Nothing But Facts On 1980s US Taxes
THE rich did get a tax break in the 1980s in the United States. The working poor did not.
Here are some Congressional Budget Office (CBO) numbers that bear this out and may act as guides through the thicket of election rhetoric and plans, including Gov. Bill Clinton's call for a hike in taxes on the highest 2 percent of incomes.
* The effective federal tax burden for the richest 1 percent of taxpayers will have declined from 31.7 percent of income in 1980 to 28.8 percent in 1993. This tax burden includes income taxes, payroll taxes (Social Security), federal excise taxes, and a calculation of the impact of corporate income taxes on individuals.
The marginal (or top) income tax rate on the rich fell from 70 percent to 31 percent. But the wealthy had so many tax loopholes in 1980 that on average they paid nowhere near 70 percent in fact. Many of those loopholes have been closed since then.
"Statutory rates were very misleading," notes Joel Slemrod, director, Office of Tax Policy Research, University of Michigan.
* The poorest fifth (quintile) of taxpayers paid 8.1 percent of their income to Uncle Sam in 1980, and 8.4 percent in 1993.
Many of these taxpayers got some help when the earned income tax credit was increased in 1986, so that the working poor often get sizable refund checks on their income taxes. But the steady rise in Social Security taxes in the 1980s offsets this factor.
* The middle income quintile have enjoyed a slight drop in their federal tax burden from 19.8 percent in 1980 to 19.5 percent in 1993.
* The most affluent 20 percent of taxpayers saw their tax burden decline from 27.5 percent to 26.6 percent.
On average, the tax burden for all US taxpayers is practically unchanged - 23.3 percent in 1980 and 23.2 percent in 1993. Within that average, the large number of tax law changes in the 1980s may have made a big difference for some individuals. But the bottom line for the nation as a whole has been tiny. The federal tax system remains modestly "progressive" - taxing the rich at a higher rate than the less affluent.
These numbers will be elaborated on by three CBO tax experts, Richard Kasten, Frank Sammartino, and Eric Toder, in a paper to be given Sept. 11 at a conference on tax progressivity put on by Mr. Slemrod's tax research office.
Another paper to be given by Princeton University economist Gilbert Metcalf finds that state and local taxes combined were about proportional in 1984 (taxing all income levels at about the same rate) and slightly progressive in 1989. He looks at income, property, and general sales taxes.
The conventional view of tax experts is that sales taxes are regressive - taxing the rich less proportionately than the poor - and state income taxes are progressive. Professor Metcalf has attempted to examine taxation in the light of lifetime earnings, including low-pay periods when individuals are just getting started in their careers and their retirement years. He finds that sales taxes are actually nearly as progressive as income taxes.
The 1986 tax law, by removing the deductibility of sales taxes from the federal tax, should have made the state and local tax system more progressive since the well-to-do benefit most from tax deductions. But changes in other state and local taxes, which Metcalf can't spell out, almost canceled out that shift.
His central finding: no big change in state and local taxes in the 1980s.
The Congressional Budget Office hasn't estimated the extra revenue that would be raised if Mr. Clinton's tax boost for the rich was enacted into law. But early this year it did look at some similar revenue-raising ideas. If the top marginal rate was hiked for those now taxed at 31 percent to 33 percent, it would boost revenues $32.2 billion in the years 1993 through 1997, or about $7 billion a year. If in addition, an extra 38 percent tax bracket was added for couples with taxable incomes over $125,000 a nd individuals earning over $75,000, it would raise $95.9 billion in those five years or about $20 billion per year.
The Clinton tax proposal would provide extra revenues, increase the progressivity of the tax system, and probably thereby reduce income inequality. But it would also reduce the incentives of the richest 2 percent to work, save, and be entrepreneurial.
This proposal is a value choice as much as an economic one.