White House Tilt Toward Wealthy Catches Public Eye

CHANGES President Bush has proposed in next year's federal budget would shift benefits toward the most affluent citizens. Democrats are likely to use this tilt to revive the ``fairness'' issue that was so useful to them last fall. The budget shifts are not dramatic enough to add significantly to the widening since the 1970s of income differences between rich and poor. But they are among the most controversial in the Bush budget and may never be passed by Congress.

Still, how the shifts spread the benefits and burdens of government may provide grist for the politics of fairness.

The most attention-getting proposals in the Bush administration's budget, sent to Capitol Hill Feb. 4, were those shifting resources down the income scale.

The budget proposes cutting some subsidies in the Medicare and farm price-support programs to people with incomes over $125,000 a year. Likewise, school lunch subsidies and grants for college tuition would be reduced for students from middle-income families and expanded for the poor.

The cuts in Medicare and farm subsidies represent the administration's opening gambit to establish the principle of means-testing in those programs. Budget director Richard Darman has invited the Congress to propose lower income ceilings - thus, greater budget savings - if it sees fit.

Since the income ceilings would cut benefits to the wealthiest, the administration has argued that Democrats concerned about fairness can hardly object to such limits. But the amount of money shifted through means-testing in these programs is very small in budget terms - well under $200 million in the first year.

This downward shift on the income scale is matched many times over by the upward shift of a proposed cut in the capital gains tax rate. Two-thirds of capital gains, according to Congress's Joint Committee on Taxation, accrue to people with incomes over $200,000. So the benefit of a tax cut for capital gains is concentrated on the very affluent.

According to a report by the Center for Budget and Policy Priorities, a liberal think tank, people earning over $125,000 a year would lose more than $2 billion under the Medicare and farm subsidy changes, but they would gain more than $50 billion through the capital gains tax cut.

The Bush administration has proposed that an independent study committee chaired by Federal Reserve Board chairman Alan Greenspan resolve some of the technical questions surrounding the capital-gains tax - among them the income levels of the people who pay them. Some economists have argued that the wealth of the capital gains earners is exaggerated, since some of them earn $200,000 or more only in the one year they sell a business at retirement or a large house after children have grown.

But little disagreement has arisen over the basic tendency of capital gains to concentrate on the wealthiest Americans.

To a lesser degree, the Bush proposal for a ``family savings plan'' would also accrue to relatively affluent families, according to a Congressional Budget Office study. This plan would allow families to save up to $5,000 a year in an account earning interest tax-free as long as they held their money for seven years. The CBO determined that the principal users of the plan would be taxpayers earning over $50,000 a year.

The majority Democrats are likely to counter the capital gains proposal with a tax cut of their own. The Social Security payroll tax has been raised during the 1980s to help pay for the retirement of the baby-boom generation in the next century. But the Social Security tax imposes the greatest burden on those earning less than $50,000. Democrats in the Senate, including majority leader George Mitchell of Maine, are showing increasing interest in cutting the payroll tax. Support is weaker among key leaders in the House, however.

The White House opposes cutting the payroll tax, since it is helping to fund the budget deficit.

The fairness argument had not helped Democrats mobilize even their own party members until last fall, when the White House resisted a surtax on people with million-dollar incomes. Polls suddenly showed the public favoring the Democrats on economic issues for the first time in over a decade.