The Reagan administration says its budget is a means of fighting inflation while stimulating economic growth -- and in the long run it might well do these things. In the short run, however, its most obvious effect would be of a very different kind: to redistribute income in this country. The money would go from poor to rich, while the middle class would come out about even.
The budget would alter incomes by giving tax breaks to the better-off while significantly reducing programs aimed primarily at the poorest people, both the chronically poor and those thrown out of work. The middle class, the largest element in the population, would continue to pay federal taxes at about today's rate, and the federal programs that primarily benefit the middle class would remain largely intact.
Reagan's budget is the most extraordinary attempt by any president in modern times to allocate the resources of the federal government. The three largest federal welfare programs are now Medicaid, food stamps and housing assistance, the non-cash or "in-kind" programs that help poor people pay their medical and grocery bills and rent. The Reagan budget would bobtail all three.
It would at the same time wipe out a generation of programs that were established on the theory that only the federal government can or will aid the neediest members of society. These are the "categorical" programs like compensatory school aid for underprivileged students and fuel assistance for poor households that the new administration wants to obolish by incorporating them in unrestricted grants to state and local governments. The total value of these grants would be one-fourth or more lower than today's level of spending on the categorical programs that they would replace.
In dollar terms the biggest change in the new budget is in the level of spending proposed for defense. If endorsed in Congress over the next few years, the United States will be spending one-third of its federal budget on armaments by the mid-1980s as opposed to 24 percent now.
At the same time, the Reagan budget only marginally affects some of the largest federal benefit programs that grow every year; Social Security Medicare and veterans benefits are three examples. By the mid-'80s these programs, which Reagan has called programs, which Reagan has called the social "safety net," will amount to more than half of all budget outlays.
If defense spending takes up more than 30 percent of the budget and these untouchable benefits take up another 50 percent or more, the discretionary budget that a president can allocate for his own purposes will shrink dramatically. Such a change could fundamentally alter the role of the federal government later in this decade.
It would probably mean that government responsibilities for areas like housing, welfare and education would be forced away from Washington and back to state and local governments, a longstanding goal of President Reagan that he may be able to achieve more easily by budgetary means than by direct legislation.
There is no easy way to reduce a two-inch-thick federal budget into a 1,500-word newspaper article, but these are some highlights of the Reagan budget, emphasizing its immediate impact:
Aid to poor people. The new administration would cut out billions of dollars now spent on health, housing, income maintenance and food stamps for poor people by reducing many programs and wiping out others. The administration's own presentation of these cuts says repeatedly that basic services for the poor can be maintained at radically lower expenditure levels, a contention already hotly disputed by many Democrats, local officials and interest groups.
Medicaid, for example, which provides federal funds to the states so they can give medical care to poor people, would be reduced by imposing a cap on total spending. Medicaid, which will cost $16.5 billion this year, would be allowed to grow just 5 percent in 1982 and then would rise with the general inflation rate. In recent years, medical costs have risen much faster than inflation generally.
Many state governments have disputed the administration's contention that basic care can be preserved for less money. States have already been reducing Medicaid benefits because available funds have not kept up with costs.
Interestingly, the even costlier Medicare program, which provides health care to all Americans over age 65, is not subjected to a cap or any other significant cuts in the Reagan budget. Medicare, of course, goes to all the elderly, not just, as Medicaid does, to the poor.
Numerous other programs for the needy are cut in the new budget. Residents of federally subsidized housing would be asked to pay 30 percent of their income in rent, instead of 25 percent as now. The food stamp and other feeding programs would be curtailed. Free legal services for the poor would be eliminated. A wide variety of health, social service and educational programs are eliminated, replaced by block grants to local governments, who would have the authority to spend the block grants any way they want to. The block grants themselves will total no more than 75 percent of the aggregate value of the categorical programs they would replace.
The Reagan budget proposes to save billions of dollars on jobs programs and unemployment benefits. Implicity, the new budget calls for a policy of encouraging workers to move from areas of high unemployment to new homes in the booming Sun Belt.
The middle class. The Reagan administration has emphasized the "safety net" of basic social programs as fundamental protection for needy Americans, but in fact these programs tend to distribute more dollars to the middle class than to the poor. Social Security, Medicare and veterans benefits are the biggest of them, and since all are distributed without any means test, they inevitably go predominantly to middle-class people.
The Reagan tax program of three 10 percent income tax cuts in a row, according to several expert computations, will leave most American families shouldering about the same federal tax burden they carry today.This is because continuing inflation in the 8 percent to 12 percent range pushes the middle class into steadily higher tax brackets, assuming their salaries are adjusted in step with inflation.
In general, the proposed Reagan tax cuts would just about exactly offset the effect of these higher tax brackets.
Specific groups of middle-class citizens would be affected by some of the budget cuts Reagan proposes. Parents of college students and the students themselves, for instance, would be affected by cuts in the tuition loan and grant system. School lunch cuts would also affect them. Cuts in highway and rail transit funds would affect the middle class significantly.
The well-to-do. In dollar terms, wealthier Americans would obtain by far the most out of the Reagan budget; they would win big under the proposed changes to the tax code. For example, if the tax cuts were fully enacted, a family with an income of $200,000 a year would be able to keep about $30,000 that it now pays in federal taxes.
Business. It, too, would benefit significantly from the Reagan tax proposals, though these increased depreciation allowances are similar to ones that the Democratic-controlled 96th Congress seemed ready to approve even before Reagan was elected.
The biggest winners will be profitable established corporations that want to invest heavily in new plant and equipment.
One category of American business will profit enormously from the Reagan budget: defense industries. They would get all the benefits given to business in general, and would receive in addition tens of billions in new government contracts if the new levels of defense spending are approved.
One category would suffer under the business proposals: big companies like General Electric and Westinghouse that use relatively low-interest loans from the Export-Import Bank in financing sales abroad of such costly items as nuclear power plants and electric generating stations. These firms compete with Japanese and European companies whose customers get cheap financing from their own governments, and the Americans insist they will lose a lot of business if they are deprived of competitive credit here. Reagan proposes cuts that would effectively close the Ex-Im Bank's doors to new loan applications for several years.