He has worked as a staff writer for the Philadelphia Inquirer and the Providence Journal. His work has also appeared in the Los Angeles Times, New York Newsday, Slate, Politico and the American Prospect.

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