Knowledge that Transforms

Two generally unpopular fiscal trends have coexisted in the 1980s. The first is the regressive change in the distribution of after-tax incomes, extensively documented by both public (CBO, 1987a; 1988b) and private authors (Robert Haveman, 1988, and Sheldon Danziger et al., 1989). The second is the rise in budget deficits and concomitant fall in net national saving rates. The two trends are usually viewed as independent, even though it should be obvious that policy measures to correct one could make the other worse-if low incomes were raised by tax cuts or transfer increases, budget deficits would rise; deficits could be closed by cutting back on programs benefiting poor people. In this paper we explore this interaction. Every year. the Congressional Budget Office produces a volume giving about 130 ways to reduce future federal deficits (1988a). Many of these options involve changes in exhaustive spending programs where it is conceptually and empirically difficult to estimate the incidence of gains and losses by income group. But many involve tax or entitlement changes where it is not so difficult to estimate the incidence of these gains and losses. We have estimated this incidence for 22 of the CBO's deficit reduction options, and find two packages: One with 7 options quite unfavorable to the rich (the hit-the-rich package) that reduces the 1990 budget deficit by $48 billion, nearly 1 percent of that year's GNP; another with 6 options quite unfavorable to the poor (hit-the-poor) that also reduces the 1990 budget deficit the same amount. We compare these two packages with a relatively neutral broad-based value-added tax (VAT) that would also reduce the budget deficit the same amount, and with historical trends in the distribution of after-tax-transfer incomes. This welter of information gives an indication of the likely future tradeoffs between deficit reduction and income redistribution, and how any expected changes compare to changes in the recent past. Our basic result is that even though there is a noticeable impact on the distribution of projected 1990 aftertax incomes between the hit-the-rich and hit-the-poor packages, and between these and the broad-based VAT, these differences are very modest compared to the time-series changes in the after-tax income distribution that have already taken place between 1977 and 1985. Deficit reduction policy can be used to ameliorate only a small share of the adverse distributional changes that have already occurred. The preliminary suggestion is also that earlier policy changes may play a minor role in explaining recent regressive movements in the income distribution, but this matter will be explored in more depth in subsequent work.

Most economists believe that legislation obligating the government to increase expenditures in the future will have some current stimulative effect on private spending; tax increases scheduled to take place in the future will depress current spending. Few economists, however, have considered the effects of budgeting or actuarial rules that oblige the government to change current spending patterns or tax laws. If such rules are followed, future taxes and expenditures will turn out to be different from current ones. Will private behavior be affected solely by currently legislated tax rates and expenditures? Or will it be affected instead by the taxes and expenditures that current budgeting rules appear to require? This question is central to interpreting the fiscal implications of additions to Social Security reserves. Social Security revenues, including interest, will exceed expenditures by $52 billion in 1989. The annual surplus will reach $98 billion by 1994 and $450 billion by 2020. These shortand medium-term surpluses are projected to be dwarfed by even larger deficits starting around 2030. Using a 2 percent real interest rate and other detailed economic and demographic assumptions, the Social Security actuary now projects that expenditures will exceed revenues over the next 75 years by just under 5 percent of the present discounted value of expenditures. Furthermore, the long-run deficit, measured in present-value terms, will grow larger each year. As each year passes, one year of surplus passes into history and all the future years with large deficits move one year closer. The present value of future benefit obligations will consequently grow relative to the present value of future revenues. Ironically, the annual surpluses in the Social Security accounts will swell to unprecedented levels just as the long-run deficit is rising. Which is the better guide to the effect of Social Security on aggregate demand-the annual surpluses, whose growth suggests that Social Security's contribution to fiscal policy is now restrictive; or the long-term deficits, which are also growing larger and suggest that Social Security is stimulative? One's answer to this question determines one's interpretation of recent budget policy. Consider the effect of the Social Security Amendments passed in 1983. Because the OASDI program faced severe financing problems in the early 1980s, Congress reduced benefit entitlements and raised Social Security taxes, but delayed full implementatDiscussants: Robert M. Ball, National Academy of Social Insurance; Lawrence H. Thompson, U.S. General Accounting Office; John Hambor, Social Security Administration.

Changes in the poverty level of related black children in families in the United States are examined for the period 1969-1979. data concern a sample of 45 SMSAs that contained at least 100000 blacks in 1980. The research investigates the extent to which changing family structure family composition and areal economic conditions are associated with changing poverty rates of black children across metropolitan areas. (EXCERPT)