Not surprisingly, supply-siders disagree over which tax tables should be used to show changes in tax rates over the 80s. They prefer to show only federal income tax, because it shows that everyone got a tax cut, the poor most of all. Here is a chart that Rush Limbaugh featured in his book See, I Told You So:
Federal Tax Reductions1
% of income paid
Top income paid in taxes: 1992 percentage
Quintile in bracket 1980 1992 of taxes cut
---------------------------------------------------------------
Poorest 20% $20,300 -0.5% -3.2% -540.0%
Second 20% $36,800 4.5% 2.8% -37.8%
Middle 20% $64,000 7.9% 6.2% -21.5%
Fourth 20% $82,400 11.0% 8.7% -20.9%
Richest 20% ------- 17.2% 15.6% -09.3%
Richest 1% ------- 29.9% 22.0% -07.9%
Liberals have two objections to this chart. The minor objection
is that this chart includes the 1990 tax hike and the 1991 increase of
the Earned Income Tax Credit, both of which supply-siders actually hated.
But they make it look better on the poor, and that's why supply-siders
include them in this chart.
The major objection is that this chart omits payroll taxes (Social
Security and Medicare). Most Americans pay the majority of their taxes
in payroll taxes. And these taxes are heavily regressive -- they fall hardest
on the poor. Why? Because there is a maximum taxable income for Social
Security; today, you pay this tax only on the first $60,600 of income.
What this means is that the richest 10 percent pay a vanishing percentage
of their income on Social Security:
Effective Social Security Tax Rates (1993)2 Income: Rate: $37,800 7.65% $378,000 1.46 $3,780,000 0.1
When you include payroll taxes to Rush's chart, this is the result:
Combined federal and payroll tax rates (1993 dollars):3
Avg. Income Total Tax Rate % Change, $ Change,
Quintile 1989 1980 1989 1989 taxes 1989 taxes
---------------------------------------------------------------------------
First 20% $8,642 8.1% 9.3% +15.1% +$104
Second 20% 20,743 15.6 15.7 +0.6 +21
Third 20% 33,659 19.8 19.4 -2.0 -135
Fourth 20% 49,347 22.9 22.0 -7.6 -444
Fifth 20% 112,700 27.6 25.5 -7.6 -2,367
Top 1% 576,553 31.9 26.2 -15.0 -32,864
This chart shows that tax rates rose on the poor but fell for the
rich. Supply-siders have objected to this revised chart for a few reasons.
One rather mistaken argument is that payroll taxes are employer-paid
and have no business being included in a tax debate on what the employee
pays. But this is a huge error. The 1995 Grolier Encyclopedia
says under its entry for "Social Security":
"U.S. social security programs are funded... through payroll
taxes collected in equal amounts from employees and employers."
In 1992, payroll taxes for the lowest quintile were 15.3 percent.
The employee paid 7.65 percent from his paycheck, and the employer paid
the other 7.65 percent from his profits. The CBO chart above includes only
the employee's 7.65 percent for its calculations.
Another supply-side objection attempts to blame the spectacular rise
of Social Security taxes on Carter, not Reagan. In 1977, the Social Security
program was in financial trouble, and Congress bailed it out. They adopted
a multi-year schedule of steadily increasing taxes, with the final hike
occurring sometime before the year 2030. However, Congress underestimated
how deeply in trouble Social Security was, and in 1982 it again fell on
rocky times, with a record $11 billion shortfall. So in 1983, Congress
voted to greatly accelerate the schedule of tax hikes that Congress adopted
in 1977. Between 1977 and 1990, this resulted in nine tax hikes. They were:
Social Security Tax Rates4
Employer,
Employee, Self- Maximum Taxable Income:
Year Each Employed Current Constant (82-84 CPI)
----------------------------------------------------
1977 5.85% 7.9% $16,500 $27,209
1978 6.05 8.1 17,700 27,116
1979 6.13 8.1 22,900 31,602
1980 6.13 8.1 25,900 31,469
1981 6.65 9.3 29,700 32,611
1982 6.7 9.35 32,400 33,534
1983 6.7 9.35 35,700 35,807
1984 7.0 14.0 37,800 36,326
1985 7.05 14.1 39,600 36,749
1986 7.15 14.3 42,000 38,346
1987 7.15 14.3 43,800 38,544
1988 7.51 15.02 45,000 38,070
1989 7.51 15.02 48,000 38,736
1990 7.65 15.3 51,300 39,296
1991 7.65 15.3 53,400 39,196
(with no scheduled increases in rates thereafter)
I shall include more detailed charts of social security and income
tax rates by decile at the end of this page.
So, who's to blame for hiking the most regressive tax that Americans
pay? The true answer is perhaps not what you would think: the corporate
special interest system. As described in an earlier section, the corporate
special interest system arose in 1975 - and two years later, it persuaded
Congress to pass a schedule of hikes that allowed the richest 10 percent
of tax payers to pay deeply regressive rates on Social Security.
President Carter and the Democratic Congress surely deserve blame for
passing this regressive schedule in the first place. But the Republicans
are equally, if not more, to blame also. The Republicans controlled the
Senate from January 1981 to January 1987. Although the House receives the
President's budget proposal first, both chambers of Congress vote twice
on the budget, once on the original bill, and again after the conference
committee. Thus, the Senate is a full player in the budgetary process.
And with Reagan in the White House wielding the veto pen, Republicans were
actually in charge of the budget process in 1983, when the Social Security
schedule was accelerated.
Which raises a crucial point: Reagan and Congress didn't have to accelerate
this schedule, especially with such a vengeance. They could have adopted
any measure to save Social Security they wanted to. The Democratic Congress
of 1977 was not holding a gun to their heads in 1983; indeed, Congress
is famous for ignoring and changing previous budget and deficit-reduction
plans. (Remember the ill-fated Gramm-Rudman deficit cuts?) Fairness demands
that Reagan and Congress accept personal responsibility for all budgets
passed on their watch.
A much better solution than Carter and Reagan adopted is to make Social
Security a truly progressive tax. That would go a long way in making the
program solvent, dependable and trustworthy again. Today, economists are
warning that when the Baby Boomers start retiring in 2020, they are going
to place such a heavy load on Social Security that it will require a tax
bailout. Pundits have seized on this fact to call for the elimination of
Social Security altogether, to be replaced by individual retirement accounts.
This would essentially return us to the conditions that existed before
1935, when it was common to see countless old people starving in the streets
after they retired. The problem is that about a third of all Americans
earn too little to save for their retirements. And in a nation where income
inequality is as extreme as it is in America, calling for people to save
in IRAs is a recipe for disaster for the poor.
EFFECTIVE TAX RATES BY POPULATION DECILE:5
Individual Income Tax
Decile 1980 1984 1988 First -.5% -.4 -.8 Second .2 .3 -.4 Third 2.6 2.8 1.7 Fourth 5.5 4.8 4.1 Fifth 7.2 6.3 5.9 Sixth 9.1 7.8 7.2 Seventh 10.4 8.7 8.3 Eighth 11.6 9.7 9.0 Ninth 13.2 10.9 10.4 Tenth 18.0 15.1 15.5 Top 1% 22.9 18.8 19.7
Social Security Tax
Decile 1980 1984 1988 First 3.4% 4.4 5.0 Second 4.3 5.0 5.9 Third 6.4 7.5 8.6 Fourth 7.8 8.3 9.4 Fifth 8.1 8.9 9.8 Sixth 8.6 9.4 10.4 Seventh 8.9 9.6 10.5 Eighth 9.0 10.0 10.9 Ninth 8.4 9.7 10.6 Tenth 5.9 5.6 6.0 Top 1% 1.5 1.7 1.8
All Taxes
Decile 1980 1984 1988 First 6.9% 10.3 9.7 Second 7.8 8.7 8.6 Third 12.1 13.4 13.3 Fourth 16.2 16.1 16.5 Fifth 18.3 18.0 18.5 Sixth 20.3 19.6 20.2 Seventh 21.8 20.7 21.4 Eighth 23.1 22.0 22.3 Ninth 24.3 22.8 23.4 Tenth 28.9 24.8 26.6 Top 1% 34.6 26.9 29.3
Return to Overview
__________________
1Rush Limbaugh, See, I Told You
So,(New York: Simon & Schuster, 1993), p. 127. Although Rush cites
the U.S. Bureau of the Census for this chart, it actually comes from the
Congressional Budget Office.
2Internal Revenue Service.
3Congressional Budget Office, 1992
Greenbook.
4Social Security Bulletin, Annual
Statistical Supplement, 1993.
5Congressional Budget Office, The
Changing Distribution of Federal Taxes: A closer look at the 80's,
July 1988, CIS#J932.31