The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks.
For example, in Europe, governments offer health care directly. In the U.S., we give employers a gigantic tax exemption to do the same thing. European governments offer public childcare. In the U.S., we have child tax credits. In Europe, governments subsidize favored industries. We do the same thing by providing special tax deductions and exemptions for everybody from ethanol producers to Nascar track owners.
These tax expenditures are hidden but huge. Budget experts Donald Marron and Eric Toder added up all the spending-like tax preferences and found that, in 2007, they amounted to $600 billion. If you had included those preferences as government spending, then the federal government would have actually been one-fifth larger than it appeared.
The Organization for Economic Cooperation and Development recently calculated how much each affluent country spends on social programs. When you include both direct spending and tax expenditures, the U.S. has one of the biggest welfare states in the world. We rank behind Sweden and ahead of Italy, Austria, the Netherlands, Denmark, Finland and Canada. Social spending in the U.S. is far above the organization’s average.