The Sovereign Mind

Free thought on politics and real life

Reagan and the “Stinking Rich”

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In my last post I explained that the Bush tax cuts did not disproportionately favor the rich, as it commonly believed. The rich are paying a greater share of the total tax burden than they were before the Bush tax cuts, even when adjusting for the increase in their total share of wealth over the same period of time.

But it’s worth looking further back to see how the tax burden has shifted over time. So, I’ll do the same analysis going back to 1979. I’d go back further, but the numbers from the Congressional Budget Office only go that far. In any case, 1979 was just before the Reagan tax cuts which drastically reformed the tax code and greatly reduced the marginal tax rate on the highest income bracket. Therefore, we would expect for the Reagan tax cuts to have favored the rich by shifting more of the tax burden away from the rich to the middle and lower classes. But, before we investigate whether that’s true, it’s worth noting that there is a difference between the marginal tax rate and the effective tax rate. The effective tax rate is the portion of income that is actually paid in taxes. The amount that someone pays in taxes depends on the tax rate and brackets, but that is only part of the picture. If the tax brackets and rates were all the mattered in the tax code, it wouldn’t be several thousand pages long. I think we can agree that what really matters is what taxes people actually pay, not what taxes they theoretically would pay according to their tax bracket’s marginal rate. So, even though Reagan reduced the marginal tax rate on the rich, that doesn’t necessarily mean that the rich are paying less taxes.

I won’t go through the details of my process like I did last time. Here are some graphs representing how the tax burden and income are distributed, and how that has changed since 1979. Click on the graph to view a larger version.

Not coincidentally, the two graphs look very similar. The interesting thing to note is that the rich are paying a much greater share of the tax burden, but they also are making a greater share of the income. We have to adjust the tax share by the income share to determine if the Reagan tax cuts increased or reduced the tax burden on the rich. Here is the resulting graph:

This is a bit more interesting than the graph when looking at the Bush tax cuts that I discussed in the last post. The tax burden picture actually hasn’t changed very much, but there are some small changes. Firstly, the poor and most of the middle class (up to the 60th percentile) are paying a smaller share of taxes than before Reagan. Secondly, the upper-middle class and most of the rich (up to the 99.5th percentile) are paying a greater share of taxes. Lastly, the super-rich, those in the top half percentile, are paying a smaller share of taxes than before. These are the millionaires, or the “stinking rich” as Timothy Noah refers to them.

So, what can we conclude from this? First, that the Reagan and Bush tax cuts made the tax structure more progressive for the vast majority of the population, contrary to the prevailing wisdom that the opposite is the case. The exception, though, is that the super-rich benefited from Reagan’s cuts. With this in mind, it is interesting to note that Democrats may be backing off of the fight to let the Bush tax cuts expire on those making over $250,000, and are setting their sites on the millionares instead:

Part of the hesitancy with hiking taxes on the rich, I think, stems from the birth of this “lower upper class.” Americans do really want to soak the rich. But a household headed by a well-paid nurse and a police chief might make $250,000 a year, the income point at which President Obama wants to let taxes rise by letting the Bush tax cuts expire. My guess is that most Americans want to raise taxes on these guys, but not on that nurse and police chief, whose wealth seems reasonable and attainable.

Politically speaking, that sounds about right to me. And it also may be the right way to go in terms of “correcting” the trend that Reagan put in motion.

Again, the caveat to all of this is that “correcting” the trend is not the only way to look at the issue. We haven’t made the case, for example, that the trend needs “correcting” in the first place. There are many arguments for and against extending the tax cuts to the rich. I’m only addressing one angle of the argument: the one that argues that we should tax the rich more because they have gotten too good a deal over the past few decades. My conclusion is that this argument is overblown since the share of taxes that most families making over $250,000 has actually gone up, not down. However, the argument does make some sense when applied to the super-rich–those bringing in an income in the seven digits.

(For data tables and calculations used in this post, see here: incomeinequalityFrom1979)

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