The US Safety Net in an Era of Middle Class Decline: Has it drifted from the poor?

A key feature of growing inequality today, and one often overlooked by scholars, is economic stagnation within the middle class. I take a fresh look at the relationship between middle class incomes and redistributive policies by spotlighting changes within the American middle class, and the role this may play in shaping the US’s redistributive polices. Using four decades of household data, the paper brings new evidence to longstanding debates over how inequality influences income redistribution, whether a welfare retrenchment has occurred, and whether growing inequality within the middle class has resulted in an expansion of social policy or possibly a drift away from the poor. The evidence presented here unambiguously shows that the value of government transfers to individuals (which includes a combination of tax payments and social benefits) has increased over time across the income distribution. While family benefits have drifted from the poor to the middle class, overall I do not find evidence of a general policy drift. However, I do find that government transfers have increasingly targeted the middle class, particularly those in its lower ranges. I trace nearly all of the growth in government transfers to the middle to the Child Tax Credit and the EITC. Accompanying these tax credits, however, have been highly regressive changes in other features of income tax policy. The paper’s results highlight the malleable features of US social policy, and shows how the widespread use of tax policy for dispensing social benefits fosters widely dispersed benefits that can also marginalize or possibly even harm the poor.