President Reagan says that he may ask Congress to make the tax cut scheduled for next July effective six months earlier. With admirable respect for the lessons of recent history, he makes no claim of a miraculous "supply-side response" to this injection of an extra $15 billion into the income stream. All that he is hoping is that the extra money in taxpayers' pockets will send them out to buy cars and clothes and other consumer goods now languishing in producers' inventories, and thus prime the pump of recovery.
There are many compelling reasons for hesitancy about adding another $15 billion to the already astronomical deficits that current administration policies will produce over the next years. But let's assume, for the sake of argument, that the current economic crisis is so severe that some additional risk is warranted. If you want to put another $15 billion into consumption, why choose a step-up of the tax cut as the mechanism?
The best arguments for it are that it is quick and easy and does not represent a permanent increase in the level of federal spending. But also note that the planned tax cut has the following peculiarity. Since it is an across-the-board reduction in tax rates -- except at the very top -- it is worth most in dollar terms to those who need it least. A taxpayer wealthy enough to owe $5,000 in taxes will get much more from the tax cut than one who owes only $500. A person who is unemployed and owes no taxes at all will get nothing.
Times are tough, and federal money is very scarce. Can we really feel comfortable helping the rich buy more things? What I am making, of course, is a distributional argument. Its premise is that if you want to maximize the well-being produced -- the moral return, you might call it -- from a given handout of federal money, you will reap much more by directing it to people to whom a small additional amount of income will mean a great deal in terms of their basic standard of living.
This type of argument is currently unfashionable. It also has its limits. If you pay attention only to the question of how the economic pie is distributed, you may find that the pie is shrinking. That's because the people who make the pie grow and who tend to be rich will get fed up if you keep taking their money away from them to give to their less-favored fellow citizens.
Recent policy, however, has tended, unarguably, in the opposite direction. Several well-documented studies have demonstrated that the effect of the recent tax and budget cuts has been to make a substantial shift in national income toward the upper end of the income distribution. These policies have also produced an economic situation in which many well-off people are even better off -- and the average worker with a job is holding his own -- but large numbers of people are very much worse off. The Neiman Marcus Christmas catalog is glossier than ever, but the families of the unemployed are living in tents outside the cities of the Sunbelt.
Less than half of the 11.6 million unemployed workers were receiving unemployment insurance last month. This month thousands more will lose their benefits as the temporary extension of benefits voted by Congress runs out. And then there are the working poor. They've lost welfare and other aid, and the administration now reportedly plans to further adjust school lunch fees so that their children may "bear a fair share of inflation." Many of these families are now desperate. The Wall Street Journal, for example, recently told of a mother who earns only $230 a month and, having lost her welfare aid, now resorts to shoplifting food because she has to sell her food stamps to pay the rent.
Some of these families, however, are still better off than families that are totally dependent on welfare. Welfare benefits generally have never reached even the subsistence level defined by the poverty line and, since 1975, the gap has increased because very few states adjust benefits for inflation. Food stamp cost-of-living adjustments helped make up welfare losses, but these adjustments were eliminated for 21 months starting in January 1981.
If you wanted to spend $15 billion-- or even a small part of it -- to stimulate these people's consumption, there are several quick ways to do it. One would be to increase federal aid to welfare families. Another would be to increase the earned income tax credit that provides help through the tax system to working poor families with children -- it's been frozen at the same modest level for several years.
Another federally paid-for extension of unemployment insurance benefits is an obvious alternative. Better yet, you could convert the money to wages and pay it to unemployed people to do useful public work--not the heavy construction type projects that take years to build up and require high-paid union labor, but the many kinds of community services that are now being cut back by hard- pressed states and localities. Because some people getting unemployment benefits wouldn't want the jobs, the others could be paid more with the same amount of money.
You will note, of course, that none of these things -- with the possible exception of extending unemployment benefits -- is likely to be done. That's because they do not appeal to any powerful constituency. What is most discouraging about the current political scene is that they don't even get talked about.