The Transformative Power of Fiscal Welfare in Europe: A State of the Art

In cash or in kind benefits are not the exclusive means through which states redistribute or address specific social needs. As has been well documented in the US context, tax expenditures also constitute an important instrument of welfare provision. In Europe, schemes such as the child tax credit in the UK or the earnings-tax credit in France are well-known examples. However, both the OECD database (SOCX) and recent case studies reveal that “tax breaks for social purposes” are much more developed in European countries than suggested in the existing literature.

We make the hypothesis that since the 1990s in the European context, due to the specific features of tax expenditures, fiscal welfare has not only constituted a “hidden welfare state”, but has also been the hidden part of welfare system reforms. For instance, while an upfront privatization of social services is often not an option, the use of tax credits might be a way to favour the development of a private sector industry in social services (pensions, health insurance, care). Tax expenditures might provide governments with a means of targeting preferred constituencies, in a process involving fewer veto players and less public scrutiny. 

The first part of the article proposes a literature review focused on the development and use of tax expenditures affecting the welfare state, especially in a reform context. The second part draws on Streeck and Thelen’s (2005) typology of institutional change to analyse and assess the transformative power of tax expenditures on welfare systems in Europe.