NEWS ANALYSIS : Budget Debate Tests Question of ‘What’s Fair?’ : Deficit: Pressure mounts to lean on the wealthy as Congress searches for ways to pay for entitlement programs.

It is a question of fairness. In a day when millions of people struggle to pay the bills, do rich people get too much from the federal government?

As the nation’s focus turns from worries of war to the challenges of peace at home, the issue has moved from the ivory tower to the Capitol dome. Benefits that historically have aided the very affluent as well as the middle class and poor are targeted for cuts by strategists of varied political persuasions.

President Bush, for instance--often accused of favoring the rich--has proposed tripling the Medicare premium for wealthy retirees and cutting payments to certain well-off farmers in the 1992 budget.

“Why should the milkman in Montana who’s making $25,000 a year pay taxes” to help cover a rich retiree’s visit to the doctor? asks John F. Cogan, a scholar at the Hoover Institution and budget aide in the Reagan Administration.

Such questions may be heard increasingly as Congress debates the U.S. budget in the coming months.

And unlike abstract economics, these questions resonate on a gut level: The gap between rich and poor Americans widened in the 1980s; many in the middle worked mightily just to hang onto their standards of living. Most workers, except the most highly paid, also faced stiffer tax burdens from rising Social Security payroll tax deductions.

Meanwhile, as the rich enjoyed declining tax burdens, a vaulting stock market and rising property values, urban woes intensified and a subculture of homelessness spread across the country.

“The 1980s were kind of a period when the wealthy basically ripped off the rest of society--and President Reagan essentially blessed the transfer,” declared Rep. Leon E. Panetta, the Monterey Democrat who is chairman of the House Budget Committee.

Yet proposals to take benefits away from the affluent or to tax the rich more heavily touch mixed emotions in a democratic society that maintains something of a love-hate relationship with its economic elite.

A majority of Americans still believe that most people have a fair shot at financial success, according to public opinion polls. In light of such optimism, they are rather wary about demanding excessive burdens from the wealthy.

“On the one hand, people say, ‘Soak the rich,’ ” said Stanley I. Kutler, a historian at the University of Wisconsin. “On the other hand, people say, ‘I want to be rich too, so don’t soak them too much.’ ”

For U.S. leaders, pressure to lean on the well-to-do--if not actually to soak them--comes in part from the budget deficit, forecast to exceed $300 billion this year, a figure that could rise as costs are tallied for the Persian Gulf War and its aftermath.

More pressure comes from the inexorable growth of the giant federal programs--Medicare and Social Security--that have zoomed in size relative to most everything else financed by taxpayers. Today, roughly half of all federal spending goes to such “entitlement” programs in which anyone who meets eligibility standards can draw benefits, from those in poverty to millionaires.

This year, such spending may reach $632 billion, more than twice the amount devoted to national defense, according to the Congressional Budget Office.

Now, with no shortage of social problems and few sources of new revenue, budget analysts are taking a fresh look at the way the nation treats its richest taxpayers. The search for savings is sparked further by “pay-as-you-go” rules that require Congress to offset added spending measures for entitlements with cuts elsewhere or with higher taxes.

“We’re in a period in which it is neither wise nor practical to raise taxes on middle-class people,” said Robert J. Shapiro, vice president of the Progressive Policy Institute, a Democratic think tank. “The only way to find new resources is to find other places to cut.”

Just where to cut, however, is the controversy. Many young families and low-income working people already face heavy financial burdens. The Bush Administration, moreover, has reason to be sensitive to the linkage between household economics and national policy. The President’s critics have long cited his advocacy of a cut in the capital gains tax as evidence that he favors the rich.

While the allied victory in the Persian Gulf has elevated Bush’s public standing, nagging economic questions could still haunt his Republican Party in the next election, pollsters argue.

“People admire him as a leader,” said Douglas E. Schoen, a partner at Penn & Schoen, a political consulting firm in New York that conducts surveys for Democrats. “They just don’t think he’s done the job to make sure that economic benefits flow to all segments of society.”

In February, the White House announced proposals to parcel out federal benefits “more fairly” in the $1.45-trillion U.S. spending plan that will take effect in October. Although some of the fairness proposals--such as restrictions on school lunch subsidies--would affect the middle class, others were aimed straight at the wealthy.

For more than half a million senior citizens whose incomes exceed $125,000, the Administration proposed hiking the monthly premium for the part of Medicare that covers doctor’s visits and outpatient services. It would jump from $31.80 to an estimated $95.40; the increase would apply to couples earning $150,000. (Even under the change, the beneficiaries would still enjoy a 25% taxpayer-subsidized premium, down from today’s 75% subsidy received by all participants.)

Certain affluent farmers also were singled out. Those with non-farm income of more than $125,000--about 10,000 people, many of whom rely on non-agricultural enterprises for a living--would lose their federal crop subsidies. In addition, the White House plans to target a larger share of college financial aid benefits to low-income applicants.

While the proposals wouldn’t yield huge savings--the Medicare proposal, for example, would save just $41 million in the $1-trillion-plus U.S. budget--they are viewed as symbolically important.

Richard G. Darman, director of the Office of Management and Budget, called the $125,000 income restrictions a “toehold,” adding that over time “one could target even better on the poor.”

Sound simple enough? Actually, the notion of “means testing,” or setting an income requirement to qualify for benefits, has potentially explosive implications. At least a few liberal analysts worry that restrictions could creep down the economic ladder over time, first squeezing money out of middle-income Medicare patients and ultimately turning Medicare into a welfare program.

“You can paint this--as the Republicans want to do--as a move toward fairness. But it’s a selective kind of fairness,” contends Lawrence R. Mishel, research director of the Economic Policy Institute in Washington. “It’s a way to get fairness where you can politically undercut a program.”

Said Rep. Panetta of the White House Medicare proposal: “Obviously, it’s likely to raise some hell.”

Increasingly, Democrats are trying to cast the question of fairness in terms of tax policies, arguing that the middle class and poor carry an increasingly unfair tax burden compared to the well-to-do. Taxes for Social Security and Medicare represent a greater burden for most individuals than income taxes, if the employer’s contribution is counted along with the employee’s.

A proposal by Sen. Daniel Patrick Moynihan (D-N.Y.) would gradually ease the Social Security payroll tax, now 6.2%, down to 5.2% in 1996.

A variation on the idea, advocated by the Progressive Policy Institute, would also trim the percentage taxed but subject all salary income to the tax, thus capturing more revenue from highly paid workers. (Currently, Social Security taxes are deducted from up to $53,400 in income. A separate 1.45% tax is deducted on up to $125,000 for Medicare hospital benefits.)

“I think it’s about time the American worker got a break,” Moynihan declared on introducing the legislation.

Questions about fairness don’t stop with Social Security. Some analysts complain that the mortgage-interest deduction favors people with more-expensive property, and others wish to resurrect last year’s proposal for millionaires to pay a special income surtax to help balance the budget.

Senate Democrats “intend to lessen the tax burden on working families while asking those with the ability to pay to bear a greater share of the income and Social Security tax responsibilities,” says a report released by Senate Majority Leader George J. Mitchell (D-Maine).

But if history is a guide, attempts to exact a larger sacrifice from those who can most easily afford it will not come easily.

In the early 1980s, for example, budget-cutters in the Reagan Administration placed much of their emphasis on slowing the growth of programs for the poor. Also targeted were benefits for the middle class, including Social Security. But it took the near bankruptcy of Social Security in the early 1980s before Congress introduced the taxation of benefits, affecting retirees with gross incomes over $25,000.

Lawmakers of both parties still have painful memories of their 1988 quest to expand Medicare coverage for catastrophic illness. Under the ill-starred plan, beneficiaries alone would have shouldered the cost of new benefits through a sliding-scale surtax of up to $800 a year. A torrent of complaints from retirees ensued, including the financially comfortable who were already paying privately for such coverage.

“The entire Congress is gun-shy about doing anything like that proposal because they got badly burned the last time,” a Democratic budget aide observed.

By contrast, today’s debate about society’s haves, have-nots and in-betweens is focused more clearly on the burden of the rich.

Unlike the budget debates in the early 1980s, which focused on cutting benefits for the poor, “Carrying it to the other end of the income scale is new,” said Alice M. Rivlin, an economist at the Brookings Institution who served as director of the Congressional Budget Office from 1975 to 1983.

THE GROWING INCOME GAP

The gap between rich and poor widened in the 1980s. Here is how the bottom 20% and top 20% of U.S. income earners fared during the decade.

The Bottom 20

Under $16,003 a year

Share, in percent, of total U.S. money income

% change, 1979-89: -11.5%

The Top 20%

Over $59,550 a year

Share, in percent, of total U.S. money income

% change, 1979-89: +7.0%

Source: U.S. Census Bureau