TAXES

As Congress has slashed taxes on the rich over the years, it has raised the taxes of the middle class to make up the difference. Here is how the family rates of the rich and the middle class have converged over the postwar years:

The Loss of Tax Progressivity
Effective Family Federal Tax Rate (Income and FICA)1
Year    Median    Millionaire or Top 1%
1948     5.3%     76.9%
1955     9.1      85.5
1960    12.4      85.5
1965    11.6      66.9
1970    16.1      68.6
1975    20.0       --
1977     --       35.5
1980    23.7      31.7
1985    24.4      24.9
1989    24.4      26.7
Total Effective Tax Rates for All Families (Federal Income and Payroll Taxes)2

Quintile        1980    1985    1990      % change 1980-90
Lowest 20%       8.4%   10.6     9.7       16.1%
Second 20%      15.7    16.1    16.7        6.0
Third 20%       20.0    19.3    20.3        1.2
Fourth 20%      23.0    21.7    22.5       -2.2
Highest 20%     27.3    24.0    25.8       -5.5
Top 1%          31.8    24.9    27.2      -14.4

The above chart shows that tax rates were cut for the rich and raised on the poor. Some supply-siders object to the inclusion of payroll taxes (Social Security and Medicare) in the above chart. For answers to these objections, see More.

Meanwhile, federal government has been shifting more of the tax burden to state and local governments:

Total Tax Collections (In Billions of Constant Dollars, 82-84 CPI)3

                        1982   1990
Federal Income Tax      $308   341
State and Local Taxes    275   374

And after all the deductions and loopholes are taken into account, state and local taxes are regressive, not progressive.

The Rise of Regressive State and Local Taxes
(Percentage of Average Families' Incomes Spent on State and Local Taxes)4

Quintile     1985   1990
Lowest 20%   12.6%  13.8
Second 20%   10.0   10.9
Middle 20%    9.1   10.0
Fourth 20%    8.6    9.5
Next 15%      8.4    9.2
Next 4%       8.2    8.7
Top 1%        7.1    7.6

The following chart shows how the tax burden has been shifted over the years. Notice that the steepest drops are in corporate and excise/estate taxes, while payroll taxes have nearly tripled:

Source of funds for Federal Spending5

        Personal     Corporate    Payroll   Excise/    
Decade  Income Tax   Income Tax   Tax       Estate     Borrowing
1950s   42.0%         26.9%       11.5%      17.2%      2.5%
1960s   42.0          20.4        18.4       14.9       4.4
1970s   40.3          13.3        27.7       11.3      11.1
1980s   38.0          7.7         29.2        8.2      17.7

Corporate tax cuts matter because the liberated profits enable companies to pay the exploding CEO salaries and benefits that we saw in the previous section.

Quite often, corporations and individuals pay even less than the official tax rate. The secret is to lobby Congress for exemptions. From 1979 to 1986, AT&T contributed nearly $1.4 million to Congressional candidates, most of them incumbents. Although the company made nearly $25 billion in profits from 1982 to 1985, it didn't pay a single penny in taxes - in fact, it got a tax rebate of $635 million.6

In 1989, Citizens for Tax Justice researched 44 major American companies. Despite collective profits of $53.6 billion, all 44 paid no federal taxes. (And all had reduced their capital spending and laid off part of their work forces. The profits from this went to higher stock dividends, an average CEO pay increase of 54 percent, and funding for corporate mergers and takeovers.)

The 1986 Tax "Reform" Act was a lobbyist endeavor from the start. Although the Act cut taxes on all income groups, it also closed loopholes -- essentially giving with one hand while taking with the other. But the real story of the 1986 Tax "Reform" Act became all the corporate tax exemptions written into the law, often in language so convoluted and arcane that not even trained tax lawyers could identify the beneficiary. One of the few decryptable examples gave a tax break to an unidentified "taxpayer who incorporated on Sept. 7, 1978, which is engaged in the business of manufacturing dolls and accessories." In plain English, this loophole should have read: "We hereby give Xavier Roberts, the inventor of Cabbage Patch dolls, a personal tax break of $6 million."7 Countless hundreds of these anonymous exemptions were lobbied into the law.

The following chart gives the size of the tax cuts after 1986. Keep in mind that these represent the official tax rates, and do not account for exemptions and loopholes which were closed for the middle class but increased for the rich.

Comparative Benefits of the Tax "Reform" Act of 19868

Income Bracket    Size of Tax Cut    Tax Savings per return
Under $10,000           11%                 $37
10,000 - 20,000          6                   69
20,000 - 30,000         11                  300
30,000 - 40,000         11                  467
40,000 - 50,000         16                1,000
50,000 - 75,000         16                1,523
75,000 - 100,000        18                3,034
100,000 - 200,000       22                7,203
200,000 - 500,000       27               24,603
500,000 - 1 million     34               86,084
Over $1 million         31              281,033

Publicly, Congress touted the 1986 Tax "Reform" Act as a way to make millionaires pay their fair share of taxes. One of their methods was raising the alternative minimum tax on the wealthy. If millionaires somehow used loopholes to pay little or no taxes, then they would be hit by the minimum tax. Representative Marty Russo, an architect of the minimum tax, said: "I take particular pride when I hear my colleagues... say that this bill has the toughest minimum tax they have ever seen. It makes sure everbody pays a fair share."

In reality, the minimum tax was a fraud. After 1986, fewer rich paid the minimum tax...9

                      Taxpayers   Taxpayers
Income                in 1986     in 1989    Down
$100,000 - 200,000    126,127     29,195     -77%
200,000 - 500,000      46,874     14,112     -70%
500,000 - 1 million    10,428      4,176     -60%
Over $1 million        15,259      2,361     -85%

And they paid less...10

                         Avg. tax        Avg. tax
Income                   paid in 1986    paid in 1989   Down
$100,000 - 200,000       $10,295         $4,561         -56%
200,000 - 500,000         23,237          9,307         -61%
500,000 - 1 million       45,218          20,694        -54%
Over $1 million          116,395          54,758        -53%

But could this have been the result of more wealthy people paying the higher regular rates? In the case of the lesser wealthy, sometimes; but in the case of millionaires, no. Of the remaining millionaires who did not pay the minimum tax between 1986 and 1989, the average tax bill fell 27 percent, from $864,068 to $634,196.11 And keep in mind these were the peak years of skyrocketing incomes.

Over the whole decade, from 1980 to 1989, the tax bill of those who made over $1 million a year fell from $980,869 to $634,196 -- a tax cut of 35 percent.11

Despite falling individual tax bills, the rich as a group paid a larger percentage of total federal tax collections in the 80s. That is because the group itself was rapidly expanding. Between 1980 and 1989, the number of people reporting annual incomes of $500,000 or more skyrocketed from 16,881 to 183,240 -- a tenfold increase. In 1980, this group paid $8.1 billion in taxes, or 3 percent of all federal income tax collections. By 1989, they paid $59.4 billion, or 14 percent of the total. 12

Supply-siders often raise this point in their debates, as "proof" that tax cuts actually shifted the tax burden upward. But a few statistics kill this argument. The 183,240 people who reported half-million dollar incomes in 1989 still represented less than one-fifth of the richest 1 percent! Although we should be glad that the ranks of the rich grew, this growth occurred in far too small a group to benefit most Americans. Meanwhile, middle class income stagnated or fell as most of the income gains went to the rich. The top 1 percent increased their share of the national income from about 8 to 12-13 percent in the 80s, an increase of 50 percent. Likewise, their share of all federal taxes paid grew from 18 to 27 percent, also an increase of 50 percent.13 (This would have been even higher had their taxes not been cut.) In short, the rich paid more taxes because they made more; the poor paid less taxes because they made less.

Many supply-siders defend tax cuts for the rich on the basis that the rich pay more taxes in absolute dollars, even at reduced rates. This argument ultimately loses sight of the real issue: massive tax cuts on the rich have fueled growing inequality of wealth and income, as the statistics in the previous section show. What is indisputable is that as our tax system has grown less progressive, and even turned regressive in some cases, middle class growth has stalled while the poor have actually lost ground.

Next Section: Budgets and Deficits
Return to The Reagan Years Home Page

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1 The data in the median column originates as follows: the 1948 figure comes from The Statistical History of the United States, 1976; the figures for 1955 to 1983 come from Alan Lerman of the U.S. Department of the Treasury Office of Tax Analysis. The calculations after 1983 come from Eugene Steuerle and John Bakija, Right Ways and Wrong Ways to Reform Social Security (Washington, D.C.: Urban Institute Press, 1993). Figures from the millionaire column for 1948 to 1970 represent the effective tax rates for those earning $1 million a year and come from the U.S. Treasury Department unpublished data set forth on page 1112 of The Statistical History of the United States, 1976. FICA is not included, but the rates would not be affected by a percentage point. The rates from 1977 onward are for the top 1% of families as computed by the Congressional Budget Office tax simulation model and include all federal taxes. Source: the 1992 Greenbook of the House Ways and Means Committee, p. 1510. The effective rate on millionaires would be close to the rate on the top 1 percent.
2 CBO, Congressional Study: Tax Progressivity and Income Distribution. March 26, 1990. CIS#H782-11.
3 1991 Handbook, Advisory Commission on Intergovernmental Relations, pp. 122-30.
4 A Far Cry From Fair, Citizens for Tax Justice, April 1991, p.18
5 Robert J. Shapiro, "Paying for Progress," Progressive Policy Institute, February 1991. Calculations derived by the author from Budget of the United States Government, fiscal year 1991, "Historical Tables," Tables 1.1 and 2.2.
6 Philip Stern, The Best Congress Money Can Buy, (New York: Pantheon, 1988) p. 13.
7 Laura Saunders, "Personalized Taxes," Forbes, June 1, 1987, p. 84.
8 Internal Revenue Service, cited by Philadelphia Enquirer, October 21, 1991.
9 Ibid.
10 Ibid.
11 Internal Revenue Service, cited by Donald Barlett and James Steele, America: What Went Wrong? (Kansas City: Andrews and McMeel, 1992), p. 7.
12Ibid, pp.4-5.
13 Kevin Phillips, Boiling Point (New York: HarperCollins, 1993), p. 112.