Bush’s Domestic Policy? It’s Soak the Middle Class : Politics: Showing its pro-rich bias, the White House wants to tighten eligibility for federal benefits, cutting out those $45,000-a-year fat cats.

Forget all that malarkey about George Bush not having a domestic policy. During the last few weeks, with national attention preoccupied by the Persian Gulf, the White House has started laying out far-reaching fiscal policies--who’s going to play and who’s going to pay--that could become a political hand grenade of the 1990s.

Obviously, it’s not the “New Paradigm,” the conservatives’ much-ballyhooed mix of enterprise zones and local empowerment ideas such as school vouchers. That’s small potatoes next to the Administration’s emerging blueprint to means-test--or roll back--middle-class eligibility for a whole range of federal program benefits, from school lunches to college loans.

With orchestrated means-testing, Middle America will lead the sacrifice in the 1990s deficit wars--allowing federal tax policies to retain their 1980s favoritism toward the “top 1%” of Americans. This could allow Democratic orators to start belaboring “The Second Middle-Class Squeeze”--brought to you by the same politicians who presided over the old middle-class squeeze of the 1980s.

The economics of middle-class means-testing have a certain logic--but the politics are incendiary. The principal architect, Budget Director Richard G. Darman, is a man of inherited wealth and no firsthand middle-class sensitivity. Yet, as a shrewd fiscal operator, Darman knows huge sums of federal budget money can be had for other purposes--beefing up programs for the poor or safeguarding existing tax breaks for the rich (or both)--by slashing middle- and upper-middle-class eligibility for federal benefits programs. Darman wants an income-eligibility line drawn somewhere between $20,000 and $125,000 a year, to cut off middle-class beneficiaries.

These ambitions do not appear in the Bush budget, which sets cutoffs for farm subsidies at $125,000 in non-farm income, triples Medicare premiums at $125,000, pegs $21,000 as the subsidized school-lunch limit and breaks college-aid eligibility at $40,000 a year. Darman’s 1992 budget is simply an entering wedge, though, because the budget director said in recent congressional testimony that he favored “an important new emphasis for reform: increasing fairness in the distribution of benefits, reducing subsidies for those who do not need them.” We can’t keep federal benefits going to those sleek, well-fed $22,000-a-year families or those $45,000-a-year fat cats, can we?

It’s an interesting gamble. By seeking to recast the fairness image to deny “the rich” their current farm, Medicare or college-aid benefits and thereby “concentrate” them on the poor, the Bush White House is out to counter its “fat-cat” protection image gained in last year’s fight over capital-gains tax reduction and in beating back the Democrats’ proposed income surtax on millionaires. This time, the hope is to be seen as promoting rather than blocking fairness.

Maybe. But not if the Democrats are smart enough to explain what’s really going on. Federal program means-testing is collateral to broader fairness for three reasons. First, because nobody can seriously tackle the truly rich--who got the real benefits of the 1980s--by playing around with the eligibility rules of federal benefit programs. This is a ploy, a GOP fiscal equivalent of Air Force planes dropping aluminum foil to fool enemy radars. The idea that Laurence Tisch or David Rockefeller will feel the hot breath of Darman’s entitlements reform is patently absurd.

Second, because the White House is still proposing the Real McCoy of favoritism to the richest 1% of Americans--capital-gains rate reduction. And third, because the middle-class Americans quietly being targeted for lighter benefits and thinner wallets have already been squeezed for most of the ‘80s by soaring Social Security taxes, surging property levies, escalating health costs, surging tuition charges and mushrooming auto insurance rates. Pickpocketing these people instead of millionaires is a travesty.

A cynical analyst or a liberal congressman could suggest that Middle America and Upper-Middle America are being targeted so the top 1% of Americans can keep their 31% tax rate. During the 1980s, while the median family income was barely ahead of inflation, the Forbes 400 richest Americans managed to increase their combined net worth from $92 billion in 1982 to $270 billion in 1989. One would think this is the obvious place for 1990s pay-back economics.

This brings us to the politics involved and the possibility that Republicans could be courting another major backlash by blithely framing “fairness” considerations and then clipping the middle and upper-middle class while protecting the genuinely rich. This was the opprobrium they faced after October’s budget debate.

The conservative assumption in means-testing Mr. and Mrs. John Q. Public is: a) Middle America will not get too excited and b) lots of Democrats, academicians and poverty groups will cheer the idea of curbing middle-class eligibility and focusing outlays on the poor. It could work. Most middle-class voters won’t pay much attention to a few overhauls in program eligibility, and some congressional Democrats are so low-income fixated they don’t care much about the middle class.

What’s more likely, though, is that Middle America and its political defenders will correctly identify means-testing as something bigger--as stage two of a painful “politics of unfairness” that began to squeeze the average family during the 1980s, while the rich rode a golden elevator. Federal policy was critical, because the “squeeze” involved combining relative peanuts in federal income-tax cuts for the middle class with significant new burdens: surging and regressive Social Security taxation, the extraordinary federal income-tax “bubbles” (through which the upper-middle class still pays a higher marginal tax rate than millionaires), rising excise taxes, user fees, stepped-up taxation of Social Security benefits and a shift of programs from Washington back to the states that forced up regressive state and local taxes. The result is one that Robin Hood’s old enemy, the Sheriff of Nottingham, would envy. By the time the 1980s ended, the top 1% of Americans had 3 to 6 percentage points more of total family income than when the decade started, and the people in the middle saw their relative share decline.

Means-testing the middle class signals another round of this “soak the middle” spirit. But it also comes at a time when the larger pattern of “Sheriff of Nottingham” economics is becoming clear enough to mobilize congressional Democrats--as they proved in last October’s bruising and, from their point of view, successful budget debate. Equally important, skittish Republican voters see the GOP bias, too. Some 20%-30% of GOP voters believe their party favors the rich; one poll revealed 80% of Republicans favored the Democratic surtax on millionaires that Bush keeps working to defeat.

Politically, then, the GOP’s October embarrassment may have only been a first act if the White House charges ahead on means-testing. The federal deficit may finally be driving a wedge into the GOP, forcing the White House to sacrifice rank-and-file middle-class economic interests to protect the interests of the top 1%. Last year, when Darman got Bush to break his no-new-taxes vow, the GOP discovered that it opened a Pandora’s Box of “fairness” issues--and means-testing could be Darman’s second Pandora’s Box.

Middle America will doubtless have to make some sacrifices to deal with the nation’s debt and shrinking resources. But fairness dictates--and more Democrats understand this--that the middle class should not be sandbagged without considerably larger sacrifices required of those at the top, who grew fat during the 1980s. So if the White House does opt for a thinly-disguised “soak-the-middle” fiscal strategy, an important battle will be joined. Bush may yet yearn for the days when the media simply snickered about his not even having a domestic policy.