Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Sunday, February 21, 2010

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.
.

5 comments:

J said...

Well, the point holds: Reagan era inaugurates the most substantial tax cuts across the board, for better or worse.

Avg. household income is like $46,000--so that's middle class (single income a bit less, but whatever). Under Carter and previous admins, that was taxed nearly 60%. Under RR, 50%, but 35% at end of era. Deductions might complicate matters. The slight raises on "payroll taxes"--you mean,medicare and SS, demo programs--don't phase that, however.

So, if the middle class votes its wallet, it will probably vote GOP, unless there's a Demopublican like Clinton who doesn't raise taxes much....

Jazzbumpa said...

By now, J, if I were you, I would be accusing you of being a cryto-Reaganite.

Cheers!
JzB

J said...

Not exactly, but I don't mistake economics for ethics, jzb. I'm for higher taxes on wealthy, especially in regards to capital gains, even say Carter rates, though the Carter bureaucracy certainly stifled the market economy. Being in favor of greater egalitarianism doesn't mean one blesses a welfare state or handouts to any and all. And Reagan did uphold a few New Deal like policies (including strengthening Medicare and SS).

And I would say middle class starts around 30 grand per year--and those people did benefit from RR's tax cuts. Or, median family income, instead of individual: most of the data I looked at says that's around 45 grand per annum . Adjust for inflation (along with the "real" rates of RR era), and the middle class did benefit, from like 30,000 grand+, tho' you are correct the wealthy benefitted quite a bit more, which I never disputed.

I just don't think a wealthy person who insists on lower taxes is evil per se, or even in GOP; he's defending his class interest, even if we don't agree. Few people would say, I want to pay more in taxes!. Really, most data shows the wealthy suburbanites tend to be liberal/demo anyway; and the pelosicrats themselves are not doing much in terms of kicking say capital gains back up .

BadTux said...

Once we throw in the payroll tax increases, however, things get even worse for those at the lower end of the bracket. They pay payroll tax on their entire income, while those in the upper bracket pay payroll tax only on a small percentage of their bracket. For example, when I was making $8,000 per year as a pizza deliverator in the late 1980's, I was paying payroll taxes on 100% of that income. Someone making $500,000, though, only paid payroll taxes on the first $75,000 of his income -- and that only if he earned it via work, as vs. via capital gains or interest or dividend income. So my payroll tax went up by 7.2% from 1980 to 1990 (adding up employer+employee share). But for the person making $500,000, his payroll tax went up only 1%.-- i.e., I got a massive tax hike, he got a tiny one.

And before someone says, "but... but... payroll taxes aren't taxes!" -- uhm, what part of the word "tax" do you not understand? It's money out of my pocket, it's taken out by the government, it's a tax. Period. The fact that at some point in the future the government is promising to give me services in exchange for that tax is irrelevant, *every* tax is hypothesized upon the proposition that the government is going to provide me with some services in exchange for that tax (such as roads, national defense, police protection, court protection of my property rights, whatevah!). A tax is a tax is a tax, of course of course of course.

BTW: I now make more money than the current payroll tax cap. Would I be upset if the government took out the full 6.2% OASDI on my full income, rather than just on the first $106,800? Uhm... *NO*. It would make no material difference to me, I make far more money than I need for my daily use and the extra money is literally gravy to me. I don't suggest raising that cap right now during a depression, but once things get back to normal and we have to think about how to pay for the baby boomers' retirements, it's something we should do.

- Badtux the Well-taxed Penguin

Jazzbumpa said...

Right. I mentioned that briefely at the end.

Actually, I see no problem removing the ceiling entirely, and doing it tomorrow. It wouldn't hurt anybody or anything.

I paid the max into SS, essentiually fr my entire career. The way my salary tracked the max over decades was almost uncanny.

For the first 20 years, I was consistently within 2 percentage points of the mean for people with my degrees and years of experience.

Cheers!
JzB the in-some-ways-centrist trombonist