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Whose Taxes Have Fallen the Most Since 1980?

David Callahan

It's no secret that wealthy Americans have enjoyed low taxes since the dawn of the Reagan era—even as they have scored huge income gains thanks to changes in the economy. A less well-known fact, though, is that middle and low-income earners have seen far bigger cuts in their federal taxes, which has helped offset stagnant incomes for these groups and may explain why there hasn't been a bigger revolt against income inequality in America. 

Big reductions in taxes for all earners have also been a driver of deficits over the past few decades, with taxes falling to historic lows for most Americans even as the U.S. expanded Medicare coverage and fought two wars. Most insidiously, political leaders of the past three decades used all the surpluses generated by Social Security and Medicare—which accrued following a 1983 payroll tax hike—to cover deficit spending and partly enable low tax rates. The Millennial generation of earners will foot the bill for this long party in the form of trillions of dollars in interest payments.

Let's take a closer look at the numbers. According to the CBO, the average federal rate for all taxes on the top 1 percent (including income, payroll, and capital gains) fell from 35 percent in 1979 to 24 percent in 1986, after the Reagan tax cuts. Taxes on top earners came back up under Clinton, but then fell again and their average rate was around 30 percent when George W. Bush left office. All told, the affluent were paying about 17 percent less in taxes in 2008 than they were in 1979. Now that top rates have gone up again, thanks to the fiscal cliff deal at the start of this year, taxes on the affluent are likely back near where they were before Reagan took office. 

Of course, taxes tell only part of the story about the changing fortunes of the top 1 percent, who've enjoyed a nearly 300 percent increase in income since 1979. The average household in the top 1 percent made $500,000 in 1980; in 2008, they made $1.5 million. The wealthy also grabbed a bigger share of all national income, nearly doubling their slice of the pie. 

Now let's take a look what happend lower down the income ladder. The average federal tax rate (again, including all taxes) for the bottom fifth of earners was 7.9 percent in 1980—and 18.9 percent for Americans smack in the middle of the ladder.

The burden of the middle group went down slightly under Reagan, but the lowest 20 percent actually saw their tax burden go up during the 1980s—thanks to the aforementioned payroll tax increase. 

During the 1990s, though, Clinton expanded the Earned Income Tax Credit and the rate for the bottom fifth of earners fell to around 6 percent. After Bush's taxes cuts in 2001, the rate for these earners fell under 5 percent. Obama's further tax cuts for this group—which were extended for a few years under the fiscal cliff deal—drove their rate down to 0 percent in 2009.

Not incuding that last round of Obama cuts, the poorest earners saw their taxes fall by more than 50 percent between 1980 and 2008. The middle quintile saw their taxes fall by about 33 percent during this same period. 

Of course, those huge tax decreases were scant compensation for largely stagnant earnings—with both low and middle income Americans earning barely more in 2008 than they did in 1980. So, without question, the wealthy have been the big winners overall.

There are a few takeaways here. First, the income story is far more important than the tax story, and those who obsessively focus on taxes miss the bigger economic picture. Modestly lower taxes under Reagan and Bush were not the main driver of the huge gains for the wealthy. Meanwhile, big tax cuts did little to change the fortunes of many ordinary Americans who got slammed because they have not been able, or allowed, to share in the economy's growth over the past three decades. 

Perhaps the main effect of big tax cuts for the bottom half of households was to enable them to run in place and avert what might otherwise have been a major rebellion against an economic system that screwed most Americans while lavishly rewarding those at the top. In effect, the wealth elite bribed the public with deficit financed tax cuts—and cheap credit—to keep quiet in the face of rising inequality even as those elites steadfastly refused to raise wages or otherwise share the wealth with workers.

Second, while only the rich benefitted from the economy of the past three decades, all income groups tangibly benefitted from the low tax regime of that period. All groups thus bear some responsibility for the huge debts incurred during this period—debts that will be passed along to our children. Taxes on the wealthy can and should go up further to deal with this problem, but tax hikes on the non-affluent are both necessary and justifiable at this point. The average tax rates for all earners fell from 22 percent in 1980 to 18 percent in 2008. We need to go back to where we were thirty years ago to have any chance of addressing our fiscal challenges. 

Good luck with that, though. Because all this underscores how decisively conservatives won the battle over taxes in recent decades. One reason for that victory is that Democrats pretty much surrendered on this issue, narrowing their agenda down to just raising taxes on the top 1 percent—which doesn't actually raise that much money. So it is that the fiscal cliff deal embraced by Democrats locked in 85 percent of the Bush tax cuts, handing conservatives a historic victory. 

In short, the low tax regime is now a bipartisan cause. And, as $16 trillion in national debt attests, it has been a costly one.