Taken as a package, the Reagan tax and budget cuts will widen the gap between the rich and the poor. But this does not mean that there are no ways to reduce welfare spending without increasing poverty. There are. They fall under the rubric of reorientation rather than supply-side retrenchment.
We propose one such reorientation that offers the potential for reducing both poverty and dependence on government benefits. It has four major components.
First, income support benefits for those not expected to work would be spared the budget-cutter's axe. Poverty has decreased because of the increase in these benefits - especially for the aged. While some of these benefits are indexed (social security retirement and disability insurance, for example), others, such as Aid to Families with Dependent Children (AFDC), are not.
Because the official poverty lines are adjusted for increases in the consumer price index, transfers to those who are not expected to work must also increase, or poverty will rise. However, downward adjustment in the index used to alter benefits might be appropriate under two circumstances: in periods when the earnings increases of most workers lag behind price increases; or when changes in the consumer price index do not adequately reflect changes in the prices of goods and services purchased by transfer recipients.
The situation for female heads of households with young children is the most serious poverty problem. Poverty remains high for this group, partly because AFDC benefits, which are not indexed (except in California), have fallen by almost 20 percent in real terms since 1969. If the current system of open-ended matching grants for AFDC were replaced by fixed block grants of equal size (as proposed by the New Federalism), real benefits would decline even further. Indeed, there seems to be no welfare reform that can reduce poverty among female heads of households with young children that does not also increase public expenditures.
The second component of our alternative approach is an attempt to increase employment and reduce market income poverty for those expected to work. The first priority in this component is the development of employment subsidies like the New Jobs Tax Credit, which was in effect from 1977 to 1979. This program provided subsidies to employers who expanded their work rolls. Studies indicate that it stimulated employment while restraining price increases. Through such a strategy, earnings and employment opportunities in the labor market for low-skill workers would be enhanced. And structural unemployment caused by minimum wages (and other gaps between worker productivity and the wage costs borne by employers) would be reduced.
The third component is an expansion of the Earned Income Tax Credit (EITC) which currently subsidizes the earnings of workers who have children, and whose incomes are below $10,000 a year. By increasing the subsidy rate, work incentives for the lowest-income workers would be enhanced. This expansion would offset the toll which inflation has taken on the tax burdens of the working poor , providing relief to a group of taxpayers receiving almost no benefits from the Reagan tax cut.
Fourth, a social child support program that attempts to minimize the need for additional public funds should be adopted. Under such a program, all adults who care for a child and do not live with the child's other parent would be eligible for a public payment that would be financed by a tax on the absent parent. If the payment from the absent parent fell below a minimum level, it would be supplemented up to that level by government funds. Even if total government expenditures were maintained at current levels, the program could reduce poverty because of the additional revenue raised from absent parents. This program directly addresses the high poverty rates of women heading households with children.
Currently, prospects for these - or any other antipoverty reforms - are remote. But keeping these proposals in the public view serves to counter the belief that government programs do not and cannot work and therefore should be drastically reduced. Although the intent of the Reagan budget cuts is to encourage work and cut government spending, it will increase poverty and discourage some from working.
Our reorientation is quite consistent with many of the objectives of the Reagan administration. It protects benefits for the truly needy who are not expected to work and it promotes employment for those who can work by subsidizing private employers and employees. And, unlike the Reagan program, it reduces poverty.
Enlightened policy should focus on preserving the accomplishments and reforming the faults of existing programs, and not destroy them in the process of correcting their faults.