Tax and Spend

The Welfare State, Tax Politics, and the Limits of American Liberalism

Molly C. Michelmore

• Publisher: University of Pennsylvania Press
• Year: 2011
• Print ISBN: 9780812222999
• eBook ISBN: 9780812206746
• Topic: History
• Subtopic: North American History
• Index: History

Taxes dominate contemporary American politics. Yet while many rail against big government, few Americans are prepared to give up the benefits they receive from the state. In Tax and Spend, historian Molly C. Michelmore examines an unexpected source of this contradiction and shows why many Americans have come to hate government but continue to demand the security it provides.Tracing the development of taxing and spending policy over the course of the twentieth century, Michelmore uncovers the origins of today's antitax and antigovernment politics in choices made by liberal state builders in the 1930s, 1940s, and 1950s. By focusing on two key instruments of twentieth-century economic and social policy, Aid to Families with Dependent Children and the federal income tax, Tax and Spend explains the antitax logic that has guided liberal policy makers since the earliest days of Franklin Roosevelt's presidency. Grounded in careful archival research, this book reveals that the liberal social compact forged during the New Deal, World War II, and the postwar years included not only generous social benefits for the middle class—including Social Security, Medicare, and a host of expensive but hidden state subsidies—but also a commitment to preserve low taxes for the majority of American taxpayers.In a surprising twist on conventional political history, Michelmore's analysis links postwar liberalism directly to the rise of the Republican right in the last decades of the twentieth century. Liberals' decision to reconcile public demand for low taxes and generous social benefits by relying on hidden sources of revenues and invisible kinds of public subsidy, combined with their persistent defense of taxpayer rights and suspicion of "tax eaters" on the welfare rolls, not only fueled but helped create the contours of antistate politics at the core of the Reagan Revolution.

CHAPTER 1

DEFENDING THE WELFARE
AND TAXING STATE

In January 1947, Thomas Waxter, chief of the Baltimore Department of Welfare (BDW) announced cutbacks in the city's public assistance programs and called on a local, nongovernmental group to investigate his department and recommend measures to “remedy any defects” in the existing system.¹ Only weeks later, the city's largest daily newspaper, the Baltimore Sun, premiered the first in a seven-part series of front-page articles exposing how fraud, inexperience, and lax administration in the BDW had already taken considerable sums “out of the taxpayer's pocket.”² That same year, in New York City, the local press's discovery of a few families living in apparent luxury at public expense set off a chain reaction that ultimately resulted in two separate probes into the city's public relief system by local and state officials and cost the city's welfare director his job.³ Similar contests over public assistance cropped up in cities and states across the country. By the early 1950s, public assistance programs had “returned to page one” as state and local politicians from Maine to California attacked Aid to Dependent Children (ADC) and General Assistance.⁴ The federal government also got into the act, approving legislation to make public the identity of ADC and Old Age Assistance (OAA) recipients and to assist states in tracking down dependent children's “runaway poppas.”⁵ These innovations, and the public's approval of them, reflected the widely held opinion, first articulated by the authors of the Baltimore probe, that the “public treasury” could not and should not provide a “dependable substitute for frugality, prudence and self denial.”⁶

These postwar welfare crises paralleled a contemporary effort to limit the taxing powers of the federal government. At the national level, Republican legislators, temporarily returned to power after the 1946 midterm elections, promised to slash federal tax rates, roll back federal spending, and “cast out a great many chapters of the New Deal.”⁷ At the grass roots, antitax groups revived a Depression-era campaign to cap federal income, estate, and gift tax rates. By 1953, tax limitation advocates had convinced the National Bar Association, the American Legion, the National Association of Manufacturers and some twenty-five state legislatures to endorse a constitutional amendment limiting federal tax rates to 25 percent. Two years later, one national poll found that almost 70 percent of Americans across all socioeconomic categories favored a 25 percent ceiling on federal taxes.

The apparently robust support for tax limitation and hostility toward all but the most minimal forms of direct public assistance masked a widespread acceptance of other important, though largely unacknowledged, government-supported economic and social security programs. While politicians, the press, and the public expressed outrage at “welfare queens” and “welfare kings” whose unwholesome dependence on government subsidy threatened the nation's social and economic future, more expensive and extensive forms of public provision, including veterans’ programs, social insurance for the aged and the unemployed, farm subsidies, and mortgage tax subsidies for middle-class homeowners, enjoyed broad support.⁸ As David Lawrence, editor of the frankly pro-business U.S. News and World Report, wrote in 1950, federal intervention “in the economic life of business and the individual” was “no longer vulnerable as a principle.” Only the “scope and degree and quality thereof” remained in question.⁹

Indeed, despite the public's professed distaste for government spending, the state grew by leaps and bounds in the postwar years. Federal spending, which had crested at 10.5 percent of Gross Domestic Product (GDP) at the height of the New Deal, averaged 17.3 percent of GDP over the 1947–1960 period.¹⁰ Most of the liberal social programs of the 1930s and early 1940s survived the brief conservative resurgence of the immediate postwar period. Lawmakers—with the support of the public—showered new and ever more generous benefits on veterans and their families, increasing the value of education benefits and making it even easier for veterans to buy a home.¹¹ Social Security likewise expanded. To be sure, some continued to attack the program as an un-American form of state “charity received by virtue of a token payment by the worker and his employer.”¹² But by the early 1950s, even such conservative stalwarts as Ohio Republican Senator Robert Taft and the National Chambers of Commerce had come to accept, if not embrace, the program as a fact of political life. The Social Security Amendments of 1950, passed by large and bipartisan margins in both houses of Congress, set the program on a course of long-term expansion, secured its place at the center of the American welfare state, and helped to transform the once vulnerable program into the “third rail” of American politics. Efforts to undo the World War II taxing state also failed. The World War II tax regime survived and even thrived, as policymakers on both sides of the aisle came to depend on the federal income tax as a critical tool in creating and managing economic growth, delivering concrete tax benefits to certain groups, individuals, and businesses, and assuring individual and national prosperity. In 1954, Congress rejected alternative revenue schemes and instead voted, again on a bipartisan basis, to affirm the revenue system put in place in 1942.¹³

The taxing and welfare states thus survived the immediate challenge of the postwar return to prosperity. Liberal state builders quickly integrated the promise of national affluence and individual prosperity into their vision for the postwar world, grafting new commitments to national economic growth and individual economic mobility onto the New Deal's promise of economic security.¹⁴ These visions of abundance grew out of the war itself, as full employment, labor shortages, and unrealized consumer power replaced the widespread unemployment and deprivation of the previous decade. The postwar period promised more of the same, a world in which a “rising standard of living coupled with real security for all” would become the “accepted pattern of American life.”¹⁵ At the same time, liberal state builders molded their defense of social policies enacted during the Depression to the nation's newfound affluence and to the postwar growth imperative. As one liberal policymaker explained, economic security programs would not only protect “against the loss of income due to unemployment, old age, disability, etc.,” but would also contribute to the prosperity of the nation as a whole by leaving “every employer and every worker free to make any adjustments necessary to meet industrial or market changes.”¹⁶

The political contests over the shape and future of the U.S. tax and welfare state in the early postwar period, and the ways in which liberal state builders responded to them, helped to determine the nature and content of the postwar social compact by establishing policy institutions and ways of thinking about government that influenced policy and politics for the rest of the century. The public's taste for certain public spending programs, combined with elites’ faith in their own ability to use tax and spending policy to manage economic growth, effectively protected the taxing and welfare systems put in place during the New Deal and World War II. However, their survival required a refashioning of both conservative and liberal ideology and politics to meet the challenges and opportunities of what publisher Henry Luce called the “American Century.” For their part, the mainstream of the GOP and organized business jettisoned prior commitments to annually balanced budgets, opposition to the progressive income tax, and determination to block any and all forms of government intervention in the economy in favor of a limited form of “commercial Keynesianism” that relied on public resources—provided largely through the federal income tax code—to underwrite and stimulate the growth of private sector market activity.¹⁷

Liberals too adjusted their sights. The postwar survival of the welfare and taxing states was far from assured. Both had been created and approved in the context of serious national emergencies that had since disappeared. Challenges to both the taxing and welfare states had begun before the war ended. In 1942, even as it approved the watershed Revenue Act to finance the war, Congress froze scheduled Social Security tax increases, closed down Depression-era relief organizations like the Works Progress Administration, and refused even to consider proposals to expand the existing regime of social protection, effectively serving notice to liberal state builders who had once hoped to launch a “third New Deal.” Efforts to contain and roll back the liberal state mounted in the postwar years, as conservative policy elites rushed to slash taxes, eliminate New Deal social programs, and contain the growth of the state. At the grassroots level, state and local investigations into and purges of ADC and General Assistance rolls and mounting popular frustration with rising tax burdens threatened to undo the successes of the last two decades.

In the end, liberals managed to protect the basic institutions of the welfare and taxing states only by mortgaging the liberal political project as a whole. Their fears that antitax sentiment might endanger existing social and economic programs—in concert with early Cold War antipathy toward statist policies and the centrality of Keynesian growth economics to postwar liberal policymaking—led lawmakers to embrace ever more complicated and obscure ways of financing key economic and social programs. Policy decisions made in the immediate postwar years—decisions that compounded the limitations of the taxing and welfare states established in the 1930s and early 1940s—set the stage for the decline of the New Deal order in the late 1960s and early 1970s. By hiding the state in plain view, liberal postwar state builders effectively divorced the welfare state benefits enjoyed and expected by the nonpoor majority from the taxes that paid for them, the government that provided them, and the more direct forms of public assistance they resembled.

Contesting the Welfare State at the Grass Roots

In late 1947, the Commission on Governmental Efficiency and Economy released its long-awaited survey of Baltimore's public assistance programs. Finding “much in need of correction” and concerned about the long-term cost to the “average citizen,” the Commission recommended fundamental changes in the practices and principles of public welfare.¹⁸ The Commission report attracted “more public notice than any similar document in American public welfare history” and helped to shape welfare politics not only in Baltimore but in cities and towns across the country.¹⁹ The New York State Department of Social Welfare, which conducted its own audit of public assistance programs in 1947 and 1948, pointed out the “striking” parallels between the “results of [its] own investigation” and the findings of the Baltimore study.²⁰ Echoed by welfare authorities in other states and cities, the conclusions and recommendations reached by the Baltimore and New York investigating committees encapsulated and shaped what would become the dominant view of welfare for the remainder of the twentieth century. Focusing on only a discrete section of the larger American welfare state and insisting that the “individual” owed, both to himself and to “society” at large, “the obligation to work out his own security,” state and local welfare authorities helped to ratify a narrowed definition of welfare that comprised only cash assistance programs for the very poor and obscured the state's growing role in other areas of the economy and society.²¹

The welfare politics of the late 1940s and early 1950s drew on long-standing prejudices against providing public assistance to the undeserving poor, rehearsed familiar paeans to individualism, and paid deference to the nation's antistatist rhetorical tradition. Ambitious politicians had long campaigned on promises to purge public relief rolls of undeserving chiselers and malingerers. Even during the depths of the Great Depression, local officials routinely reexamined relief histories to check abuse and reduce assistance costs.²² But, these postwar welfare crises and the public attention paid to the apparent costs of public welfare can be fully understood only in light of the fundamental changes in the American state and in Americans’ relationship to that state wrought by almost two decades of depression and war. The postwar purges in Baltimore, New York City, Detroit and elsewhere reflected political and economic pressures unique to the postwar period as well as the dilemmas posed by the vast expansion of the taxing and welfare state over the previous decades. For one thing, the size and costs of public assistance programs were unprecedented. Although unemployment virtually disappeared during and after the war, costs for ADC and General Assistance spiraled. In Baltimore, to take but one example, ADC caseloads grew by 122 percent between 1945 and 1947; the General Assistance population grew by 60 percent.²³ Costs spiked accordingly. In 1946, the city's welfare budget was $3.9 million. A year later, the BDW spent $6.6 million on public welfare, with the largest cost increases in its ADC and General Assistance programs.²⁴ Fearful of the public's reaction to these rising costs, BDW officials worried about how they could “explain to the public why such large additional funds were needed in a time of full employment?”²⁵

The popular press asked the same question. Even before the Efficiency and Economy Commission issued its report, the Baltimore Sun did its part to draw attention to fraud and abuse in the city's welfare system.²⁶ Despite the editorial board's stated commitment to public programs “to succor the needy,” the Sun's seven-part series, written by Howard Norton, characterized the city's welfare system as rife with inefficiency, mismanagement, and possibly criminal abuse. The first article of the series set the tone for the rest, stressing the cost of the city's assistance programs—by which Norton meant only ADC and General Assistance—and pointing to the “paradox” of more than “23,000 people living on relief” in spite of “virtually full employment.”²⁷ As welfare costs rose, and imposed a heavier burden on the taxpayer, Norton and the paper's editorial board insisted, the conduct of the assistance program had become undeniably a “public affair.”²⁸

Rising costs helped to produce a similar welfare crisis in postwar New York City. The New York welfare system, the largest in the nation, witnessed an explosion in its caseload after the war; annual costs for the city's welfare department rose from $75 million in 1946 to $122 million a year later.²⁹ Given the postwar boom, such increases seemed difficult to account for, until the chance discovery of a few “luxury relief” cases by the city's press provided a simple—if erroneous—explanation. A routine check of local welfare practice by state officials found that city welfare officials had, on occasion, housed public assistance recipients in local hotels. That these cases were relatively rare—only thirty-seven families lived in hotels—and that the hotels involved could scarcely be described as deluxe accommodations hardly mattered. Nor did the fact that the city acted quickly to address these so-called luxury relief cases. By 26 May, two weeks after the press first got hold of the story, only one family remained in a hotel; thirty-six others had been relocated. Nonetheless, the headlines were sensational and the city's press relished describing how the city had lodged a “family on relief” in a hotel at a cost of $500 per month at a time when the quip “two families for every garage” described all too well the housing s...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication Page
• Contents
• Inroduction: Tax Matters
• 1. Defending the Welfare and Taxing State
• 2. Market Failure
• 3. Things Fall Apart
• 4. Fed Up with Taxes
• 5. Game Over
• Epilogue: Stalemate
• Notes
• Index
• Acknowledgments