The Snare of Poverty : Once Again, Rich Gain More Than Poor in Tax-Reform Plan

Conservatives and liberals agree: Sen. Bob Packwood’s tax bill is a great step forward. A fellow of the Hoover Institution even proclaimed it the beginning of a “second war on poverty” because it takes the poor off the tax rolls. Is the millennium at hand?

Not quite. It is indeed gratifying that those in poverty are no longer going to pay taxes. But when one looks at the sorry history and probable future of that gain, jubilation can be brought under control.

To begin with, why did a family living right on the poverty line have to pay $1,200 to Washington in 1985? The answer is that many of those now congratulating themselves on their fiscal compassion, including the entire Reagan Administration and a good number of Democrats who went along with its 1981 tax act, helped create the problem they now magnanimously propose to solve.

In 1982, when the Economic Recovery Tax Act of 1981 came on line, the point at which a four-person family began to pay taxes was located $1,135 below the poverty line. That is, we were taking money away from a large group of people we officially declared--it is one of the meanings of the poverty “line”--as having to choose between necessities. In 1979, before Ronald Reagan, his party and his Democratic co-conspirators changed the law, taxable income for such a family started at $1,214 above the poverty line (that is outrageous, too, but let it pass).

Indeed, one of the statistical cruelties of this society is that we count the poverty population on the basis of their before-tax income. In 1983, if we had factored in the increase in taxes on the poor that resulted from Reagan’s law and from bracket creep, the number of children living in poverty would have increased by 8%. Last year, the Congressional Research Service documented that one of the causes for the shocking increase in poverty among the young was: the federal tax code.

At the same time the nation thus gave the back of its hand to the poor, it provided loving care for the affluent. The Urban Institute calculates that, in 1984, the upper 20% of the income structure saw their taxes decrease by 5.9% while the bottom 20% got a zero cut and a de facto increase because of inflation.

But, one might argue, what do you expect from a President who cut information programs on the availability of food and then blamed the hungry for not knowing where to get a meal? Would that such a devil theory could dispose of the matter, particularly since one is dealing with a lame-duck devil. But that is to ignore the systematic prejudice of the tax laws and the economy.

In his effusions over the “second war on poverty,” the Hoover fellow, citing the opponent of welfare programs, Charles Murray (author of “Losing Ground”), argued that taking the poor off the rolls will function as a work incentive. So it will and that is indeed good. But consider the last time we tried to do that: The Earned Income Tax Credit (EITC) was introduced in 1975 and made permanent under Jimmy Carter in 1978. It actually sends cash to married couples among the working poor who file returns. It is not just that they don’t have to pay the government because they are in a zero tax bracket; the government pays them instead as an encouragement to keep working and stay married.

The motives behind the EITC were fine: to provide a modest “negative tax” to people who were poor even though they worked hard. But there was another, less noble and quite traditional, reason for this reform. It was designed to offset the impact of increased Social Security taxes on people who owed no income taxes. That is, having taken money away from the poor with one hand--Social Security taxes--we decided to help them with the other hand, through the EITC. To be sure, something is better than nothing, but it hardly amounted to a significant gain in justice.

Moreover, the EITC started going downhill the day it was passed. That is, its real value started to drop even as the taxes of the working poor were going up. Simply to maintain its 1979 real value in 1986 would require increasing the payments by about a third and would give some small assistance to families making more than $16,000 a year.

That trend is not isolated, for the real value of all programs for the poor have been going down since 1969. That fact alone subverts Murray’s basic thesis that welfare recipients are rational calculators who shrewdly take advantage of liberal programs by removing themselves from the labor market. For even as we have been making it less profitable for the poor to work by increasing their taxes, we have allowed the buying power of those not working to decline even more. Our government’s policy was, in effect, to force those at the bottom into the labor market and then to tax their meager earnings. Only those who do not truly appreciate the ironies of American life will be surprised that we then had a national debate on the laziness of the poor.

The ironies about the rich almost always move in the opposite direction. In the current tax proposals, for instance, they lose some of their more outrageous deductions, many of them subsidies that had the effect of distorting the allocation of, or just wasting, economic resources. But they get immediate and substantial relief for this indignity: Their maximum tax rate is radically reduced. There may well be some shift of tax burden among affluent individuals and particular corporations but no one should imagine that the share of the top, or the growing inequality of our society, will be changed in any way.

The country should return to an ex-cliche that is now a bright new radical idea. It is called progressive taxation--requiring that people share the tax burden in proportion to their ability to pay. It was once a liberal bromide and has become an exciting innovation. Indeed one of the sorriest aspects of the current united front of the conservatives and the liberals is that many of the latter have been so totally mesmerized by supply-side hokum that, at a time of impending Gramm-Rudman cuts, they allowed themselves to accept the idea that any tax law must be “revenue neutral.”

Why should the government thus compensate the rich with lower tax rates for the loss of non-economic and outrageous subsidies they never should have had in the first place? Note well, no deduction that actually leads to the generation of new jobs in areas of unemployment and poverty should be taken away. I am talking purely and simply about federal support for paper entrepreneurship in the “casino society” of our financial markets. And I am not even being as radical as Reagan, who actively redistributed more wealth than any politician in this century, from the bottom and the middle to the top. Why not just honor that ancient principle of taxation based on ability to pay?

For all of the liberal voices in the conservative chorus, the new tax act violates that fundamental principle. It temporarily binds up some of the wounds the poor suffered--in the 1981 tax act and in the malfunctioning of the American economy--but there is no reason to expect that even such a modicum of decency will endure any longer than it has in the past. Maybe such a miserable compromise is the best we can get but that is no reason to rejoice in it or to fail to project an alternative to it.

I propose, then, to amend the cynical wisdom. In the United States today, even as we hold hands across America, death, taxes and nastiness to the poor are inevitable. Not forever. But for now.