Taking from the Poor to Give to the Rich

Article excerpt

To sell the public on the Contract With America, conservative intellectuals, politicians and media personalities dismiss the popular wisdom that tax policies in the 1980s were a bonanza for the wealthy. They portray these years instead as a "soak the rich decade." A good example occurred on March 4 when Professor Russ Roberts of Washington University's Olin School of Business told Vincent Schoemehl's KMOX radio audience that the richest parts of American society were paying more in taxes at the end of the 1990 than before Ronald Reagan's tax policies were enacted.

Roberts was rejecting the suggestion that cuts in taxes for the wealthy in the 1980s contributed to the growth of the budget deficit, often regarded as the top priority of the contractors in Congress. "It's a factual issue," said Roberts. "The question is what happened to tax revenues in the 1980s. . . . Tax rates were cut. Not only did total collections go up, but the proportion that came from the rich went up. It goes against the kind of mythology that we created in the 1980s that it was the decade of greed and we exploited the poor to make the rich better off."

It is possible to make Roberts' case if one takes as the baseline for analysis 1980, after the first major tax cuts for the rich were passed during the Carter administration in 1978. Most of the damage had been done by 1986, when Congress felt compelled to backtrack. Even taking into account the tax reform of 1986, which ameliorated some of the most regressive aspects of the Carter and Reagan tax bills, the kind of analysis offered by Roberts collapses if the baseline considered is 1977.

A good yardstick for assessing taxation trends is the effective tax rate, defined as the average percentage of a family's income paid in taxes. According to the Congressional Budget Office, the effective tax rate for the wealthiest fifth of American families fell from 27.1 percent in 1977 to 24 percent in 1985. The resulting deficits forced the subsequent changes of 1986.

After 1986, all (including the wealthiest 20 percent) but the poorest fifth of families saw their effective tax rate increase. However, the proportion paid by the middle 60 percent of families remained higher in 1991 than it was in 1977, while that paid by the richest 20 percent remained slightly lower. The top 1 percent did even better, according to a House Ways and Means Committee study. Their incomes more than doubled while their tax-rate fell by nearly a fifth. …