Income Tax Changes in the Reagan Era

OK.  I really don't want to hear any more about Reagan having done much to help the middle class.  Or about offsets, either.  Here it is, graphically.  Data is from The Tax Foundation.  Graphs, by me, at an expense of considerable time and effort, I might add.  This is based on the tables for a married couple, filing jointly.

First, Tax rates at various income levels. This is based on taxable income, after exemptions, exclusions, deductions, and whatever, etc. and so forth.  This is the bottom line number you take to the tax tables.  Each line represents the tax rate for a given income level, over a time span from 1978 to 1994, to bracket the Reagan - Bush I era..    This not the effective rate - it is the marginal rate, paid on the last dollar earned.

Two features stand out.  First is bracket collapse.  By 1988 there are (effectively) only three brackets.  From '88 through '90, at some high level, the top rate reverted to 28%.   By way of contrast, in 1978, there were 26 brackets! 

Second is the imposition of the income tax on the absolute lowest earners.  In 1987 the zero bracket was eliminated.  By 1988, someone earning $1 was paying the same marginal rate, 15%, as someone earning $20,000.  So much for offsets!

There is some decline in rate during the early '80's at the $10,000 and $20,000 levels.  But remember, these years were characterized by high inflation.  Cost of living adjustments and other negotiated wage increases caused bracket creep as nominal wages increased.  More on this later.

In 1980, $20,000 was not a shabby wage, placing an earner well into the third quintile, which spanned wage levels of $17,510 to $24,800.   Income quintile data from the U.S. Census Bureau.

The second graph shows the actual amount of tax paid for various levels of taxable income.  Taxable income levels shown are $3000 (dark blue), $5000 (pink), $10,000 (yellow), $20,000 (blue), and $30,000 (purple.)   To put the effects of inflation and bracket creep into perspective, the red line shows the actual amount paid at the top of the second income quintile.  That might be a decent proxy for someone in the middle class.

Tax paid by the $20,000 earner decreases from $3225 in 1981 to $2371 in 1986.  This trend reversed with the tax reconciliation act of 1986.  By 1988, he was paying $3000.  Of course, unless he was getting regular wage increases, he was also being devoured by inflation.

Meanwhile, the $30,000 earner (purple line,) well into the 4th quintile in 1980, saw his taxes go down, and stay down.  Though by 1988, he was only in the lower third of the third quintile.  By 1993, he sank further, to the top of the second quintile.  The point is that income in the $20 to 30K range was pretty decent for a middle class family in 1980, but not so much by 1988.

Now, one last graph, showing the effects on some high income earners.

 

Because, you see, everything we've looked at so far is decimal dust.  While the changing tax code might have thrown a few hundred bucks at someone making $20,000, the change from 1980 to 1988 reduced the tax burden by $71,724 for someone earning $250,000.   The amount he paid is shown in the orange line.  Even the decrease for the $50,000 earner (brown), which might seem considerable ($14,778 in 1980, $10,133 in 1998) pales into insignificance.  In fact, the reduction from $41,998 to $25,338 for a $100,000 (green) earner is paltry by comparison.  These are people who were doing very well, indeed.  In 1980, $50,000 placed an earner deeply into the top quintile.

An important point needs to be re-emphasized.  This is all based on TAXABLE INCOME.  The rich have many loopholes and tax avoidance schemes which are simply not available to those at lower pay scales.  If someone has taxable income of $250,000 you can bet his total income is a hell of a lot higher.

Nor does this account for capital gains taxes, which are levied at even lower rates.  Again, access to this favored bracket is severely limited for the non-wealthy.

Another thing not considered here is the concurrent increases in payroll taxes for Social Security and Medicare

So, as ugly a picture as these graphs present, the reality is far worse.
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