Financing the Welfare State: Elite Politics and the Decline of the Social Insurance Model in America

Abstract

While there is a vast and rich literature on the benefits and services provided by the welfare state, few scholars have investigated how these programs are financed. The tax side of the budget equation is crucial for the ability of welfare states to exist and expand; without a stable and growing source of revenues, the welfare state can neither meet its existing obligations nor increase its responsibilities. The mode of finance can be particularly important, as some taxes are more visible or contested, and thus more difficult to raise. For example, because there are limits to how much revenue can be raised with progressive income taxes, many industrialized countries finance large social programs through contributory finance, that is, payroll taxes. Levied over a broad swath of the population, these taxes generate a large amount of revenue, yet are politically acceptable because people see them as payments that entitle them to benefits in return.