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February 6, 1992
"The Take, Historically, has been Stable - The Tax Cut Mantra"
San Jose Mercury News

By Timothy Taylor
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POLITICIANS have a special mantra in an election year. "A tax break for the middle class," they hum, and audiences of voters applaud feverishly.

But despite the ritualistic invocation of tax cuts, the evidence shows that the individual income tax is taking just about as large a share of the economy now as it has been for the last four decades. For example, the individual income taxes collected 8.2 percent of gross national product in 1952 and 1953, and 8.6 percent in 1990.

In the proposed 1993 budget, $520 billion in income taxes would take 8.3 percent of the total economy. Despite President Bush's recent rhetoric emphasizing tax cuts, this level of taxation is well within the historical range. Personal income taxes have been below 8 percent of GNP for 10 of the last 40 years, between 8 and 9 percent of GNP in 25 of the last 40 years, and above 9 percent of GNP in the remaining five years.

But even if the overall level of income taxation isn't rising, the clamor of middle class persecution could still have some truth in it, if the burden of the tax has been shifted from the rich and the poor to the middle.

From 1960 to 1974, a family of four started owing income tax when their income hit about 90 percent of the poverty level. In 1975, the tax code was amended so that the income tax didn't kick in until income exceeded the poverty line by 20 percent; no family of four below the poverty line owed income tax.

However, tax protection for the poor eroded through the late 1970s and early 1980s. By 1984, a poor family of four again owed income taxes when its income exceeded 82 percent of the poverty line. But the Tax Reform Act of 1986 changed that, and now that family wouldn't owe any income tax until its income exceeded 127 percent of the poverty line.

So it is true that the tax burden has recently shifted away from the poor, similar to the way it did in the mid-1970s. However, cutting taxes on the poor doesn't cost very much, so it's hard to believe that middle class taxpayers would feel overburdened by this change. Moreover, even if they do feel burdened, proposals to shift the tax burden toward the poor have an unpleasant Scrooge-like ring.

Of course, everyone supports increasing the tax burden on all the rich people who have more income than they do. However, evidence on whether the tax burden has shifted from the rich to the middle-class is not especially clear.

Exhibit A in arguing that such a shift has occurred is the lower marginal tax rates on the wealthy. For example, back in 1952, the tax tables said that 90 percent of any amount earned over $100,000 (about $500,000 in current dollars, adjusting for inflation) should be paid as taxes. Back in 1952, even those with income of $16,000 ($80,000 in current dollars) were in a 56 percent tax bracket!

Tax rates in the top income brackets have fallen sharply since then, first with the Reagan tax cuts in the early 1980s and then with the Tax Reform Act of 1986. A single filer would now pay income tax of 33 percent on income earned above $75,000.

Exhibit B is that as tax rates on the wealthy have declined, so has the proportion of their income paid in income taxes. Through the 1950s and 1960s, the very wealthy often paid 40 to 50 percent of their income in federal taxes; today, the figure is more like 25 percent.

This evidence might seem to end the argument. Surely, if the wealthy are paying lower tax rates and a lower proportion of their income in taxes, the middle class must be taking up the slack, right? Well, no.

Back in 1950, 11 percent of total taxes were paid by those with adjusted gross income above $100,000. Today, adjusting for inflation, a comparable level of income would be $500,000. And in 1988 -- the most recent year for which detailed IRS data are available -- those reporting more than $500,000 in income paid 15.4 percent of total income taxes.

Evidence for the 1980s tells a similar story. For example, the top 1 percent of families by income paid 12.8 percent of total federal taxes in 1980, 13.3 percent in 1985, and 15.7 percent in 1990, according to Congressional Budget Office calculations.

So the wealthy are paying a smaller share of their income in taxes, but a higher share of the total tax bill. Both liberals and conservatives believe obvious conclusions can be drawn from these facts, but they disagree on what the conclusions are.

Liberals tend to conclude that the falling tax rate proves society hasn't asked enough from the wealthy. Conservatives tend to conclude that high tax rates are counterproductive, because they cause the wealthy to invest in high-priced tax consultants -- or just to take more time off from work -- and thus avoid paying those high rates.

My guess is many of the complaints about taxes are from people who are venting concern about their standard of living, especially during a recession. People who complain about high taxes may also be feeling the bite of the "social insurance" taxes that support Social Security and Medicare, which also come out of their paychecks, and which have risen sharply.

I suspect that most of us, rich and middle class alike, could afford to pay a bit more in taxes, if it was really necessary. But we have a strong and understandable reluctance to let the government budgeteers define what is needed.

Friday: Corporate Taxes

Chart shows total federal tax receipts and individual income taxes as percentages of the gross national product (1950 - 1991, fever chart)

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