A new report says the real waste isn't in food stamps but with tax breaks that subsidize spending on things like health care and housing. (Photo by Kevork Djansezian/Getty Images)

The public places lots of scrutiny on the services that the government delivers to poor people: Witness the recent outrage over welfare recipients eating steak, visiting swimming pools, and driving a Mercedes while receiving public funds. But a new study argues that the real waste in the American system comes not from welfare programs like food stamps, but from widespread tax breaks that subsidize spending on things like health care and housing.

Jacob Funk Kirkegaard, a senior fellow at the non-partisan Peterson Institute for International Economics, argues in a new report that once you take these kinds of tax breaks into account, the U.S. actually devotes far more resources than many other countries to “social spending” -- spending on pensions, health care, family support, unemployment, housing assistance, and similar benefits meant to help people out in hard times. And, compared with most advanced countries, the U.S. gets far less bang for its buck in terms of health outcomes and equality.

As the chart below shows, the U.S. government spends only about 19 percent of GDP on this kind of social spending, compared with around 20-31 percent for various European countries. But even when the U.S. government lets the private sector provide certain social benefits, like health insurance, it still “pays” for it in a certain sense through tax breaks, Kirkegaard argues.


The U.S. offers huge amounts of what Kirkegaard calls “tax breaks for social purposes,” including the Earned Income Tax Credit, tax-exempt pension contributions, and new tax breaks for Americans to buy health insurance. In contrast, many European governments give services or cash benefits directly to their citizens, but then take some of that money back by taxing those cash benefits, or the person’s spending more generally.

Once you take those tax flows into account, how much different countries spend on social services changes dramatically. Including tax flows, Kirkegaard estimates that the U.S. government spends 20.8 percent of GDP on social services, which is just 3.2 percentage points lower than the EU average, and higher than Canada and Norway. Basically, the trans-Atlantic divide disappears.

But to really compare countries, you have to take a final step and add in what people are spending on social services without any government support, says Kirkegaard. Setting aside any ideological beliefs about the size and function of the government, this approach allows you to see how efficient a given level of spending is in providing services in different countries.

Once you add in that private social spending and the effect of taxes, it changes the ranking entirely. Now the U.S. devotes more to social spending than Sweden, the U.K., Germany, and Denmark – actually, every other advanced country except France. “The US ‘welfare state’ might be relatively small, but that doesn’t mean that total social spending is low in the United States,” Kirkegaard writes.


Peterson Institute for International Economics

So the U.S. actually spends a lot on social benefits – and, the paper goes on to argue, we aren’t getting that much of a return on our investment. Kirkegaard goes on to present a bunch of charts that make the U.S. look like a crazy outlier in its heavy spending on health care and its poor results.

For example, here is average healthcare spending per capita graphed against potential years of life lost among men, a measure of premature death. For most countries, premature death among men falls as spending goes up. But the U.S. is off on its own, spending way more than comparable countries but roughly in the middle of the pack for mortality.


Peterson Institute for International Economics

That same graph looks even worse for women. Premature death for women in the U.S. is about on par with Mexico, which spends just $858 on health care per capita compared with nearly $8,000 per capita in the U.S.


Peterson Institute for International Economics

The situation is similar for infant mortality, with far more spent for middling results:


Peterson Institute for International Economics

By all of these measures, the U.S. is an outlier, with a relatively expensive and ineffective health care system. As the charts show, greater spending in the private sector in the U.S. generally hasn’t resulted in a more effective healthcare system.

There’s a clear political rationale behind the American system of giving people tax breaks on their health care spending, rather than having the government give them health care: The public pays fewer taxes, and the government doesn’t appear to be spending money.

But the Peterson study suggests this system merely hides the true level of government spending. Tax breaks for lunches eaten on business trips are rarely given the same amount of scrutiny as the use of food stamps at the grocery store, but the ultimate cost to the government is the same.

The American system also does less to redistribute wealth from the rich to the poor, since the private sector mostly depends on individuals and households to spend money, and people can’t spend money they don’t have, says Kirkegaard. The result is that the U.S. spends a lot on social services, and still has relatively high levels of inequality, as this chart shows.


Peterson Institute for International Economics

So when people fixate on welfare programs like food stamps, they miss how the U.S. government actually spends the bulk of its money trying to help families—money that, based on this report, could be spent a lot more efficiently.