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The Rich, the Poor & the Reagan Administration

According to a recent Gallup poll, 82 percent of the American people hold that President Reagan’s domestic programs “help the rich” and 75 percent hold that they “hurt the poor.”

In one respect, this Gallup finding may seem understated. For so insistently have the major news media harped upon the alleged hard-heartedness of the Reagan administration, from the night of the first inauguration ball to the present day, and so emphatically has every Democrat, from “Tip” O’Neill to Tom Hayden, made this the central item in his political bill of indictment against the present administration and against the Republican party in general, that one is surprised to learn that 18 to 25 percent of Americans do not immediately agree.

Still, the fact that the “fairness” issue has been made the single determining focus in assessing the domestic record of the administration does not mean that it has itself been considered fairly, on its merits.

Indeed, when one tries to establish what is “fair,” problems arise immediately. In 1976, Jimmy Carter campaigned on the claim that the tax system of the U.S. was so unfair as to constitute “a disgrace to the human race.” By 1980, no one thought that Carter, as President, had made it less so. As he departed office, Carter also left behind an annual rate of inflation of 13 percent, 7.5 percent unemployment, interest rates at 22 percent. No one then claimed that Carter was helping the poor. By his own description, the country was suffering a broad “malaise.” It is by no means obvious, then, that Reagan’s programs are any more unfair than Carter’s.

What is obvious, however, is that the Reagan administration’s critics have more exalted standards in mind. Some judge fairness by the degree of “redistribution” effected in society. In their eyes, an administration would be fair if it took from the rich and gave to the poor. Yet as Bertrand de Jouvenal long ago pointed out, this dreamy ideal can never be fulfilled literally, for the simple mathematical reason that there are too few rich and that, even in the aggregate, they have too little income. The most recent Internal Revenue Service tables (for 1980) could hardly be clearer on this point: only 117,000 Americans had a gross adjusted income of $200,000 or more. Their total income came to $46 billion, on which they paid $20 billion (or 43 percent) in income taxes. To confiscate the entire remaining after-tax income of every U.S. citizen earning over $200,000 and give it all to the poor, whatever one might say about the “fairness” of such a measure, would result in under $850 for each individual officially counted as poor.

Do those who advocate redistribution believe, then, in taking from the middle class and giving to the poor? This the Democrats do not say. And one cannot, in any case, really credit most of President Reagan’s critics with an honest belief in equality of income, if only because so many of them are themselves very well paid and have shown no discernible movement toward taking less, in the name of fairness, or in any other name for that matter.

It is especially peculiar that partisans of fairness also attack tax indexing. Every time the lower 50 percent of earners have advanced a little in income, higher tax brackets have knocked them back. Beginning in 1985, tax indexing will cure this; yet far from being a measure welcomed by those ostensibly concerned with fairness, it is a measure repudiated by them.

So if fairness does not mean doing as Democrats did from 1976 to 1980, and does not mean redistribution from the middle class to the poor, and does not entail indexing, what does it mean? Perhaps it signifies, as some have put it, that there should be no cuts in tax rates for the rich and no welfare cuts for the poor. But even this turns out, theoretically and practically, to be problematical.

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II

The record of tax payments to the IRS is not well-known. Here are the tables for 1980:

Personal Income Taxes Paid, 1980 (money amounts in billions)
IRS Income Groups Number of Returns Gross Adjusted Income Total Taxes % of All Taxes Paid
Total: 93,902,469 $1,613.7 $250.3 100
$0-5,000 20,055,529 49.7 0.7 0.3
5-10,000 18,370,997 136.6 7.8 3.1
10-15,000 14,303,041 177.1 17.1 6.8
15-50,000 38,043,711 992.7 146.2 58.4
50,000-100,000 2,568,427 165.9 39.8 15.9
100,000-200,000 443,514 58.6 19.4 7.6
200,000- 117,250 45.8 19.5 7.8

As the figures suggest, those Americans who earned more than $50,000 in 1980—the top 3 percent—remitted 31 percent of all income taxes paid, or $79 billion of the total $250 billion collected by the IRS from individual income taxes. In 1980, the bottom 50 percent, or those who made $12,000 or less, paid $14 billion in income tax (or only 6 percent of all taxes paid). Thus, the top 3 percent paid five times more in taxes than the bottom 50 percent combined.

For the top 3 percent to carry the bottom 50 percent seems highly admirable. What one cannot say is that those in the top layer “benefit” unduly from a cut in tax rates that is of the exact proportion granted to every other taxpayer. For by saying this one would simply be calling attention to the far greater proportion of taxes such persons are now paying. The Reagan tax cuts of 1981 were, by design, one and the same for all, at every income level. In fact, as the independent Congressional Budget Office has noted, under the Reagan program “the largest tax cut in dollar terms” has gone not to the very rich but to the “$10,000 to $40,000 middle-income group, which as a group also has the most households and the most income.” The CBO adds: “The highest category [of income earners] receives a slightly lower cut relative to previous tax liability.” This is because for such persons the topmost 50 percent marginal rate on earned income remains in effect.

Not only have high-income persons not benefited disproportionately from the cut in tax rates, but the gross amounts they are paying are, if anything, greater than before the cuts went into effect. If that were not true—if, instead of paying $79 billion in taxes, as in 1980, the 3 percent at the highest income in 1982 were paying, say, $71 billion (a 10-percent cut) or 67 billion (a 15-percent cut)—then the IRS would be receiving less in 1982 than it had received in 1980, and this might be considered “unfair” in its consequences for federal expenditures. But such a supposition is false. Although the final figures are not in, it is almost certain that the top 3 percent of income earners in 1982 had by April 15 of this year paid more than $79 billion in taxes. The rate at which they were taxed went down, but the amount of taxes they paid appears from early signs to have gone up.

How this works in practice may be seen in concrete examples. When President Reagan released his own tax return for 1982, many reporters observed that the reduction in the maximum tax from 70 percent to 50 percent had saved him some $48,000. Only a few went on to note that in fact the President paid more taxes in 1982 ($292,616) than in 1981 ($165,641). In his case, this was because of the sale of his home in California. In the case of many others who also paid more, it was because they took advantage of more favorable tax laws to sell other assets—stocks, bonds, and the like. In the case of still others, the lower tax rate made a difference in their willingness to take on additional enterprises, on which they earned more money than in the preceding year while simultaneously paying more taxes.

No doubt there were persons who received large “unearned” income from investments and who benefited handsomely from the reduced tax rates. Consider a man (the type is rare) who in 1980 kept $300,000 after taxes from a million-dollar income in dividends and interest. In 1982, with the cut in tax rates from 70 percent to 50 percent, the same man now kept, through no extra effort of his own, $500,000. This was his good fortune. But what was such a man going to do with the extra $200,000? He was likely to invest a substantial portion of it. In the new tax environment, moreover, he was likely to begin moving many of his other investments. Most such transactions would create taxable gains. Since he was already paying $200,000 less in taxes than in preceding years, he might reasonably believe that he could “afford” some of these gains, in the hope of even larger future ones (also potentially taxable). Thus, such an individual could actually improve his personal liquidity and his annual income while also paying higher taxes (although in a different manner) than before. He gained, and the government also gained. So did the economy, whose growth was stimulated by new funds made available for private investment.

Is this unjust, unbeneficial, or unfair? It seems, on the contrary, wise policy.

House Speaker O’Neill has proposed to “cap” the new income-tax cuts so that no one will be able to reap a “benefit” of more than $700. Although by his own admission this will affect only those who earn over $46,500 (by his reckoning, about 8 percent of all taxpayers), O’Neill says the proposal will “save” the Treasury $6 billion. Yet the amendment might well lose the Treasury more than $6 billion. If the Speaker’s real goal is to increase the amount of taxes collected from higher-income earners, he should contemplate some other method—perhaps even the President’s. For in practice, the most likely way to increase such amounts is to encourage productive investments on which mutually attractive tax rates apply.

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III

If the “rich” side of the so-called “fairness” issue seems to have less in it than meets the eye, what about the “poor” side? Is President Reagan’s program hurting the poor?

In one area—employment—the obvious answer is yes. Although one cannot blame Reagan for an unemployment rate already going up well before his tax and welfare programs went into effect, the fact that unemployment rose by a full 3 percent during Reagan’s first two years in office means that some 3 million families experienced real hardship. Savings were wiped out; lifetime projects were grievously interrupted or destroyed; fears spread; some factory doors clanged shut forever.

Yet when people say that Reagan’s programs are hurting the poor they have in mind not so much the number of the unemployed as the condition of the welfare programs sustaining the poor. Quite apart from the increase in the numbers of the poor because of unemployment, the poor are said to be getting poorer.

President Reagan is alleged to be cutting benefits to the poor. But what does “cutting” mean? One can cut a benefit in three ways: (a) by inflation; (b) by providing less funding; (c) by curbing a projected growth in funding. For Democrats, the classic way of cutting benefits has been to give with one hand (in appropriations) while taking away with the other (through inflation). This was President Carter’s way. During his four years in office, inflation raged almost at double-digit levels for three years, devastating individuals and families with low income or fixed income. Inflation is the cruelest tax, although the easiest one for the “party of compassion” to levy. (To adapt an old Tammany Hall saying: “The fella who said, ‘Patriotism is the last refuge of scoundrels’ overlooked the possibilities of compassion.”) President Carter levied the tax of inflation with a vengeance.

In this respect, Reagan has done more to help the poor than Carter. Inflation has come down more quickly, more steeply, and (so far) more steadily than anyone dared to hope on inauguration day. Whatever dollars the poor receive under Reagan, they are more honest dollars than they were under Carter, when even the practice of indexing welfare benefits to the rate of inflation could not prevent all other costs from leaping beyond reach.

As for gross expenditures on welfare programs, even adjusting for inflation, there are a few—but only a few—welfare programs on which the government is spending less in 1983 under Reagan than was spent in 1980 under Carter. In the aggregate, certainly, far more is being spent. Even in 1980, critics said welfare spending was “out of control.” It still is. Mercilessly, and most often without commensurate benefit, it just keeps going up, automatically. President Reagan deserves little “credit” for this; on the contrary, he has tried desperately to control it. Yet his efforts to make deep cuts have by and large failed.

To be sure, if we were to ask poor and unemployed Americans, one by one, whether their present condition under Reagan is worse than, better than, or the same as under Carter, I would expect Reagan to score lower than Carter. Such persons are the best judges of their own circumstances. But on the level of federal social policy—which has to do with appropriations, expenditures, programs, line budgets, and year-end reports—it is impossible to sustain the accusation that Reagan is spending less on welfare programs than Carter did.

Take the three biggest items, the so-called “middle-class” social programs which actually benefit the poor even more significantly than they benefit others: Social Security, Medicare, and Medicaid. (Poverty was not long ago a problem predominantly of the elderly; these three programs have virtually ended that.) On these three programs Reagan is indisputably spending more than Carter did:

Outlays for Three Basic Social Programs (millions of dollars)
  1980 1983
Social Security 117,117 168,267
Medicare 35,033 57,262
Medicaid 13,956 19,326
Total: 116,106 244,875
Source: Office of Management and Budget

Thus, the sharpest accusations about “hurting the poor” cannot plausibly be aimed at these three fundamental welfare programs. But what about the relatively minor programs designed especially for the poor: Aid for Families with Dependent Children (AFDC), food stamps, housing assistance, rent supplements, Small Business Administration minority loan programs, Head Start, and the long list of other agencies, programs, and benefits? These amount, in aggregate, to about 10 percent of all federal spending, or some $70 billion. And it is on these that the case against Reagan rests.

This case is built principally on the contention that the administration has not merely cut the rate of increase of the programs in question, but has also made actual inroads into their funding. The particulars, which tend to bear out the President’s frequent assertion that virtually every program has been budgeted for more in 1983 than in 1980, speak for themselves:

Outlays for Social Programs (millions of dollars)
  Estimated
  1980 1983
Unemployment Benefits 18,029.2 36,855.0
Housing Programs 5,353.6 9,325.0
Food Stamps 9,117.1 12,045.1
Child Nutrition 3,377.1 3,196.5
Women, Infants, Children 716.7 1,117.7
AFDC 7,308.4 7,766.8
Supplemental Security Income 6,411.5 8,845.3
Earned Income Tax Credit 1,275.2 1,205.0
Source: Office of Management and Budget

These figures are not adjusted for inflation (which has been reduced but not eliminated). In a time of recession, moreover, one would expect to see a gross increase in social spending to ease the burden of the poor and near-poor. Just such an increase is patent in these figures. Still, some categories show only a slight rise or, in two cases, a fall. The fact that the Reagan administration has tightened eligibility requirements for these programs just at this precise moment is the most plausible reason for saying that Reagan’s program is unfair.

On whom did these cuts fall most heavily? Not on the poorest of the poor. By all evidence, the poorest, who have benefited the most from the reduction in inflation, have also been the least affected by the Reagan cuts. In every category, those cut have been at the top of the relevant criteria for eligibility. So much is this the case that some conservatives and liberals have jointly rebelled, calling it a scandal that the Reagan “ax” has fallen most harshly on the “working poor,” those on the upper boundaries of poverty and dependence. Are these not the very persons—so to speak, the “most deserving” poor—who ought to be encouraged? Why cut off their benefits? Except that just above their ranks there are others who also could use a little extra help, and also above those. (Moreover, under previous practices, 80 percent of the “working poor” were not receiving the benefits received by a lucky 20 percent; this unfairness more than any other has brought welfare into disrepute.)

It is thus a portion of the borderline poor who have felt the pain. Within those programs which have been cut, or whose growth has been cut, the Reagan policies have consistently aimed at removing from the rolls those with higher incomes. Ironically, these are the very ones among the poor likely to have voted for Reagan in 1980, and presumably likely to do so again in 1984, in numbers much greater than the poorest of the poor, whose eligibility has been entirely protected. As Roosevelt is sometimes referred to as the liberal who saved capitalism, Reagan may some day be known as the conservative who saved the welfare state intact for the very poor.

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IV

If, however, the Reagan administration has neither helped the rich nor hurt the poor in the blatant way that has been charged by its critics, it has failed to address meaningfully the larger question posed by the continuing existence of a welfare population whose ranks are not diminishing but appear rather to be swelling.

Federal expenditures for human services no longer seem to be correlated with decreases in the level of poverty. More money is being spent; poverty seems not to have been reduced. In constant, uninflated dollars, and adjusted for population increases, government spent seven times as much on direct cash-income transfers in 1970 as in 1950. It then spent twice as much in 1980 as in 1970. In addition, many in-kind transfers (food stamps, housing assistance, Medicaid) increased dramatically.

It is true that, thanks mainly to the rapid economic growth of the 60’s, and perhaps also to Lyndon Johnson’s “War on Poverty,” the percentage of the population in poverty dropped from about 30 percent in 1950 to under 12 percent in the early 1970’s; but then it began to grow again, and in a manner utterly unresponsive to federal ministrations.

In the latest year for which numbers are available (1981), there were 31 million poor persons, defined as all those in non-farm families of four having an income lower than $9,287. Of these, significantly more than half, almost 17 million, were under age sixteen, mostly the children of single mothers. Only a small proportion—about 3 million—were over sixty-five. Thus, only about 11 million of the poor fall between the ages of sixteen and sixty-five and are therefore capable of being active in the market system on their own behalf. A significant portion of these adults, moreover, are single mothers; others are handicapped, ill, or otherwise afflicted. This leaves only a small number, about 2 million, of able-bodied persons who can work.

Obviously, a decent society wants to put a solid financial floor under all its citizens who cannot help themselves or who are temporarily down on their luck (For the vast majority of the poor, a poverty income occurs only in one or two years out of ten; it is rarely a permanent condition.1) Given the figures above, how much would it cost to do this?

For the sake of simplicity, let us stipulate that there are 8 million poor households (dividing 31 million individuals into households of four), and that, on average, each of these households has about $4,500 of income.2 Then, in order to gauge the magnitude of the “problem” of poverty, we might multiply the number of poor households by $5,000 (the difference, roughly, between the stipulated average income and the official cut-off figure of $9,287). It does not seem from this perspective that financing every non-farm family of four at a minimum floor would cost more than $40 billion. Even if the 8 million poor households had no income of their own (except guaranteed medical care), the cost would not be more than $75 billion. Seen in this light, and defined solely in monetary terms (as the poverty “industry” does define it), poverty is not an especially expensive problem.

In 1983, however, the federal government will spend not $40 billion but an estimated $400 billion in entitlements to individuals. As we have noted, most of this ($244.8 billion) is granted through Social Security, Medicare, and Medicaid. But a rather substantial portion is also granted through the multiple programs mentioned above: food stamps; AFDC; low-income housing or rent supplements; the supplemental food program for women, infants, and children; school-lunch programs; and the like. Would it not be cheaper, more efficient, and ultimately more successful to eliminate these minor programs and give sufficient funds directly to the poor, in order to lift them above the federally defined poverty level?

This leads to another question: does not the current design of programs afford “mischievous” incentives, increasing rather than decreasing the numbers of the poor from year to year? There is strong evidence that this is what is occurring. The widely noticed “feminization of poverty” is a case in point. As distinct from twenty years ago, a large majority of the poor today consists of single mothers and their children. From year to year, these numbers have recently begun to accelerate.

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The American people have been exceedingly generous in the amounts of money they have assigned for the elimination of poverty; yet, despite this expenditure, poverty seems not on the way to being eliminated but rather to be growing. Surely, therefore, it is incumbent on all of us—but especially on those who accuse President Reagan of “hurting the poor”—to think of alternatives. Do the President’s critics recommend uncontrolled expenditures without cuts, and with raging inflation, as under Carter?

The critics are not likely to endorse this position openly. Rather they are likely to recommend either a raise in taxes (at the very least, à la Speaker O’Neill, by “capping” tax cuts somewhat near the top 3 percent of income earners) or a cut in defense spending. Since we are already in a presidential election year, it is improbable that the Democrats will succeed in raising tax rates. According to a recent Sindlinger poll, moreover, not only does a clear majority of the public support tax indexing and the third installment of President Reagan’s tax cut, but those in lower brackets support both these features far more strongly (for commonsense reasons) than those in higher brackets. This leaves cuts in defense.

No one can argue that President Reagan’s announced aim of bringing defense spending up to 7.9 percent of GNP by 1988 exceeds historical precedent; under Presidents Eisenhower and Kennedy, defense took 9 percent of GNP. Before the Reagan Presidency, opinion polls strongly supported spending “more” on defense. Today only a minority still demands “more.” But much has changed: the earlier desire for “more” is being fulfilled. Nevertheless, whoever succeeds Reagan, whether Republican or Democrat, will be faced with the bill which comes due every fifteen years or so for a new generation of weapons. Thus a decrease in defense spending, even if effectuated, is unlikely to be more than a temporary device for tunneling money into welfare programs that already expend more funds by far than the task of eliminating poverty would seem to require.

The fairness of the Reagan policies will be addressed next year during the television debates between the candidates of the two major parties, when the inevitable words will be spoken: “Do you believe that you are better off now in 1984 than you were in 1980?” Even many citizens who personally are not better off at that time may judge that their prospects at least are better. This is what America has always promised—and delivered.

As a Democrat, I hope that my own party will devise a new approach to the problem of eliminating poverty. A promising direction would seem to be the suppression of the present multitude of minor programs in favor of a package of direct cash payments and in-kind benefits designed to place every family above the official poverty line tout court. The cost of such a radical redesign would appear to be no more, and perhaps considerably less, than the present burden. Such a design—which has, in one form or another, been endorsed by Milton Friedman and Senator Daniel P. Moynihan—would eliminate at one stroke both the perverse incentives of current programs and a huge amount of regulatory apparatus. Should the Democrats propose it, a Republican administration would be hard-pressed to oppose it; and a Democratic administration might achieve it. As a strictly monetary matter, poverty would cease to exist.

In the meantime, intellectual fairness is not being served by allowing partisan passion to inflate and to obfuscate the “fairness” issue.


Footnotes

1 See Martha S. Hill, “Some Dynamic Aspects of Poverty,” in M.S. Hill, D.H. Hill, and J.N. Morgan, eds., Five Thousand American FamiliesPatterns of Economic Progress, Vol. 9 (Institute for Social Research, University of Michigan, 1981), pp. 116-120.

2 All of the elderly poor are already receiving Social Security and are covered by Medicare and Medicaid, and all of the poor without exception are covered by the latter. In addition, those who work at the minimum wage ($3.35 an hour, or approximately $6,700 a year) are counted as poor, even though they earn some income every year. It thus seems not implausible to argue that the poor already receive, in aggregate, at least half the income necessary to lift them above the poverty line. Finally, the multiple “in-kind” benefits the poor currently receive would, if counted, drastically reduce the number of the poor given above.

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