Reagan's Economic Counterrevolution
PETERSON, WALLACE C.
A BREAK FOR THE RICH Reagan's Economic Counterrevolution BY WALLACE C. PETERSON The Reagan Administration is moving boldly to radically redistribute wealth, income and power in American...
...Among the latter are Medicaid (low-income medical care), Aid to Families with Dependent Children, food stamps, extended unemployment benefits, the Comprehensive Employment and Training Act, housing subsidies, student loans, and minimum and student benefits under Social Security...
...The Reagan Administration seems determined to repeat this mistake, but on a much bigger scale...
...It might not take the country all the way back to the 1920s, but it would significantly diminish the degree of progressivity in the Federal tax structure...
...They reveal that in the last 20 years it has been war and recession, not "out of control" social spending which has been primarily responsible for any step-up in the flow of Federal dollars...
...It is born of the President's belief-reiterated last week to a group of supporters in the East Room of the White House-that the government should "give this economy back to the American people...
...In presenting the Reagan proposals to Congress, Budget Director David A. Stockman further argued that the "truly needy" would not be hurt by reductions in social spending, since the "social safety net" of protection for the aged, the unemployed, the poor, and veterans would remain intact...
...In the Congressional debates on the Reagan budget for fiscal '82, hardly any attention was paid to the extent of the military build-up proposed by the Administration, or its implications for the future health of the economy...
...Perhaps the one thing that can be said with certainty about the Reagan tax-cut package is that it would shift the tax burden in favor of business and the upper income groups...
...A recent Business Week poll shows 68 per cent of the families in that income range supporting the Reagan proposals...
...In this context the figures in the following table, taken from the "Economic Report of the President," are instructive...
...If any part of the Federal spending picture is truly "out of control," it is this peculiar form of government handout...
...A major reason for this is the dismal failure of the Carter Administration to bring inflation under control...
...The President originally asked that tax rates on personal income be lowered by 10 per cent "across the board" for three years...
...This figure is both vastly inflated and faulty because it fails to recognize that Federal regulatory activity yields benefits as well as costs...
...2. Subsidies to the well-to-do through tax expenditures are extremely large...
...Strong popular backing now exists for the President's economic program, particularly among those who consider themselves "middle-class," best defined as families earning $20,000-$50,000 per year...
...Weidenbaum is the source of the widely-circulated figure that Federal regulation costs taxpayers, business firms and consumers about $ 100 billion a year...
...Reagan now claims to have "dug in my heels" on a slightly revised formula that would produce a 24 percent tax cut over 33 months, starting October 1, The supply-side theories of economist Arthur Laffer of the University of Southern California are the intellectual basis for these proposals...
...Since there is much doubt about the true impact of the combined Reagan spending and tax cuts, monetary policy will have to carry the full burden of restraint if, as is likely, the program turns out to be more inflationary than deflationary...
...Interestingly, in both the Administration tax proposals and the Congressional reaction to them virtually no attention has been paid to the matter of "tax expenditures," a vast array of exclusions, exemptions or deductions that affect taxable income and the amount of taxes people and corporations actually pay...
...the prime losers will be the poor and " near" poor, the aged, the ill, and the jobless-in short, the economically weak living at the lower end of the income scale...
...The Congressional Budget Office estimates it may reach $465 billion by 1986...
...Seen as awhole,the Reagan economic program is a radical attempt not merely to reduce the size of the Federal government, but to bring about a fundamental change in direction...
...Unfortunately, in its pristine simplicity this is a throwback to a world where the "government is best which governs least"-And progress and equity are best served when income, power and wealth are safely concentrated in a relatively few hands at the top...
...The basic justification given for cutting social spending is that it is "out of control," and consequently causing large budget deficits that are at the root of inflation...
...Lyndon Johnson's refusal to raise taxes to pay for the Vietnam War is what let the present inflation genie out of the bottle...
...By 1984, the Administration would reduce Federal spending to 19.3 per cent of the gross national product, or roughly to the level that prevailed in the 1950s...
...What almost surely would be stimulated, though, is investment in shopping centers, condominiums and other speculative ventures having little direct impact upon productivity...
...The same Business Week poll shows that 64 per cent of the middle class blames Federal spending for continued inflation...
...This was pretty much a carbon copy of the legislation that Republican Representative Jack Kemp of New York and Republican Senator William Roth of Delaware have been jointly introducing in the Congress for several years...
...This is simply not true...
...And that is how "Reaganomics" has been sold to the public...
...1. The overwhelming proportion of these benefits go to those in the highest income brackets...
...The other prong of the Reagan tax package is an accelerated write-off schedule for business depreciation, the purpose being to stimulate investment and raise productivity...
...Here, too, there are uncertainties...
...It will probably be late summer before all the conferences necessary to reconcile differences between the bills emerging from the Republican-controlled Senate and Democratic-controlled House are held and the final budget package is completed...
...A BREAK FOR THE RICH Reagan's Economic Counterrevolution BY WALLACE C. PETERSON The Reagan Administration is moving boldly to radically redistribute wealth, income and power in American society...
...The inflation rate went from 6.8 per cent in the first year of the Carter incumbency to 12.4 per cent in the last year, pushing increasing numbers of the lower and median middle class into higher tax brackets without bringing them any real gains in their aftertax income...
...Simultaneously, substantial tax reductions are planned...
...They are called " tax expenditures" because their economic i m pact is no different from a direct payment or subsidy by the Federal government, except that they operate through the tax system rather than as expenditures in the budget . Three important facts about this little-known feature of the Federal budget should be understood...
...In his view, a reduction in taxes would unleash an explosion of work and saving so great that Federal tax revenues ultimately would increase...
...Only when the government was gearing up for war (Vietnam) or in a recession (1974-75 and 1980) did Federal spending outpace spending overall...
...The belief that Federal regulatory activity has become excessively burdensome for business and is therefore a major factor in inflation is largely the handiwork of Murray L. Weidenbaum, former economics professor at Washington University and now Chairman of the President's Council of Economic Advisers...
...With military spending rising from 24.1 to 32.4 per cent of the Federal budget in the same period, the additional money for the Pentagon obviously would be provided at the expense of social spending...
...What his argument overlooked is that in the early '60s poverty was discovered to be widespread precisely because the so-called "safety net" programs (dating mainly beginning July 1,1981...
...First, there is to be a massive reduction in social spending, especially for the Great Society programs instituted or expanded in the mid-1960s...
...In sharply reducing the role the Federal government plays in our national life, the President will achieve fundamental changes in the distribution of income and wealth...
...3. Tax expenditures have been growing faster than normal budgetary outlays...
...Laffer argues that the tax burden on individuals in this country badly blunts the incentive to work and save...
...But Laffer's presumed link between taxes, incentives and productivity rests more on faith than empirical evidence...
...From 1976 through 1979, for example, the Federal deficit declined from $53.1 billion to $14.8 billion, yet the annual inflation rate rose from 5.8-11.3 per cent...
...At the same time, there are to be large increases in national defense spending-on the grounds that the nation has fallen so far behind the Soviet Union, a major "catch-up" effort is needed...
...at other times spending by Washington lagged...
...The two remaining elements of the Reagan economic strategy involve sharply scaling back the regulatory functions of the Federal government, and securing strong support from the Federal Reserve System as the whole program is implemented...
...Nevertheless, the Reagan Administration appears determined to dismantle most of the regulatory apparatus of the Federal government, including the newer agencies that operate in such politically sensitive areas as consumer protection, job safety and the environment...
...Such findings suggest that most people believe checking inflation is the main objective of cutting Federal outlays and bringing the Federal budget into balance...
...There is no indication that the Reagan Administration, in its zeal to reform the nation's income tax structure, has given any consideration to the resulting revenue losses...
...The latest figures from the Congressional Budget Office estimate that for the current fiscal year tax expenditures will total $179.8 billion for individuals and $48.7 billion for corporations...
...With respect to the latter, the Administration wants the Federal Reserve to cut the growth rate of the money supply in half by 1986, reflecting the President's firm commitment to the monetarist position...
...Since in practice Federal taxes are more proportional than progressive, and state and local taxes are clearly regressive, the effect would be to make the overall tax structure regressive...
...The second element in the Reagan strategy is a two-pronged reduction in taxes...
...Both houses of Congress last month approved the Reagan budget for fiscal 1982, thereby setting the limit on total government spending for the 12-month period beginning October 1. The details of the specific dollar cuts-exactly where they will be made and what their size will be-Are currently being thrashed out on Capitol Hill...
...The unhappy experience opened the way for acceptance of Reagan's argument that government is not the solution to our economic difficulties, but the "source of the problem...
...There is no assurance that business firms would use the enlarged cash flows generated by accelerated depreciation for productivity-improving investments...
...Indeed, it is likely that the overwhelming proportion of any income gained through tax reduction would be spent, not saved, adding to inflationary pressures...
...In fact, recent data show quite another picture...
...from the New Deal era) did not cover many Americans...
...They thus constitute a vast "welfare system for the affluent," although the system is practically hidden from public view...
...This was the reason for the "war on poverty" and "Great Society" legislation of the mid-60s...
...It is already clear, however, that the Reagan counterrevolution embraces a fourfold strategy...
...But its actual significance is quite different...
...Over the next five years, the Administration intends to expand military outlays by $181 billion, an increase which in 1980 dollars is three times greater than the one that took place during the Vietnam War...
...Wallace C. Peterson, a new contributor to these pages, is currently the George Holmes Professor of Economics at the the University of Nebraska at Lincoln...
...The prime beneficiaries will be the truly rich and the affluent...
Vol. 64 • June 1981 • No. 12
