Supply Side Was Sweetest Deal for the Richest 10%

The richest 1% of Americans are paying an average of $82,000 a year less in taxes today than they would have under the tax system in effect before the “supply side” revolution that began in 1978, according to a research study released Thursday.

By contrast, all but the most affluent 10% of taxpayers are now paying higher federal taxes--income and Social Security taxes combined--despite Congress’ efforts in the 1986 tax overhaul to reduce the burden on middle- and low-income persons.

The report, prepared by the labor-sponsored Citizens for Tax Justice, is part of a campaign by congressional Democrats to highlight how tax burdens have shifted away from the very wealthy to the rest of the population.

“It’s time to reject this upside-down approach to tax policy and restore some real fairness to the federal tax system,” said Robert S. McIntyre, the group’s director.

The report was embraced eagerly by House Majority Leader Richard A. Gephardt of Missouri, who heads a Democratic task force that is promoting a tax package aimed at providing some relief for middle-income voters.

“The arrows of fairness are pointed in the wrong direction,” Gephardt told a news conference at which the report was released. He charged that the White House is pushing a capital gains tax cut, which would largely benefit wealthy taxpayers, because Bush “believes the numbers are headed in the right direction and need another push.”

Many Democrats are also interested in proposing a tax hike for the highest-income Americans. But Gephardt said congressional Democratic leaders have not yet decided whether to endorse an income-tax increase on the wealthy.

The party’s leadership in Congress is also looking for a way to roll back Social Security taxes, which have added more to the federal tax burden on middle- and lower-income Americans than income tax cuts have subtracted. Top Democrats are afraid, however, of a plan by Sen. Daniel Patrick Moynihan (D-N.Y.) to cut Social Security taxes by $62 billion over the next two years because the proposal would dramatically widen the federal deficit.

Rep. Dan Rostenkowski (D-Ill.) is trying to fend off all efforts to cut taxes. Rostenkowski, who heads the tax-writing House Ways and Means Committee, is expected to argue in a series of public appearances over the next few days that some taxes should be raised. He is prepared to call for boosting the 28% tax rate on families with incomes above about $200,000 to 33% and to advocate an increase in gasoline and other excise taxes.

Conservatives strongly dispute the Democratic argument on tax fairness.

Sharply lower income tax rates for most Americans, with substantial tax cuts for the wealthy, were necessary to help revive economic growth, they argue. They point out that the rich, whose incomes grew substantially in the 1980s, pay considerably more in taxes today than they did 12 years ago.

“An influential minority of Democrats (are trying) to revive old fallacies about how income and wealth are shared, at the expense of constructive tax policies to ensure that both income and wealth continue to expand,” argued Alan K. Reynolds, a well-known “supply side” economist at Polyconomics, a Morristown, N.J., consulting firm. Supply siders argue that lower taxes stimulate economic growth, which in turn raises overall tax revenues.

The Citizens for Tax Justice study said tax changes since 1977 are worth $93.1 billion in savings this year to the richest 10% of Americans. By contrast, the remaining 90% are worse off by $25.6 billion.

The study went back to 1978, when President Jimmy Carter was in office, because that was the year Congress first sharply cut the tax on capital gains, which are levied on profits from the sale of investments in stocks, bonds, real estate and other assets. Following President Ronald Reagan’s election, lawmakers in 1981 approved a huge across-the-board income tax cut for both individuals and corporations.

The 1986 tax overhaul partially reversed the trend toward granting tax cuts to the wealthy by eliminating a number of loopholes, the report noted. The result was to boost taxes by about $17 billion on the most affluent 5% while reducing income taxes somewhat for the bottom four-fifths of all families.

Overall since 1977, the Citizens for Tax Justice report concluded, the pretax income of the lower 60% of American taxpayers, adjusted for inflation, has fallen by roughly 14%. Despite that decline, taxes on that group have increased by almost $19 billion.

For the top 1% of all Americans, however, inflation-adjusted income has soared by 86% to an average of almost $549,000. Their inflation-adjusted federal tax burden has fallen by 15%, or $84 billion.

FAMILY INCOME AND TAX REFORM

Chart shows the percent change in inflation-adjusted family income, before and after taxes, between 1977 and 1990. For example, a family earning $30,960 has 6% less pre-tax income in 1990 than it had in 1977 (in constant dollars) and 7% less after taxes.

INCOME LEVEL PERCENT CHANGE 1977--1990 After Tax Before Tax $7,725 -14% -14% $19,350 -9% -10% $30,960 -6% -7% $44,900 2% 1% $63,660 12% 11% $82,200 13% 12% $125,800 23% 24% $549,000 86% 110% Source: Citizens for Tax Justice