Reagan’s Legacy: Tax Cuts for Rich, Tax Hikes for the Rest

Ronald ReaganWhen people think of Ronald Reagan, they normally think of him as a big tax cutter. And there’s a good reason for that: when he came into office, he cut federal income taxes across the board by 25% over three years. As I’ve discussed many times elsewhere, this is not as evenhanded a thing to do as it sounds. The truth is that the only kind of tax in the United States that is truly progressive is the federal income tax. This is the reason that conservatives focus on it. It is what was behind Romney’s 47% comment, “These are people who pay no income tax…” Note that what he said wasn’t even accurate: state income taxes are far more regressive. But Reagan did cut everyone’s federal income taxes, so I’ll give him that.

But a funny thing happened. Since he was also determined to greatly increase military spending, the federal debt, which had been decreasing for decades suddenly increased at an alarming rate. So after those initial tax cuts, and without nearly as much fanfare, Reagan raised taxes again and again. But he kept those federal income tax rates low and and made them even lower. He started with a top tax rate of 70% in 1981, dropped it to 50% in 1982, and dropped it again to 28% in 1988. He also lowered effective capital gains taxes (before being forced to raise them later) and effective inheritance taxes—two forms of taxes that don’t much affect the poorer classes.

So what was the result of all this? You might think that it was to lower the federal taxes that Americans pay, but that’s not so much true. The total federal income taxes that came in his first year in office were 19.1% of GDP and they were 17.8% the year he left. But at the same time, the other major federal tax—payroll tax, that hits the poorer classes hardest—went up from 5.8% of GDP in 1981 to 6.5% in 1989. That is an overall decrease in taxes, but it was not equitably shared.

Will Bunch explains what this means to individuals in his book, Tear Down This Myth:

When Reagan took office in 1980, middle-income Americans with children paid 8.2 percent of their pay in [federal] income taxes and 9.5 percent in payroll taxes, while in 1988, when Reagan left office, it was down to 6.6 percent in [federal] income taxes but up to 11.5 percent in payroll taxes.

Let’s be clear here: when Reagan came into office, middle-income Americans were paying 17.7% of their income in federal taxes; when Reagan left office, middle-income Americans were paying 18.1% of their income in federal taxes. That’s a 0.4 percentage point increase in taxes. Assuming a median income of $30,000 per year, they were paying an extra $1,200 $120 in taxes.

I don’t have the exact numbers for the rich, but let’s just do a back-of-the-envelope calculation. Let’s forget the capital gains (which went up slightly) and estate taxes (which stayed constant but the deduction went way up). Let’s take a typical rich person who made $500,000 in all earned income. Further, let’s look only at the taxes paid that was in the top tax bracket. In 1981, it was income over $212,000, but in 1989, it was income over $29,750. Note just how regressive that top marginal level is there at the end: for a lot of middle class people, there was a flat tax, and probably a regressive tax because the rich are better able to take advantages of deductions and hide income. Anyway, based on this, our rich person’s federal taxes went from $201,600 in 1981 to $131,670 in 1989. That’s a decrease in taxes of 35%.

For some reason, I have not been able to find the data for the the payroll tax cap over time. I know I’ve seen it in the past. Right now it is just over $100,000. That means that people don’t pay any payroll tax on the money they make over that amount. It also means that the payroll tax is the most regressive tax we have. Now this number goes up a bit each year to keep up with inflation. So I figure it was about $75,000 in the 1980s, but I’m going to be cautious and just assume it was $100,000, which we know it wasn’t. That means that the rich person’s payroll taxes went up from $9,500 to $11,500. An increase of 21%, given that the rich person never paid much in payroll taxes, it doesn’t mean much.

So let’s put all of it together. In 1981, the rich person was paying $201,600 + $9,500 = $211,100 in total federal taxes. In 1989, the rich person was paying $131,670 + $11,500 = $143,170 in total federal taxes. That’s a decrease of 32% in their total federal tax bill.

That’s the Reagan tax legacy. He raised taxes on the poorer classes by a small amount. And he greatly lowered them on the rich. Now the idea (Supply Side Economics) was that this would make the economy boom because it would encourage people to produce. But what it actually did was encourage the already wealthy to pay themselves as much as they possibly could. So while in the past, workers got a cut of productivity gains, they didn’t anymore. All those productivity gains went to the rich because they had an incentive: they could keep more of it. That’s how “supply side economics” really worked. Democrats are only starting to realize this (both Clinton and Obama have been effusive in their praise of Reagan) and the Republicans are completely ignorant of it. Reagan was the most elitist president in modern times. He was the anti-Robin Hood. We should be toppling statues of him all over the nation.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

7 thoughts on “Reagan’s Legacy: Tax Cuts for Rich, Tax Hikes for the Rest

  1. "That’s a 0.4 percentage point increase in taxes. Assuming a median income of $30,000 per year, they were paying an extra $1,200 in taxes."

    An extra $120, actually. I know you slipped that in just to see if we were paying attention.

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