Many believe the Reagan and Bush tax cuts overwhelmingly benefited the wealthy. However, data from the non-partisan Congressional Budget Office (CBO) shows that poor and middle income Americans have benefited more than the wealthy.
In 1979, the poorest 20% of earners paid no income tax. By 2007, that same group had a negative income tax rate of 6.8%. In other words, they took home 6.8% more than they paid in to the federal government. Middle income Americans paid an effective income tax rate (the amount paid after deductions) of 7.5% in 1979. That rate was cut to 3.3% in 2007, a drop of more than 50%.
What about those dastardly one percenters? Back in the days of Jimmy Carter, Americans in the top one percent of earners paid an effective tax rate of 21.8%. The effective tax rate fell all the way to ... wait for it ... 19%.
Even when taking into account all federal taxes, the poor and middle class have benefited more than their wealthy counterparts. In 1979, the total effective federal tax rate (including payroll taxes, excise, capital gains, estate, and corporate taxes) was 8% for the poorest Americans and 18.6% for middle income earners. Thanks to the Reagan and Bush tax cuts, those rates fell 50% and 23%, respectively. The top one percent of earners had their total effective tax rate fall 21% over the same time period.
The tax code has also become more progressive. As indicated above, the top 1% of earners now pay an effective income tax rate of 19%, nearly six times the percent paid by middle income earners (3.3%). In 1979, the differential between the rate paid by the top one percent was less than three times that of middle class earners.
Not surprisingly, the wealthy are also paying more of the tab now than they did 30 years ago. In 1980, the top 5% of income earners paid 37% of all income tax revenue, while the bottom 50% paid 7%. By 2009, the top 5% of earners paid a whopping 59%, while the bottom half of earners paid just 2.25% of the total pie.
The wealthy also pay more than their representative income would dictate. According to the most recent data available from the IRS, the top 1% earned 17% of the total income in 2009. Meanwhile, they paid 37% of all the taxes paid. The bottom half of earners took in 13% of the 2009 total taxable income, yet paid just 2.25% of the total tax revenue.
But haven’t all these tax cuts blown a hole in our budget? The answer is no. Despite across the board tax cuts, revenues remained at or near historic levels as a percentage of GDP until the financial collapse in 2007. In fact, tax revenue as a percentage of GDP was exactly the same in 1979 as it was in 2007: 18.5%. With the recession, tax revenue has dipped to 14.9% of GDP, while spending has risen to 25%, which accounts for our widening deficit.
If current tax rates are left in place, the CBO projects that tax revenue will return to historic levels by 2021, while spending will remain well above historic levels, 26% of GDP. The picture gets even worse with time. The CBO predicts spending to reach 34% of GDP by 2035. It would be impossible to collect 34% of GDP in revenue without steep tax increases on all Americans; including the poor and middle class. There simply aren’t enough rich people to pay the bill. To put this in perspective, in order to close the budget gap in 2010 solely on the backs of those making more than $250,000, the two highest tax brackets would have to rise to 132 percent and 142 percent. Of course, it’s impossible to tax individuals more than 100%; even if it were desirable.
In sum, the tax cuts enacted by Reagan and Bush have benefited the poor and middle class more than the wealthy. Their taxes have been cut more drastically than wealthy Americans, and many have been taken off the tax rolls altogether. In 2009, a majority of Americans paid no federal income tax. The poor and middle class also pay a far lower percentage of the total revenue pie now. Despite across the board tax cuts, revenues have remained essentially constant. Unfortunately, our spending has ballooned, and is only projected to increase with time.
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