INCOME AND PAYROLL TAXES

Not surprisingly, supply-siders disagree over which tax tables should be used to show changes in tax rates over the 80s. They prefer to show only federal income tax, because it shows that everyone got a tax cut, the poor most of all. Here is a chart that Rush Limbaugh featured in his book See, I Told You So:

Federal Tax Reductions1



                           % of income paid 

             Top income    paid in taxes:      1992 percentage 

Quintile     in bracket    1980      1992      of taxes cut 

---------------------------------------------------------------

Poorest 20%   $20,300     -0.5%     -3.2%     -540.0% 

Second 20%    $36,800      4.5%      2.8%     -37.8%

Middle 20%    $64,000      7.9%      6.2%     -21.5% 

Fourth 20%    $82,400     11.0%      8.7%     -20.9%

Richest 20%   -------     17.2%     15.6%     -09.3% 

Richest 1%    -------     29.9%     22.0%     -07.9% 

Liberals have two objections to this chart. The minor objection is that this chart includes the 1990 tax hike and the 1991 increase of the Earned Income Tax Credit, both of which supply-siders actually hated. But they make it look better on the poor, and that's why supply-siders include them in this chart.

The major objection is that this chart omits payroll taxes (Social Security and Medicare). Most Americans pay the majority of their taxes in payroll taxes. And these taxes are heavily regressive -- they fall hardest on the poor. Why? Because there is a maximum taxable income for Social Security; today, you pay this tax only on the first $60,600 of income. What this means is that the richest 10 percent pay a vanishing percentage of their income on Social Security:

Effective Social Security Tax Rates (1993)2



   Income:    Rate: 

   $37,800    7.65% 

  $378,000    1.46 

$3,780,000    0.1 

When you include payroll taxes to Rush's chart, this is the result:

Combined federal and payroll tax rates (1993 dollars):3



           Avg. Income   Total Tax Rate    % Change,    $ Change, 

Quintile     1989        1980      1989    1989 taxes   1989 taxes 

---------------------------------------------------------------------------

First 20%    $8,642       8.1%     9.3%     +15.1%      +$104 

Second 20%   20,743      15.6     15.7       +0.6         +21 

Third 20%    33,659      19.8     19.4       -2.0        -135 

Fourth 20%   49,347      22.9     22.0       -7.6        -444 

Fifth 20%   112,700      27.6     25.5       -7.6      -2,367 

Top 1%      576,553      31.9     26.2      -15.0     -32,864 

This chart shows that tax rates rose on the poor but fell for the rich. Supply-siders have objected to this revised chart for a few reasons. One rather mistaken argument is that payroll taxes are employer-paid and have no business being included in a tax debate on what the employee pays. But this is a huge error. The 1995 Grolier Encyclopedia says under its entry for "Social Security":

"U.S. social security programs are funded... through payroll taxes collected in equal amounts from employees and employers."

In 1992, payroll taxes for the lowest quintile were 15.3 percent. The employee paid 7.65 percent from his paycheck, and the employer paid the other 7.65 percent from his profits. The CBO chart above includes only the employee's 7.65 percent for its calculations.

Another supply-side objection attempts to blame the spectacular rise of Social Security taxes on Carter, not Reagan. In 1977, the Social Security program was in financial trouble, and Congress bailed it out. They adopted a multi-year schedule of steadily increasing taxes, with the final hike occurring sometime before the year 2030. However, Congress underestimated how deeply in trouble Social Security was, and in 1982 it again fell on rocky times, with a record $11 billion shortfall. So in 1983, Congress voted to greatly accelerate the schedule of tax hikes that Congress adopted in 1977. Between 1977 and 1990, this resulted in nine tax hikes. They were:

Social Security Tax Rates4



        Employer, 

        Employee,    Self-       Maximum Taxable Income:

Year    Each         Employed    Current     Constant (82-84 CPI)

----------------------------------------------------

1977    5.85%         7.9%       $16,500     $27,209 

1978    6.05          8.1         17,700      27,116

1979    6.13          8.1         22,900      31,602

1980    6.13          8.1         25,900      31,469

1981    6.65          9.3         29,700      32,611

1982    6.7           9.35        32,400      33,534

1983    6.7           9.35        35,700      35,807

1984    7.0          14.0         37,800      36,326

1985    7.05         14.1         39,600      36,749

1986    7.15         14.3         42,000      38,346

1987    7.15         14.3         43,800      38,544

1988    7.51         15.02        45,000      38,070

1989    7.51         15.02        48,000      38,736

1990    7.65         15.3         51,300      39,296

1991    7.65         15.3         53,400      39,196

(with no scheduled increases in rates thereafter)

I shall include more detailed charts of social security and income tax rates by decile at the end of this page.

So, who's to blame for hiking the most regressive tax that Americans pay? The true answer is perhaps not what you would think: the corporate special interest system. As described in an earlier section, the corporate special interest system arose in 1975 - and two years later, it persuaded Congress to pass a schedule of hikes that allowed the richest 10 percent of tax payers to pay deeply regressive rates on Social Security.

President Carter and the Democratic Congress surely deserve blame for passing this regressive schedule in the first place. But the Republicans are equally, if not more, to blame also. The Republicans controlled the Senate from January 1981 to January 1987. Although the House receives the President's budget proposal first, both chambers of Congress vote twice on the budget, once on the original bill, and again after the conference committee. Thus, the Senate is a full player in the budgetary process. And with Reagan in the White House wielding the veto pen, Republicans were actually in charge of the budget process in 1983, when the Social Security schedule was accelerated.

Which raises a crucial point: Reagan and Congress didn't have to accelerate this schedule, especially with such a vengeance. They could have adopted any measure to save Social Security they wanted to. The Democratic Congress of 1977 was not holding a gun to their heads in 1983; indeed, Congress is famous for ignoring and changing previous budget and deficit-reduction plans. (Remember the ill-fated Gramm-Rudman deficit cuts?) Fairness demands that Reagan and Congress accept personal responsibility for all budgets passed on their watch.

A much better solution than Carter and Reagan adopted is to make Social Security a truly progressive tax. That would go a long way in making the program solvent, dependable and trustworthy again. Today, economists are warning that when the Baby Boomers start retiring in 2020, they are going to place such a heavy load on Social Security that it will require a tax bailout. Pundits have seized on this fact to call for the elimination of Social Security altogether, to be replaced by individual retirement accounts. This would essentially return us to the conditions that existed before 1935, when it was common to see countless old people starving in the streets after they retired. The problem is that about a third of all Americans earn too little to save for their retirements. And in a nation where income inequality is as extreme as it is in America, calling for people to save in IRAs is a recipe for disaster for the poor.

EFFECTIVE TAX RATES BY POPULATION DECILE:5

Individual Income Tax

Decile     1980     1984     1988

First      -.5%     -.4      -.8

Second      .2       .3      -.4

Third      2.6      2.8      1.7

Fourth     5.5      4.8      4.1

Fifth      7.2      6.3      5.9

Sixth      9.1      7.8      7.2

Seventh   10.4      8.7      8.3

Eighth    11.6      9.7      9.0

Ninth     13.2     10.9     10.4

Tenth     18.0     15.1     15.5

Top 1%    22.9     18.8     19.7

Social Security Tax

Decile    1980     1984     1988

First      3.4%     4.4      5.0

Second     4.3      5.0      5.9

Third      6.4      7.5      8.6

Fourth     7.8      8.3      9.4

Fifth      8.1      8.9      9.8

Sixth      8.6      9.4     10.4

Seventh    8.9      9.6     10.5

Eighth     9.0     10.0     10.9

Ninth      8.4      9.7     10.6

Tenth      5.9      5.6      6.0

Top 1%     1.5      1.7      1.8

All Taxes

Decile     1980     1984     1988

First       6.9%    10.3      9.7

Second      7.8      8.7      8.6

Third      12.1     13.4     13.3

Fourth     16.2     16.1     16.5

Fifth      18.3     18.0     18.5

Sixth      20.3     19.6     20.2

Seventh    21.8     20.7     21.4

Eighth     23.1     22.0     22.3

Ninth      24.3     22.8     23.4

Tenth      28.9     24.8     26.6

Top 1%     34.6     26.9     29.3

Return to Overview
__________________
1Rush Limbaugh, See, I Told You So,(New York: Simon & Schuster, 1993), p. 127. Although Rush cites the U.S. Bureau of the Census for this chart, it actually comes from the Congressional Budget Office.
2Internal Revenue Service.
3Congressional Budget Office, 1992 Greenbook.
4Social Security Bulletin, Annual Statistical Supplement, 1993.
5Congressional Budget Office, The Changing Distribution of Federal Taxes: A closer look at the 80's, July 1988, CIS#J932.31