What McGovern Would Mean to the Country

Along the campaign trail George McGovern has issued a specific set of blueprints for how he would alter the nation's economic and defense policies. But he has also said very little about some matters, notably foreign policy. Nearing nomination, McGovern has become somewhat less precise on his specifics and somewhat more forthcoming on the gaps in his world view. In this five-page Political Report, TIME analyzes what McGovern would mean as President.

Economics: Leveling Out

IN a skit at a McGovern rally in Manhattan's Madison Square Garden last week, Showman Mike Nichols, playing an all-round expert, tried to explain the candidate's economic policy to Worried Liberal Elaine May.

May: I just love his economic program, but what is it?

Nichols: Well, in broad outline--May: No, I know it in broad outline. What is it specifically?

Nichols: I can only give it to you in broad outline.

A skit at a Nixon rally could hardly have pinked McGovern more deftly in his most vulnerable spot. Earlier this year, as a lightly regarded hopeful in a jammed Democratic field, McGovern laid down an economic program that seemed remarkably precise. Once he began winning primaries, his positions were put to deep analysis. McGovern's figures just did not add up, and the discrepancies were great enough to suggest that the Prairie Populist had not fully thought through his ideas.

Now that he has the nomination almost in his grasp, McGovern has fuzzed much of his original arithmetic. But one thing is clear: in tone and direction, his program is a design for the most basic change in the nation's economy, and indeed its whole society, since the New Deal of Franklin Roosevelt.

"Each American should pay his fair share, and each American should receive his fair share," says McGovern. To him that means great family fortunes would be broken up; the wealthy and many middle-income earners would pay higher taxes; incomes would be leveled. Corporate taxes would rise sharply. The Government would take over more of the planning of investment. The American economy would come to resemble Western Europe's, with high social spending, low defense spending and more central direction.

Part of the money raised by the tax increases and by cuts in defense spending would go to the poor. Part would be spent by the Government to upgrade education, fight pollution, improve rapid transit and hire people who cannot find jobs in the private economy. Private investment would probably suffer. But McGovern's brain-trusters--mostly economists at M.I.T., Harvard, Yale, Northwestern and Princeton, who get advice from Maverick John Kenneth Galbraith--are not worried. They argue that U.S. business would be kept humming, thanks to increased Government investment and more spending by the no-longer poor.

The Senator has yet to make clear exactly how large the grants to the poor would be, and precisely who would be taxed just how much to pay for them. Having issued one set of numbers, and backed away from many of them, he must soon come forward with some solid figures. As far as can be determined, this is his current position:

MINIMUM INCOME. McGovern's basic idea is to replace the present inefficient, bureaucratic welfare programs with direct federal "grants" for everyone, from billionaires to newborn ghetto babies. Actually, millions of people would never see the money; the grants would be only phantom figures on their tax statements. At first, the Senator set the grants at $1,000 per person per year, but only the very poor would get that much. The grants would be taxed, and taxpayers would lose their present $750 personal exemptions, with the result that most people would have at least part of their $1,000 grant eaten up by higher taxes. After this complex tax jiggling, McGovern's initial estimates were that a family of four with an income of $8,000 would collect $2,000 from the Government. A family with a $12,000 income would collect nothing. Families earning more than $12,000 would suffer progressively more severe tax increases.

In both finance and philosophy, this program goes far beyond the welfare-reform bill (H.R. 1) that Nixon got the House to pass last year. Both programs would establish the principle of a minimum income, equalize welfare payments across the country, and have the Federal Government take over the funding of them, thus relieving states and cities of what has become a crushing fiscal burden. But H.R. 1 would pay only $2,400 a year to a family of four, leaving it well below the officially designated urban poverty line of $3,968; McGovern's $4,000 payments would lift the city family barely above the line.

And his plan is much more than a welfare scheme. It aims at a vast redistribution of income, not just from the rich to the poor, but also from the upper-middle class to the lower-middle class.

The obvious drawback is the cost.

McGovern staffers calculate it at $50 billion a year. They claim that $23 billion could be offset by cutbacks in other federal programs, but their arithmetic is questionable. Some $8 billion would come from wiping out federal contributions to the present welfare programs. But the other $15 billion consists of the purely theoretical gains to be made by not enacting 1) an increase in Social Security benefits and 2) a $5 billion revenue-sharing program that McGovern would propose if there were no minimum-income plan.

Even these dubious calculations would oblige McGovern to raise $27 billion in new tax revenue. He says that most of this would come from steeper taxes on U.S. families that earn more than $20,000 a year. He once estimated the average net tax increase in the $12,000-to-$20,000 bracket at a mere $21--whether per person or per family was not clear. Later he revised the calculation to $50 per person--or $200 for a family of four. In fact, one computer run showed that the tax increase on families in the $10,000 to $15,000 income group would average $222. The increase would average $1,001 for families earning $20,000 to $25,000, and $4,021 on family incomes between $25,000 and $50,000. The computations so horrified McGovern that he sent the whole program back to his economists for redrafting.

Subsequently, McGovern has hinted that the grants might be reduced. He has said that fixing on $ 1,000 "may have been a mistake." The grants could not be cut too much without keeping some of the poor in poverty, but they might, for example, be lowered below $1,000 per person in large families. In any case, McGovern has yet to prove that he can devise a plan that will accomplish his goals without forcing unacceptable tax increases, especially for the middle class.

TAX REFORM. Above and beyond the tax increases that would finance the minimum-income plan, McGovern has called for reforms that he says would raise $28 billion for new social programs and that would have the effect of hitting many upper-bracket taxpayers twice. He has often spoken about closing "loopholes," but he has singled out only one--the depletion allowance for oil and other minerals, which he would gradually reduce. Pressed last week by Republican members of the Joint Economic Committee, he testified that he was "inclined" to keep three of the most important privileges that benefit individual taxpayers. They are the tax exemptions for interest on state and local bonds, and deductions for charitable contributions and interest payments on home mortgages.

Yet McGovern would force the three-quarters of a million U.S. families whose incomes are above $50,000 to pay a minimum tax even if they had huge, legitimate deductions. The payment would be 75% of the tax rates on straight salaries. It is impossible to say what any family would actually pay, but 75% of the present rate on a taxable income of $50,000 is $12,795. One consequence of the minimum tax: corporations would be tempted to reward their executives not with salary raises but with fancy fringes.

Heirs of affluent people would also be penalized. Taxes on individual inheritances in excess of $60,000 would jump, reaching a maximum of 77% on amounts of $500,000 or more. (At present, the maximum rate is 77% on estates of more than $ 10 million.) Because the new tax would apply to individual inheritances instead of total estates, a person would do better to will his lifetime earnings to, say, ten beneficiaries instead of one or two. Breaking up the estate into many smaller inheritances would reduce the tax bite. Thus the affluent would have an incentive to bear more children and to invest not in securities or real estate but in jewels. The latter could be easily handed down from parents to children without the taxman knowing of it.

Besides raising money for a long list of McGovern spending programs, the high inheritance tax has the aim of dismantling the great American family fortunes. Families could no longer pass on from generation to generation the power of the Mellons or Rockefellers or Kennedys. Is that a proper aim? The philosophical debate is as old as the Republic, and it split the Founding Fathers. James Madison advocated laws that "would reduce extreme wealth towards a state of mediocrity and raise extreme indigence toward a state of comfort"--a reasonable description of McGovern's goals. Thomas Jefferson argued against perpetuation of wealth, contending among other things that the assurance of a large inheritance "sometimes does injury to the morals of youth by rendering them independent of, and disobedient to, their parents." But Alexander Hamilton contended that inequality of property "would exist as long as liberty existed, and that it would unavoidably result from that very liberty itself."

Clearly, McGovern's egalitarianism would cause severe dislocations in the economy. Inherited wealth is a source of the risk capital that helps new companies get started and nourishes inventions. Economists dispute just how important it is for these purposes, but none doubt that much less of it would be available under McGovern's program.

There would also be less corporate profit. Business taxes would be raised by anywhere from $ 13 billion to $ 17 billion, depending on what McGovern statements one reads, but even at minimum this would be a walloping 39% raise. This would be accomplished by knocking out breaks for corporations that have been written into law since 1960. The two chief benefits to be removed are accelerated depreciation and the 7% tax credit on investments in new or modernized plants and machinery.

Surprisingly, these changes might not reduce by very much the profits that many companies report to shareholders. Hit hardest would be companies that have huge fixed investments in plants, and those that have put the investment credit right into current profits instead of spreading them out over many years. For example, U.S. Steel last year reported after-tax profits of $155 million; under McGovern's plan, its profits would have been $ 131 million--a drop of $24 million. By contrast, ITT's earnings would have been down only from $337 million to $328 million, and General Motors would have lost only $2 million of its $1.9 billion net. Yet even the companies that would not suffer much immediately would feel the impact over the long pull. Reason: the companies that do not report their investment credits as current profits put them into reserves for future use. With the credits gone, these companies would have less of reserves--and thus less to spend for expansion and modernization.

Economists sympathetic to McGovern argue that investment would be encouraged as a result of demand built up by the minimum-income program and heavy social spending. Companies, they believe, would simply have to expand to supply an enlarging market. Conservative economists reply that businesses would spend less to expand and modernize, because the costs of investment would be higher. The result would be a slower growth of productivity. Interest rates might also go up. Reason: businesses would have to borrow more of whatever they did invest --at the very time that McGovern's tax program was reducing the supply of savings available for loans.

SOCIAL SPENDING. McGovern proposes eventually to spend $55 billion a year on new and/or expanded federal programs. The extra spending includes:

$15 billion for the Federal Government to take over one-third of the financing of education and thereby enable states and cities to reduce property taxes,

$3 billion to build schools and hospitals,

$3 billion for pollution control, $3 billion for public transit, $1.5 billion for drug control, $2 billion for assistance to civilian research and development.

In addition there would be a crash $10 billion program to hire job seekers and put them to work building housing, public-transit and sewage-plant projects. There would also be a comprehensive plan of medical insurance, financed separately by an increase in payroll taxes, and expenses of unspecified size to retrain and pay at 80% of full salary the people thrown out of work by McGovern's defense slashes.

This program raises the question of whether McGovern understands, as Lyndon Johnson did not, that spending more money does not necessarily cure social ills. At minimum, though, McGovern has picked the right targets. With rare exceptions, such as his proposal to increase price supports on wheat and dairy products, his plans zero in on obvious and urgent social needs. McGovern would also begin the long-overdue process of shifting the funding of social programs away from cities and states, which pay for them with inefficient and regressive sales and property taxes, to the Federal Government, which can pay with generally fair and effective income taxes (TIME cover, March 13).

The overriding question again is whether the nation can afford it. McGovern's answer is easy and superficially reassuring: yes. His $28 billion in tax reforms and $32 billion in defense savings (see following story) would cover the $55 billion of new social spending. Yet the math is tricky. Some Democratic economists calculate that his defense cutbacks would save $10 billion less than he thinks. His revenue proposals could raise less than he estimates because Congress tends to shave down proposals for tax increases. His social programs could easily be costlier than he calculates because Congress has a propensity for jacking up spending.

Slim Margin. The margin for miscalculation is perilously thin. A study by predominantly Democratic economists at the Brookings Institution concluded that by fiscal 1975, President Nixon's existing and proposed programs would produce a deficit of $17 billion, even if the economy was operating at full employment. So much red ink in a fully employed economy could be grossly inflationary. A rise in living costs could quickly make necessary an income of more than $4,000 to pull an urban family of four out of poverty.

Large increases in teacher salaries and construction costs could undermine McGovern's school-financing programs. In order to avoid that outcome, taxes might have to be increased even more sharply.

It is easy to disparage any part of McGovern's program, but it must be judged as a whole. The spending programs that he proposes would be impossibly costly without the defense savings. McGovern himself recognizes that the income tax increases that the middle class would be hit with would be politically unsalable without the property-tax relief envisioned in his education proposals and the increased equity in the tax field promised by his inheritance-and corporate-tax suggestions. Though fuzzy in detail, his program does hang together conceptually.

The advantages and the drawbacks are clear. One economist high in the Nixon Administration concedes cautiously: "Assuming that everything can be funded and it is not inflationary --and those are big ifs--McGovern would equal full employment. But he would probably mean lower productivity and slower growth." Is this the kind of economy and society that the people want? Voters cannot judge intelligently until they know more about the real cost --and who would pay exactly how much. McGovern must be both more candid and more precise on those passion-rousing issues, which concern not only the pocketbook but also the whole future direction of American society.

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