Personal income tax rate for top bracket1 Years Percent 1945 91% 1946-63 88 1964-81 70 1981-86 50 1988 28 1991 31
The following chart shows the effectiveness of a progressive tax
system. When the top rates were truly high from 1950 to 1978, American
income at all levels grew at about the same pace. But when progressivity
was lost in the 80s, the income of the poor began falling, while that of
the rich continued growing.
Income Growth by Quintile2
Quintile 1950-1978 1979-1993 Lowest 20% 138% -15% 2nd 20% 98 -7 3rd 20% 106 -3 4th 20% 111 5 Highest 20% 99 18
Economists have a standard measure of income inequality, called the Gini Index. In this index, the higher the number, the greater the income disparity between the rich and the poor. (0 = perfect equality, 1 = only one person in the economy has all the income.)
Gini Index of Income Inequality3
Before After
Taxes Taxes
1979 0.403 0.352
1980 0.401 0.347
1981 0.404 0.350
1982 0.409 0.359
1983 0.412 0.368
1984 0.413 0.372
1985 0.418 0.381
1986 0.423 0.404
1987 0.424 0.380
1988 0.425 0.384
1989 0.429 0.387
1990 0.426 0.381
1991 0.425 0.379
1992 0.430 0.381
As mentioned earlier, the U.S. economy slowed in 1973 for reasons
still not completely understood. The average weekly earnings of nonsupervisory
workers -- about four-fifths of the civilian workforce -- peaked in 1973,
and have been falling ever since:
Average weekly earnings of nonsupervisory workers, total private industry,
1982 dollars4
1965 $290 1970 297 1973 315 (Peak) 1975 292 1976 297 1977 299 1978 301 1979 291 1980 274 1981 271 1982 267 1983 272 1984 274 1985 271 1986 271 1987 269 1988 266 1989 263 1990 259 1991 255 1992 255 (Nadir)
The above chart is especially useful in rebutting supply-siders who use other measures to argue that everyone's incomes rose during the 80s. For detailed refutations of these other measures, see More.
Average hourly earnings also fell over the 80s:
Average hourly earnings, total private industry (1982 dollars)4 1973 $8.55 1980 7.78 1985 7.77 1990 7.52 1993 7.39
Presidents Reagan and Bush froze the minimum wage for 9 years, essentially
giving those workers a pay cut each year as inflation bit into their paychecks.
In 1992 dollars, the 1963 minimum was $5.74 -- or 35 percent more than
it is today.
Raises in the Federal Minimum Wage5
Percent of average Year New rate production earnings 1950* $0.75 54% 1981 3.35 43 1990 3.80 35 1991 4.25 38 1994 -- 35
*For brevity's sake, this chart omits the 15
minimum wage increases between 1950 and 1981. No newly introduced minimum
wage has ever been lower than 35 percent of the average wage, although
old minimum wages have certainly gone below this. For a fuller chart, see
More.
Economists previously believed that raising the
minimum wage would cost jobs, especially among teenagers. However, recent
research suggests that the truth might be a bit more complicated than this,
and that when the minimum wage falls too low (due to inflation), it can
be raised safely. For more on the controversy stemming from the Card/Krueger
study, see More.
On the other hand, the salaries of executives skyrocketed during the
80s:
Salaries and benefits of corporate CEOs as a multiple of the average
factory worker's6
1980 30 times 1991 130-140 times
And these super-salaries did not come primarily
from greater profits, but from a larger slice of the profits: (More)
Executive Compensation as a Share of Corporate Profits7
1953 22% 1987 61
The following chart shows the growth in the number of millionaires
and billionaires during the 80s. Notice that their numbers skyrocketed
in the years 1985-87.
Approximate number of millionaires and billionaires in the U.S., 1978-19888
Year Millionaires Decamillionaires Centamillionaires Billionaires 1978 450,000 1 1979 519,000 1980 574,000 ? 1981 638,000 ? 1982 38,885 400 13 1983 500 15 1984 600 12 1985 832,000 700 13 1986 900 26 1987 1,239,000 81,816 1,200 49 1988 1,500,000 100,000 1,200 51
Percent Increase of Combined Salaries by Income Bracket, unadjusted for inflation (1980s)9
Income Bracket Percent Increase $20,000 - 50,000 44% 200,000 - 1 million 697 Over $1 million 2,184
Viewing the above chart more broadly, the total wages of all people who earned less than $50,000 a year -- about 85 percent of all Americans -- increased an average of 2 percent a year from 1980 to 1989, which did not even keep pace with inflation. By contrast, the total wages of all millionaires shot up 243 percent a year.
Defenders of the Reagan era claim that income mobility in the U.S. is great enough to overcome income inequality. That is, if people move up and down the income scale to a significant degree, then, over a lifetime, your average income is going to match my average income. However, there are a few flaws with this argument. First, income mobility in the U.S. is not even close to making this a reality. (More.) Second, one could hardly justify slavery on the basis that, for 1 percent of your life, you, too, will be the master.
So who gets ahead, and who gets left behind? The single most decisive
factor is education:
Education, Experience and Wages10
Percent change in earnings New Workers (1-5 years experience) from 1979 to 1987 Less than 12 years of school -15.8% High school degree -19.8 16 or more years of school +10.8 Old Workers (26-35 years of experience) Less than 12 years of school -1.9 High school degree -2.8 16 or more years of school +1.8
Some people claim that if the poor want to
get ahead, they should just return to college. However, the job market
can bear only a limited percentage of educated professionals, and there
is already a glut of college grads in most fields. This makes competition
the hallmark of today's meritocracy, which critics call destructive in
its extreme form. (More)
Although the following chart is one of the largest, it is also one
of the most important. This chart shows how the incomes of most American
families stagnated or fell during the 80s, with gains posted only by the
top 20 percent. It also reveals how supply-siders lie with statistics,
but more on this in a moment. For those unfamiliar with the term "decile,"
the 1st decile is the poorest 10 percent of the population, the 2nd decile
the 2nd poorest, and so on.
Average Income Level and Effective Federal Tax Rates in Each Family
Decile by Year, in 1988 dollars (Corporate income tax allocated to capital
income)11
Percent change:
1977- 1980- 1985-
Decile 1977 1980 1985 1990 90 90 90
1st $4,277 3,852 3,568 3,805 -11.0% -1.2 6.7
2nd 8,663 7,982 7,717 8,251 -4.8 3.4 6.9
3rd 13,510 12,530 12,230 13,110 -3.7 4.6 7.2
4th 18,980 17,240 17,010 18,200 -4.1 5.6 7.0
5th 24,520 22,380 22,070 23,580 -3.8 5.4 6.9
6th 30,430 28,100 27,620 29,490 -3.1 5.0 6.8
7th 36,880 34,370 34,620 36,890 0.0 7.3 6.5
8th 44,820 42,050 43,370 46,280 3.3 10.1 6.7
9th 56,360 53,660 56,190 59,860 6.2 11.6 6.5
10th 111,100 107,900 123,200 133,200 19.9 23.4 8.2
top 5% 149,500 146,000 172,100 187,400 25.4 28.3 8.9
top 1% 319,100 321,400 415,700 463,800 45.4 44.3 11.6
All 34,830 32,850 34,480 37,050 6.4 12.8 7.4
As you can see, the majority of American families were worse off
in 1990 than they were in 1977, at the beginning of Carter's presidency!
When supply-siders talk about family income in the 80s, they are always
careful to use 1980 as a benchmark for their comparisons, and never 1977.
This is because the recession of 1980-82 was the worst since World War
II -- perfect for comparing the later Reagan years in their best light.
But comparing the Reagan recovery to the non-recession year of 1977 puts
everything in perspective: most Americans lost ground, even at the end
of the recovery.
Which leads to the question: are presidents responsible
for creating recessions and recoveries? If yes, then Reagan deserves credit
for rescuing the economy from Carter's mismanagement. But if not -- which
is what almost all mainstream economists believe -- then the supply-sider's
praise of the 80s rings hollow. In that case, it is natural for recessions
to be followed by recoveries, and supply-siders might as well take credit
for the incoming of the tide. In reality, the Chairman of the Federal Reserve
Board is far more responsible for influencing recessions and recoveries.
(More)
Supply-siders have a partial rebuttal to the above chart. They point
out that family size decreased during the 70s and 80s, which means that
less family income would cover fewer people, and therefore not lower their
standard of living. The following chart shows the long-term decline in
average family size:
Average Family Size12
1970 3.58 persons 1975 3.42 1980 3.29 1985 3.23 1990 3.17
But this counter-argument runs into a few others.
First, falling individual income is responsible for declining family size,
so to say that families are maintaining their standard of living despite
everything is missing the point. (More) Second,
the rather small decline in family size does not explain or justify the
massive income gains seen by the top 1 percent, while 80 percent of all
families are treading water.
The following chart shows how large a slice of the economic pie everyone
is getting. More specifically, it shows how much of the total national
income that each 20 percent of American families are making. As you can
see, everyone's slice of the pie grew smaller in the 80s except the top
20 percent, which grew. And the top 1 percent was responsible for most
of that quintile's growth, as the last chart reveals.
Percent of National Aggregate Income Received by Each Quintile (by
Family, in 1992 dollars)13
Quintile 1980 1992 Lowest 20% 5.2% 4.4 2nd 20% 11.5 10.5 3rd 20% 17.5 16.5 4th 20% 24.3 24.0 Top 20% 41.5 44.6 Top 5% 15.3 17.6
Shares of Pretax Adjusted Family Income14
Quintile 1977 1980 1985 1988 1989 Lowest 20% 4.7% 4.3 3.7 3.5 3.5 2nd 20% 10.8 10.5 9.5 9.1 9.2 3rd 20% 16.3 16.0 15.1 14.6 14.7 4th 20% 22.9 22.9 22.2 21.7 21.7 Top 20% 45.6 46.7 50.1 51.4 51.4* Top 1% 8.3 9.2 11.6 13.4 13.0
*Table reads that 51.4 percent of all adjusted pretax family income
in 1989 belonged to families in fifth or highest quintile. Quintiles are
weighted by persons.
A common defense of these charts runs something
like this: "How equally the pie is sliced is not as important as the
fact that the pie itself is growing. Our GDP grows almost every year, so
everyone benefits." But this argument becomes incoherent when paired
with the claim that America should be an unrestricted meritocracy. If competition
is the primary basis of American society, then how equally the pie is sliced
becomes significantly more important than the size of the pie itself. (More)
An even stronger refutation is that, over the
80s, as the pie has grown, 70 percent of the extra growth has gone to the
top one percent, with the rest going to the next 5 percent or so. The middle
class share has simply stayed the same size.15
This means that the average American worker is working harder, producing
more, and creating overall growth, but is not seeing any of the rewards.
And this largely explains why middle class anxiety, voter anger and economic
uncertainty are gripping the nation today. (More)
Next Section: Taxes
Return to The Reagan
Years Home Page
___________________
1 Internal Revenue Service.
2 U.S. Bureau of the Census, Current
Population Survey.
3 U.S. Bureau of Labor Statistics. The
"before tax" column is Measure 1 of the Gini Index. The "after
tax" column is Measure 15, which measures inequality after all taxes
and government transfers.
4 U.S. Bureau of Labor Statistics,
Bulletin 2445, and Employment and Earnings, monthly, June and March issues.
5 U.S. Department of Labor, Employment
Standards Administration, Minimum Wage and Maximum Hour Standards Under
Fair Labor Standards Act, 1981, annual and unpublished data.
6 Kevin Phillips, Boiling Point
(New York: HarperPerennial, 1993), p. 251.
7 Internal Revenue Service.
8 The statistics and estimates for
millionaires are drawn from multiple sources, according to Kevin Phillips
in The Politics of Rich and Poor (New York: Random House, 1990),
Appendix A, p. 239. The decamillionaire data for 1982-88 comes from Thomas
J. Stealey, Marketing to the Affluent (Homewood, Ill.: Dow Jones-Irwin,
1988). The remaining data comes from Forbes and Fortune surveys
of the richest Americans during the 1980s.
9 Internal Revenue Service.
10 Calculations based on L.F. Katz
and K.M. Murphy, Changes in Relative Wages, 1963-1987: Supply and Demand
Factors (Cambridge, Massachusetts: National Bureau of Economic Research,
1990).
11 Congressional Budget Office, House
Ways and Means Committee, 1992 Green Book.
12 U.S. Bureau of the Census, Current
Population Reports, P20-477.
13 U.S. Bureau of the Census, Current
Population Reports, P60-184; and unpublished reports.
14 Congressional Budget Office tax
simulation model, cited in U.S. House Ways and Means Committee, 1992 Green
Book, p. 1521.
15 This is the so-called "Krugman
calculation," which has successfully resisted various statistical
challenges by supply-siders. See Paul Krugman, Peddling Prosperity:
Economic Sense and Nonsense in the Age of Diminished Expectations (W.W.
Norton & Company, 1994), p. 138.