What's Fair?

A new study livens the issue

Democrats generally call it "the fairness issue." Jesse Jackson describes it as a "reverse Robin Hood process, taking from the poor and giving to the rich." The President dismisses all such talk as "political demagoguery." Last week the non-partisan and widely respected Congressional Budget Office published a report that seemed to concede the argument to the Democrats. Its conclusion: Reaganomics, with its deep personal income tax cuts and reductions in spending on social programs, has been a boon to the nation's wealthy families and has hurt those that were already poor.

The CBO found, for example, that nearly 80% of last year's tax reductions went to families ("households," in Census Bureau terms) earning between $20,000 and $80,000 annually. Yet this income level is achieved by only half of the families in the U.S. By contrast, roughly the same number of families have incomes under $20,000, and they got a mere 7% of the tax breaks. That is less than half the share of tax cuts enjoyed last year by the 2% of all families with incomes of $80,000 or more. Main reason: the top tax rate on the highest incomes was slashed from 70% to 50% all at once in 1982. Tax cuts for people in lower brackets went into effect more gradually.

In analyzing the impact of the Administration's budget cuts, the CBO concentrated on health-care programs, retirement and disability pay, unemployment compensation, welfare, aid to education and social services. The combined impact of budget and tax cuts on families earning less than $10,000 a year, the study found, was that the loss of benefits from these programs more than wiped out their slight gains from the tax cuts. Counting only cash benefits, their losses exceeded their gains by an average of $160 per household in 1983. Families with incomes above $40,000 (14.6% of U.S. households) had the largest net gains: an average of $2,240 each last year.

Private studies by various think tanks have come to similar conclusions about gains made by the wealthy and losses sustained by the poor under Ronald Reagan's economic policies. The reasons are fairly simple: higher-income families rely much less on the benefits from social programs than do those in lower-income groups and thus are less affected by cuts in those programs' budgets; at the same time, Reagan's main tax reduction produces significantly larger dollar savings for those with higher incomes. While the federal income tax is progressive, imposing proportionately bigger burdens on those who earn more, the tax cut is not similarly graduated but rather a straight 25% slash in the rate for all income levels.

The CBO report, however, is not likely to settle the fairness debate. At his press conference, Reagan argued that the report does not weigh the favorable impact of lower inflation on the poor, who have little discretionary income and thus feel more acutely the pinch of rising prices. The CBO confined its analysis to the direct effects of tax and budget cuts. Similarly, the CBO did not try to measure the impact of increases in Social Security taxes paid by wage earners, since the hikes were enacted, although not fully put into effect, before Reagan took office. Those increases reduced the take-home pay of most workers, partly offsetting the effect of the tax cuts.

Reagan admitted that the Democratic charge that his Administration favored the wealthy was "a political problem," but he contended angrily: "There's absolutely no truth in it." House Speaker Tip O'Neill responded just as unequivocally, with partisan political hyperbole: "On the fairness issue, everyone believes the Congressional Budget Office. No one believes Reagan." The November election may hinge on whether the Democrats can make such assertions stick.