IRS Is Getting Smaller Slice of Most Paychecks

A majority of Americans rushing to get their tax returns in the mail by midnight will pay a smaller share of their income in federal taxes than at almost any time since the national tax revolt first flared in California two decades ago, according to government statistics and recent studies.

Broad Reagan-era tax cuts, Clinton-era assistance for the working poor and newly effective child and education tax breaks for the middle income are combining to protect the bottom 60% or more of American families from a bigger tax bite even as their incomes are lifted by the economic boom and the fraction of the nation’s income flowing to Washington approaches a record high.

Analysts say the mix of declining tax burdens and the economy’s long, strong growth is helping to fuel a heady new public confidence. And it appears to be shaking what until recently had seemed an immovable first principle of modern American politics--that tax cuts are good, the bigger, the better. Even some fervent tax-cut advocates acknowledge that the political wind has gone out of their sails, at least for now.

“There’s not the sense of urgency,” House Majority Leader Dick Armey (R-Texas) conceded after an anti-tax rally Monday in Fredericksburg, Va. “People are saying ‘Times are so good, it’s unseemly to be asking for a tax cut.’ ”

The recent decline in tax burdens for the majority has had a flip side--an expanding burden for those in the top fifth of the nation’s income earners, and especially those in the top 5%, a category that the Congressional Budget Office says will require a family of four to make almost $200,000 this year in order to enter.

But most affluent taxpayers are doing very little complaining, in part because their incomes have risen so spectacularly during the current boom and in part because so much of their added wealth has come in the form of rising stock prices, which, in contrast to real estate, is only taxed when shares are cashed in.

“We are not hearing from high-income households to the extent we did in the past because they have done so well,” said William G. Gale, a senior fellow at the liberal Brookings Institution in Washington.

Clear Contrast to Inflationary ‘70s

Such a muted response is in sharp contrast to the late 1970s when double-digit inflation corroded the value of paychecks, pushed most Americans into ever-higher tax brackets and jacked up real estate taxes in tandem with roaring home prices, a combination to which California voters responded by approving Proposition 13 in 1978.

By now, both California property taxes and federal income taxes are indexed to protect taxpayers against inflation, and politicians in Washington and the states have spent two decades reducing the tax burden on large segments of the nation.

Tax-cut advocates assert that the cutting has not gone far enough, and they offer several seemingly powerful statistics as evidence.

The first is that the fraction of the nation’s gross domestic product going to federal taxes has risen from 17.7% in 1992 to a peacetime high of 20.5% last year. The second, and related, is that per-capita federal taxes have risen from $4,625 to almost $6,700, or 45%. “The tax burden is on the rise again and it is outrunning income growth,” said Republican presidential contender Steve Forbes.

The problem with these figures, according to tax-cut critics and impartial analysts, is that they fail to take into account how much of the recent growth in the government’s total tax take is the result of a growing economy and not a ballooning tax burden, and they wrongly suggest that the federal tax bill is borne evenly by all taxpayers.

“Technically, they are correct; aggregate federal revenues are up,” said Gale. “But it’s also true that typical families are paying less in taxes, not more.”

Measuring how much less is trickier than it first appears, not least because the agencies responsible for performing the task for the Democratic administration and the Republican-controlled Congress--Treasury, the Congressional Budget Office and the Joint Committee on Taxation--all use different definitions of income and taxes, and measure changes for slightly different groups of people.

But their results are pretty much the same: A substantial majority of taxpayers are feeling the smallest tax bite they have felt at almost any time in the last two decades.

Consider:

* Treasury reports that four-person families making the median annual wage of $54,900 will pay 7.46% of their income in federal taxes this year, the lowest since 1966. Families making double the median, or $109,800, will pay 14.11%, the lowest since 1972. Families making half the median or $27,450, will get money back.

Even if the Social Security and Medicare taxes that people pay are added in, the results are similar for the majority, with families at the median paying 15.11%, the lowest since 1976, and those at half the median paying about 6.47%, the lowest since the mid-1960s.

* Using a slightly different method, CBO concludes that the 60% of families at the bottom and in the middle of the nation’s income pile are paying the lowest fraction of their income in federal taxes since 1977, the earliest year for which the agency has figures.

An analysis of CBO figures by the liberal Center on Budget and Policy Priorities says the tax bite for families at the median--the very center of the income pile--has fallen from 19.5% in 1977 to 18.9% this year, a decline that will save them $300 to $400. This year’s tax bite will be the lowest of any in the last two decades except 1983, a year when the Reagan tax cuts were kicking in, but the government was also posting a huge deficit.

“It’s easy to get tax burdens down when you’re running a deficit, but it’s no measure of the true cost of government,” said Iris J. Lav, the center’s deputy director.

White House Points to Clinton’s Role in Cuts

Clinton administration officials are busily touting the latest tax trends, claiming they show the president making good on his earliest campaign pledges to help middle-class Americans. But independent analysts say the recent reductions in tax burden are really the product of a not-altogether-planned confluence of tax changes under Clinton and his GOP predecessors, Reagan and Bush.

“The typical American family now gets tax relief for their crucial priorities: when they buy a home, when they incur child care expenses, when they send a child to college and when they sell their home,” said Deputy Treasury Secretary Lawrence H. Summers.

Most people’s federal tax burdens have been declining for several years, but few have noticed until recently.

That is largely because the declines were small and were at least partially offset early in the decade by increases in such state levies as the sales tax. Those increases are apparent in California tax figures that show total state and local tax revenues growing from $111.96 per $1,000 of personal income in 1990-91 to $115.56 in 1994-95, according to Ted Gibson, chief economist for the state Department of Finance.

But many of the early ‘90s’ increases have been reversed by recent state tax cuts, including reductions last year in state income taxes, vehicle license fees and property taxes in California. Indeed, some analysts now believe that for a majority of taxpayers, the state and local tax burdens, as well as federal ones, have fallen.

“My suspicion is that over the ‘90s, a disproportionate share of the growth in state and local revenues has come from high-income taxpayers,” said Donald J. Boyd, director of fiscal studies at the Rockefeller Institute of Government in Albany, N.Y., and a longtime student of state tax trends. “For the majority, the burden has come down.”

Part of the reason people are now noticing the decline in federal tax burdens involves the way the latest round of tax breaks, those for children and college bills, are kicking in. About $400 of the $500-per-child tax credit that Congress passed in 1997 took effect in 1998, reducing the tax bills that many families are now paying. But because the credit was new and because only part of it kicked in, few people adjusted the amount of income they had their employers withhold.

The result: The number of refunds Washington is making is running 4% ahead of last year and their average size has jumped 15% to $1,575, according to the Internal Revenue Service.

Recent polls suggest that the combination of declining tax burdens and rising refunds is taking much of the fervor out of the drive for tax cuts, and that Americans by large majorities want to see new government surpluses used to ensure the solvency of Social Security and Medicare. But analysts caution against taking the recent change of heart as evidence that taxpayers are looking toward a new era of activist government.

“People are ready to see their money spent on Social Security or on paying down the debt. They are not ready for a whole lot of new programs,” said Karlyn K. Bowman, an expert in public opinion at the conservative American Enterprise Institute in Washington.

Last-minute help filling out your tax forms is available from the Your Taxes guide on The Times’ Web site: https://www.latimes.com/taxes

* UNDER THE MICROSCOPE

The IRS is pressured to change its ways despite a report finding no serious abuses. C1

* SAVINGS PROPOSAL

The White House unveiled a retirement savings plan for low-income Americans. C3