Inequality Haunts America as Taxes Favor the Rich, Penalize the Middle Class

America is a more unequal society today than it was 10 years ago. This does not just refer to the increase in poverty since 1979. Most people have at least some idea about that outrage. This particular inequality confronts the middle class.

The United States faces a curious situation today: The middle class is under assault and doesn’t know it. One reason: A prime source of the problem is located in the Internal Revenue code, one of the most important, least understood and even mysterious instruments of social policy in the United States. A majority of the people have been hit by fine print they never read.

Consider just a bit of data from last fall’s Congressional Budget Office report. Primarily as a result of the 1981 Tax Act--the quintessential “supply side” program of the Reagan years--taxes of the poorest 10% of the people went up by 2.5% between 1977 and 1984, while those of the richest 1% went down by a whopping 7.8%. That is a fairly routine irony of recent years: The most vulnerable are punished by government policy, the most secure are made more secure.

And the great middle, neither rich nor poor? The 80% of Americans between the top and the bottom either got a tiny tax cut of less than 1%, or, in the case of one group, a tax increase of 1.2%. Since the wealthy got that 7.8% bonanza, the burdens of paying for government were shifted from the top down and public policy made all the more unequal.

But then didn’t the 1986 tax law supported by the President make amends for the Robin Hood-in-reverse policies of 1981? Hardly? Despite all the media hype about fairness, and even though there was significant relief for the bottom 20% of the taxpayers (who advanced all the way back to where they were under Jimmy Carter), federal taxes this year will still hit the middle class far harder than the rich.

There are three reasons. First, the Administration gave so many benefits to the well-to-do in 1981 that even a slight move toward fairness in 1986 will leave those at the top with a 1988 tax bill that will be 6% less than 1977’s. Second, the favored few did indeed lose some of their most indefensible deductions but they were compensated by getting a massive cut in the maximum tax. And finally, Social Security and other insurance taxes, the most regressive in the land, account for a growing percentage of federal revenue; the income tax portion, which is not as regressive, is declining.

But percentages are hard to visualize--which is why the middle class hasn’t yet figured out that it is being attacked. Dollars are more obvious. Take the 10% of Americans who are right in the middle of the income structure. Between 1977 and 1988, the CBO tells us, the average family income, measured in 1987 dollars, will go down by $1,120.

Add to these direct consequences of government policy the fact that the Reagan recession of 1981-82 and the huge lay-offs since have put labor on the defensive and held wage increases to less than the inflation rate. And with the exception of the recent growth in manufacturing employment--which does not begin to offset the losses in that sector since 1979--most of the new jobs in the United States have been in low-paid, non-union positions.

Small wonder, then, when the Bureau of the Census reported last fall that between 1980 and 1986 the share of household incomes of the middle 60% of America went down by 1.6% while that of the highest 20% rose by almost 2%.

The problem is, most Americans do not “feel” these numbers. They know that they have to run very hard just to stay in the same place, but their “share” of total wealth is an abstraction and not a fact of their daily lives. The middle class hasn’t been pushed down into poverty so the new inequality does not hit the members where they live.

Then why bother about an injustice so subtle that most people don’t even know they suffer from it? Because it could be a major reason for the next recession and that will hit those same people on the head.

The economic justification for Reagan’s massive welfare payment to the rich in 1981 was that they would spend their tax savings to finance a “supply side” boom, investing in the new plants and machines that would create jobs for the workers and competitiveness with the Japanese. Only there was a recession instead. More to the point, the wealthy put that money into speculation and inflation hedges. It was used, among other things, to pay for the fun and games on Wall Street which bid up stock prices out of any proportion to the real world of the economy and prepared the way for the crash of Oct. 19.

As the business press universally acknowledged, the recovery that began in 1983 came from the “demand side,” from the same middle class consumers who had been worked over by the 1981 Tax Act. To be sure they had to put some of their purchases on MasterCard and Visa since their real household income was declining. But they were the agency of recovery, not the rich who had been paid so lavishly to play that role.

But now, we are told, consumers are getting wary--and weary of their debts as well. The holiday sales were not as bad as some anticipated, yet Business Week reports that the last quarter of 1987 saw a sharp drop in consumer spending.

Never fear. There is a new savior. Increased exports as a result of the cheap dollar have actually pushed up manufacturing employment and they will keep the United States prosperous in 1988. Or, so one is told. But most of the steel and auto workers who lost their jobs before the dollar went into a free-fall will never come back to their industries. And even more to the point, exports account for 11% of the gross national product, domestic consumers for 66%.

Sooner or later--no one knows exactly when, but 1988 is certainly a possibility--the attack on the middle class will stop being a mysterious statistical trend and turn into the cause--or at least the aggravation--of an economic downturn that will hit millions of people in the most unsubtle ways.