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Restoring Fairness

Distributional Effects of the Spending Proposals

Some of the outlay proposals in the Administration's program have effects that spread across the population. Others, however, have identifiable effects on incomes, or on services targeted to particular income groups. We have sought to impose the principle of fair contribution so that the burden is concentrated on those most able to bear it. Similarly, investment programs are targeted to those in need and pursue greater productivity growth and standards of living for the population as a whole.

Table 3-4 shows the distributional effects of those program increase proposals that are amenable to such analysis including Head Start, the Job Training Partnership Act and the Job Corps, housing assistance, WIC, dislocated worker training, one-stop career training centers, and veterans medical care and hospital construction. Also included are three spending reductions: Federal employee health benefits; Federal employee pay; and the premium increase for Medicare Part B. Table 3-4 reflects 1997 spending levels deflated to 1994 dollars. This year was chosen to correspond to the fully implemented tax proposals displayed on subsequent tables. The total of analyzed spending increases is $8.9 billion; the total of analyzed spending reductions is $6.6 billion. Not all of the spending proposals constitute changes to the disposable incomes of families. Some spending on services, such as Head Start or Job Corps, would brighten the economic futures of participants but would not change their families' incomes directly.

Table 3-4 shows that families and single people with incomes below $10,000 benefit from $3.6 billion of additional spending. Those with incomes below $20,000 benefit from an estimated $4.9 billion. Further, these groups will benefit from almost all of the proposed increases of $8.2 billion in outlays for the earned income tax credit, food stamps and the low-income home energy assistance program (LIHEAP) when tax policies discussed below are fully phased-in. Table 3-4 also shows that families with incomes above $50,000 would bear virtually the entire burden of the budget savings. Most of the savings are the result of the proposal to hold Federal salaries below projected levels.

Although Table 3-4 includes a significant proportion of the proposed changes in outlay programs, many proposals are not reflected. Stimulus outlays for 1994 are not included. Some spending proposals would not affect beneficiaries directly, such as Medicare changes that would affect providers but not beneficiaries, and so are not included. When proposals are intended to affect the economy as a whole or everyone more or less equally, such as increased spending to improve the national infrastructure, no attempt was made to distribute the effects by income level. In a few cases, such as enterprise zones, education proposals for schools in low-income neighborhoods, or community development block grants (CDBGs), there were no bases for a reasonable distribution by income level, and they were omitted from the analysis. The outlay programs not included in this analysis are a substantial part of the overall recommended policy changes, and so these estimates of the ultimate distributional impact should be used with caution.

Distributional Effects of the Tax Proposals

The impact of the revenue raising proposals is shown in Table 3-5. As discussed above, the major revenue changes in the deficit reduction proposal are higher rates under the personal income tax, removal of the earnings cap for the Medicare tax, higher rates for the estate tax, and increased taxation of large businesses. These taxes primarily affect wealthy individuals and have virtually no impact on taxpayers in the lower- and middle-income groups.

To control pollution and alleviate our dependence on imported oil, the package also contains a broad-based energy tax. The energy tax by itself would place a relatively heavy burden on many taxpayers with limited ability to pay. For this reason, the introduction of the energy tax was combined with several offsets, including an expansion of the earned income credit and an increase in transfers under the Low-income Home Energy Assistance Program (LIHEAP) and under the Food Stamp program. These three offsets eliminate any increased burden at the low end of the income distribution. Middle-income families experience only a slight increase in their tax liabilities, and the tax burden rises with family income thereafter.

Table 3-5 summarizes the combined impact of all revenue raising provisions in the stimulus, investment, and deficit reduction combined, including the offsets to the energy tax. This table confirms that our plan distributes the tax burden in a fair way, ensuring that low-income families are spared any tax increase and that middle-income families experience only a slight rise in their taxes; most of the burden falls on higher-income households.

Overall Distributional Effects of the Program

Table 3-6, which combines the tax and outlay changes as a percentage of pre-tax income, shows that the effects of the Administration's program on the two sides of the budget ledger are consistent and mutually reinforcing.

The lowest income category receives both a small tax cut and a benefit increase under the administration's program. Other income categories up to $30,000 have little net tax change. At higher income levels, there are spending cuts that are quite small, but tax increases that are more substantial.

The program effects identified here, however, will not affect all families within any income group in the same way. In fact, many families will not be affected at all by any of the program changes, while others (Federal employees, low-income program beneficiaries) may be affected by several. Thus, the ultimate impact on the population may vary considerably from family to family. On the whole, the burden is borne mainly by those most able to bear it.

Table 3-4. Change in Federal Outlays for Social Programs and Federal Pay /1 (Positive numbers are additional tax revenues, negative numbers are outlays) Family income Amount (billions of dollars) As a Percent of Pre-tax income $0 to $10,000 3.6 3.7 $10,000 to $20,000 1.3 0.5 $20,000 to $30,000 0.0 0.0 $30,000 to $50,000 -0.8 -0.1 $50,000 to $75,000 -0.9 -0.1 $75,000 to $100,000 -0.6 -0.1 $100,000 and more -0.6 -0.1 Total 2.3 0.1

spending levels deflated to 1994 dollars. Includes increases of $8.9 billion and savings of $6.6 billion for a net proposed change of $2.3 billion. Increases are for Head Start and associated nutrition programs ($3.4 billion), youth titles of JTPA ($0.8 billion), housing programs ($1.1 billion), WIC ($0.9 billion), dislocated workers ($1.8 billion), one-stop career shopping ($0.2 billion), and veterans medical care and construction ($0.6 billion). Savings are for lower Federal salaries ($3.0 billion), Federal employees health benefits ($0.02 billion), and higher Medicare premiums ($3.6 billion).

Table 3-5. Change in Federal Taxes and Certain Transfer Payments /1 (Positive numbers are additional tax revenues, negative numbers are outlays) Amount As a Percent As a Percent (billions of Pre-tax of Post-tax Family income of income income dollars) $0 to $10,000 -0.2 -0.2 -0.2 $10,000 to $20,000 0.0 0.0 0.0 $20,000 to $30,000 0.4 0.1 0.1 $30,000 to $50,000 4.4 0.5 0.6 $50,000 to $75,000 7.6 0.7 0.9 $75,000 to $100,000 5.9 0.7 0.9 $100,000 to $200,000 8.0 0.7 0.9 $200,000 and more 34.3 2.9 3.7 Total 60.5 1.0 1.3

as if policies were fully phased in CY 1994. Transfer payments include increases of $3 billion for Food Stamps and $1 billion for LIHEAP.

Table 3-6. Combined Effects of Tax and Transfer Changes (Positive numbers are additional tax revenues, negative numbers are outlays) Family income /1 Amount (billions) As a Percent of Pre-tax income $0 to $10,000 3.8 4.5 $10,000 to $20,000 1.3 0.4 $20,000 to $30,000 -0.3 -0.1 $30,000 to $50,000 -5.2 -0.6 $50,000 to $75,000 -8.5 -0.8 $75,000 to $100,000 -6.4 -0.7 $100,000 and more -42.8 -1.8 Total -58.2 -1.0

The concepts of family income used in the tax and spending tables above are not strictly comparable. The tax table reflects the Department of the Treasury's concept of economic family income. The outlay table reflects the concept of money income employed by the Bureau of the Census. To combine the tax and outlay effects, amounts of taxes and outlays were compared to aggregates of Treasury family income by income level from the tax table.