                              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

 1/1997 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

 1/Effects 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

 1/ 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.
