GOP Contract a Reversal of Decades-Old Federal Policies : Politics: Deep cuts in social programs to offset tax reductions would help upper-income Americans most. Balanced-budget amendment also planned.

The Republican strategy for overhauling the federal government represents an attempt to bring to a screeching halt 60 years of Washington policies designed to redistribute wealth from the most affluent in American society to the poor.

That agenda, spelled out most clearly in the House GOP’s “contract with America,” calls for deep cuts in welfare and other poverty programs to help pay for tax cuts that most directly help upper-income Americans. It would repeal President Clinton’s policy of forcing rich Americans to pay for a greater share of the government’s costs.

The 10-point contract, the conservative Republican blueprint for action by the new, GOP-controlled Congress during its first 100 days in session next year, would also try to amend the Constitution to require a balanced federal budget as soon as the year 2002.

Balancing the budget would presumably force further deep cuts in most other federal programs that benefit the poor and the middle class, except Social Security, which would be specifically exempt. The spending cuts would have to grow each year to offset the tax cuts unless the tax cuts act as a spur to economic growth and actually enhance federal revenues.

Republican leaders talk forthrightly about the importance of reversing generations-old federal policies.

“The function of the federal government is to create opportunity, not redistribute income,” said incoming House Majority Leader Dick Armey of Texas. “What we are advocating is not a transfer of wealth from the poor to the rich, but policies that allow people to keep their own wealth, to reverse the redistribution that has been going on for so long.”

Rep. Bill Archer (R-Tex.), the next chairman of the House Ways and Means Committee, which writes tax legislation and has jurisdiction over many welfare programs, said: “We’ve got to find a way to help people to help themselves rather than redistributing wealth.”

Along with the rest of the House Republican leadership, Archer is committed to slashing outlays for food stamps, Aid to Families With Dependent Children and other federal programs that are targeted at people with low incomes.

The “contract with America” would deny AFDC benefits to about half of the families that now receive it. Over five years the Republican proposal would slash at least $40 billion from welfare and related programs.

At the same time, the contract would provide a wide array of tax breaks that would leave the tax burden on the wealthiest Americans at its lowest levels in at least a decade. Altogether, Republicans say, their provisions lowering taxes on upper-income Americans, affluent retirees and businesses would cost about $40 billion over five years--roughly the same amount by which they plan to cut welfare.

Ultimately, leading Republicans see the contract as just a down payment on their long-range goal of extracting the government from the role of fiscal Robin Hood, taxing the rich and showering benefits on the poor.

“If the Republican contract is enacted, the level of redistribution that goes on through the government is going to be dramatically reduced,” said Daniel Mitchell of the Heritage Foundation, a conservative Washington think tank with close ties to the incoming Republican leadership.

While hard numbers are not yet available on the cumulative impact of the Republican contract, Mitchell estimates that it could cut the redistributive effects of current government policies by about 10%.

“It’s not redistribution of income from the poor to the rich and middle class, it’s stopping the redistribution of income from the rich and middle class to the poor,” he added.

From the bottom of the income ladder, the prospect of the Republican revolution is chilling, especially because the gap between the rich and the poor has already widened significantly.

The private economy has set the tone, with highly skilled workers commanding ever higher salaries at the same time that employers are able to hold back the wages of low-skilled workers.

Last year, for example, the poorest 20% of the nation captured only 3.6% of the national income, the lowest level since the Great Society programs were launched in the mid-1960s. The richest 20% received 48.2% of the nation’s income. More than 39 million Americans are now living below the poverty line, including more children than at any time since 1965.

Meanwhile, inflation has taken a healthy bite out of federal benefits for the poor. The value of the average monthly AFDC benefit per family, adjusted for inflation, has declined 45% since 1970.

Critics believe that the Republicans have significantly underestimated the severity of the welfare cuts in their contract. While Republicans estimate their changes would save $40 billion over five years, for example, the liberal Center on Budget and Policy Priorities believes that they would lead to reductions of $57 billion over four years. The center says the plan would remove the safety net from under 2.5 million families and 5 million children--and have twice the impact of President Ronald Reagan’s welfare cuts.

The savings would come largely by making legal non-citizen immigrants ineligible for scores of benefits, combining nutrition programs into a single block grant to states and capping their growth.

The GOP proposal also slaps a spending ceiling on other programs, including AFDC, supplemental security income for the elderly and disabled, low-income housing programs and child-care subsidies for the working poor.

Full food stamp, SSI and AFDC benefits would no longer be guaranteed to everyone eligible. If people qualified for more benefits in any year than Congress had allocated, benefit levels would be reduced or some otherwise eligible people would be denied benefits.

“These programs are on autopilot,” said Rep. E. Clay Shaw Jr. (R-Fla.), the incoming chairman of the Ways and Means subcommittee with jurisdiction over welfare reform. “Congress should be more responsible to the taxpayer for what we do with their money.”

Republican architects say their plan will save families by liberating the poor from a deadening dependence on federal handouts.

“Taking welfare away as a way of life, some people are going to get hurt, but the vast masses are going to be helped through the self-empowerment that we intend to force on them,” Shaw said. “Welfare is no longer going to be tolerated. It’s bad for the recipients, and it’s bad for taxpayers.”

“It’s basically a repudiation of the welfare state,” said Steve Moore, a senior analyst at the conservative Washington-based Cato Institute. “This is the tough-love approach.”

Indeed, the Republican formula reflects the growing consensus among middle-class Americans that the nation can no longer afford its traditional welfare programs, economists said.

The federal government’s role in redistributing income grew steadily after World War II as Americans enjoyed an unprecedented leap in incomes and living standards. But now, as living standards are growing more slowly, middle-class taxpayers increasingly resent welfare--and in the November elections showed their support for a smaller government role in fighting poverty.

So it is not surprising that senior Clinton Administration officials now argue that the contract represents a Republican effort to play on middle-class anxieties by blaming poverty programs for the nation’s ills.

“What is missing from the Republican contract is a reality test: Cutting welfare will not address the economic problems facing the working poor or the stagnation of wages of middle-class Americans,” said Laura D’Andrea Tyson, chairwoman of the Council of Economic Advisers. “It is a dangerous prescription to blame the poor for the problems of the working and middle class.”

Yet to the Republicans who have captured control of Congress, the contract holds out the promise of igniting a burst of private economic activity and job growth that ultimately will benefit everyone, including the poor. It is a free-market agenda that takes the supply-side tax-cutting theories of Reaganomics and couples them with the deep spending cuts in domestic programs that Reagan never achieved.

At the heart of the contract are tax cuts that Republicans believe will unleash the resources of the most affluent Americans to save, invest and create millions of jobs.

The cornerstone is the Republicans’ long-cherished proposal for cutting in half the tax rate on capital gains--the profits realized from the sale of investments--and indexing future gains so that taxes are not levied on inflation-driven gains. In addition, taxpayers could deduct losses on home sales.

The effect of those changes would make about three-quarters of all capital gains tax-exempt. Republicans estimate that their capital-gains break would cost $56 billion over five years, and the congressional Joint Tax Committee has found that more than 70% of the benefits would flow to those who earn over $200,000 a year.

The contract also calls for making upper-income taxpayers eligible for individual retirement accounts, scrapping the higher tax rate on Social Security benefits for affluent retirees, repealing the so-called marriage penalty for two-income couples, increasing the amount of estates and gifts that are excluded from federal taxes and changing the way small businesses write off their investments. Most of the benefits would flow to relatively affluent taxpayers.

By far the largest tax break proposed is a $500-per-child tax credit for families. At a cost of $107 billion over five years, it is the key element in the Republican effort to win the middle class over to its agenda. The Republican proposal does not limit the break to the middle class; families with annual incomes up to $200,000 would be fully eligible, although poor families with no income tax liabilities would receive no benefit.

‘Contract With America’

* The text of the Republican “contract with America” is available on the TimesLink on-line service. Also available are profiles of incoming House Speaker Newt Gingrich and other GOP leaders. Sign on and click “Special Reports” in the Nation & World section.

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