This is the claim made by a book ,on the American economy by a centre-right economist, which I have been reading: Economic Issues by Michael Walden.
His argument is that while during the 80’s tax rates were decreased there was also a big increase in the taxable base especially in the 86 bill because lots of deductions were removed.
He quotes a study which calculates the effective federal income tax rate after adjusting for this which says that the tax rate actually increased for those making more than 1 million from 81-88. For all other groups the effective tax rate decreased and the highest percentage decrease was for the lowest income groups.
Any comment on this? It’s substantially different from the conventional wisdom about the 80’s.
Bump
Any comments anyone?
Leftists around here sometimes criticize Reagan ,his tax cuts in particular, for being regressive so I thought someone might have something to say.
Actually I too believed that the Reagan cuts were regressive so I was kind of surprised to see the argument to the contrary. I am not entirely sure about its accuracy though.
CP, I did actually try to find some reviews of your author, but I wasn’t able to (at least not online). I did learn that he’s a professor at North Carolina State–for what that’s worth. Those findings are contrary to everything I’ve read on the subject; but that’s all I can say, alas.
“Those findings are
contrary to everything I’ve read on the subject;”
Any links for this? I would be especially interested in a study which takes into account changes in the taxable base like the study I mentioned and which considers both the big tax bills 81 and 86. I believe it was the 86 bill which had the more “progressive” features.
Note that it’s not sufficient to note the rising inequality of the 80’s since that could easily have been driven by other forces like technology.
BTW the study which Walden uses is by a conservative think-tank called the James Madison Institute so ,like I said , I took it with a pinch of salt. Unfortunately it’s not available on their website.
CP, I was speaking much more generally. Here is a 1988 article from The Atlantic Monthly that you might find interesting (though it doesn’t address your specific query).
http://www.theatlantic.com/politics/ecbig/edsalleq.htm
Perhaps someone with more specialist knowledge will answer your question. If not, you might want to try e-mailing an economics professor. I know that DeLong’s website (which I’ve posted links to on other threads) welcomes e-mail commentary and I’d guess questions are welcome too.
http://www.tcf.org/Publications/Basics/Tax/History.html
Check out figure 5 which , I believe, covers the same “effective” tax rate that Walden talks about.
It appears to indicate that while the 81 cut was indeed regressive by 1989 much of this had been reversed. From 80-89 the top 20% got in absolute terms about a 2.5% cut whereas other groups got perhaps a little less than 2%. In terms of percentage decreases I think this means that in 89 the tax system was roughly as progressive as in 80.
By 93 the tax system was more progressive than in 80 according to the article.
A little correction:
In terms of percentage decreases obviously the lower quintiles get much bigger decreases. In terms of a metric like the slope of the tax rate function ,though, I think it’s accurate to say that taxes were roughly as progressive in 89.
Figure 5 evaluates tax rates as a percentage of GDP. What this demonstrates, if anything, is that GDP is often a misused metric. In this particular case, if we want to evaluate the tax burden it is not enough to know the percentage of GDP represented by each quintile’s taxes we also would need to know the percentage of GDP generated by each quintuile. If we had that information, we might at least offer some meaningful measure of burden.
One thing even a cursory glance at figure 5 demonstrates is that taxation as a percentage of GDP has decreased significantly since 1980. One thing even a cursory glance at the next chart (marginal tax rate) shows is that marginal tax rates in the same period (ending 1993) have decreased the most for the highest levels and the least for the $25,000 range. Does this mean teh tax cut was regressive? Not in and of itself. the chart lists “taxable income”, so we would need to know exactly hos that figure is being defined and whether the details of that definition mitigate the discrepancy between upper and midle income levels. We would also have to have figures for “bracket shift” to know whether increased income for a significant number of tax payers mitigated the simple tax percentages. The chart certainly suggests that the tax cuts of 1980 were regressive with respect to the burden on the upper and middle classes, but that is all.
Actually the GDP label on the y-axis is probably a mistake. First of all it contradicts the text and secondly if you add up all the figures for say 1985 you get more than 35% which is much more than total federal taxes as a percentage of GDP. So I believe the chart does measure the effective tax rate for each group as the title says.
“The chart certainly suggests that the tax cuts of 1980 were regressive with respect to the burden on the upper and middle classes, but that is all.”
Hmm. Do you mean the tax cut of 1981 or the tax cuts of the 80’s?
Like I said I think the chart shows that the 81 tax cut was regressive but that across the 80’s the tax cuts were roughly neutral.