Distribution of the federal tax burden, share of after-tax income, and after-tax income by presidential administration and household type, 1981-2000

Journal of Sociology and Social Welfare, June, 2005 by Richard K. Caputo

Findings of this study show that the lowest- and middle-income households overall and those with children had lower total effective Federal tax rates during the Clinton administration than during the Reagan and G.H. Bush administrations. Concomitantly, the top one percent and highest income quintile households overall, those with children, and those headed by an elderly person age 65 or older without children had higher total effective Federal tax rates during the Clinton administration. Nearly every category of household type and income level measured in this study had more after-Federal-tax income during the Clinton administration than either the Reagan or G.H. Bush administrations. The study also found that the shares of after-Federal-tax income were equitable across the three presidential administrations for the lowest-income quintile households with children, while the share of after-Federal-tax income for middle-income quintile households with children actually declined during the Clinton administration. The study concludes by noting that where it counts most for individuals and families, namely in the amount of after-tax money available to households, there were no differences by presidential administration during the post-Reagan era among low-income households and where differences were found for middle-income households, they were opposite what more liberal or less centrist-left Democrats would have hoped for.

Key Words: After-tax income, Federal tax burden, tax policies of Reagan, G.H. Bush, and Clinton administrations

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This paper examined the distribution of the total effective tax rates, the share of after-tax income, and the amount of after-tax income among the bottom, middle, and highest household income quintiles, as well as the top one percent, by presidential administration between 1981 and 2000. It followed an earlier paper (Caputo, 2004) that examined a variety of socioeconomic indicators for productivity, corporate profits, and poverty by presidential administration in the latter part of the twentieth century. The former study indicated that the "great divide" thesis regarding the U.S. economy before and after the Reagan administration depended on which measure of the economy was the focus of attention. In addition, on some measures where before and after differences were detected, the nature of those differences was paradoxical, suggesting that Democratic presidential administrations catered to constituencies thought to be more aligned with Republican administrations. Corporate profits as a share of national income, for example, were highest in Democratic rather than Republican administrations and despite the increased income inequality found for the post-Reagan years, individual and family poverty rates remained relatively constant after edging upward from the 1970s but still below 1960s highs. Further, findings of that study provided some evidence corroborating neoclassic economic theory in regard to incentives and productivity and they presented a challenge to activists who equate poverty as a natural or an inevitable byproduct of the more market-driven fiscal and monetary policies of the 1980s and 1990s.

The purpose of the present study was to determine the extent that those bearing the brunt of the Federal tax burden throughout the economic booms of the mid-to-late 1980s and 1990s differed by presidential administration and household type. At the time of this study, tax-related data comparable to that used here were not available for either the 1961-1979 or post-2000 periods. Did the distribution of the Federal tax burdens among household income groups during the Reagan administration differ from that of the G.H. Bush administration or was it similar? Did the distribution of the Federal tax burdens during the Clinton administration shift from those of either the Reagan or G.H. Bush administration, or from both of them? To what extent did different lower income household types, for example those with children and those headed by seniors, contribute disproportionately more or less shares of the Federal tax burden and after-tax income than comparably structured upper income households under the Reagan, G.H. Bush, or Clinton administrations?

The Reagan and Clinton administrations presided over substantive changes in tax policy. The Economic Recovery Act of 1981 reduced the top marginal income tax rate from 70 percent to 50 percent in 1982, also effectively reducing the top rate paid on capital gains from 28 percent to 20 percent, and cut rates for lower income individuals between 1982 and 1984. The Reagan administration, however, followed the 1981 tax cuts with two tax increases. The Tax Equity and Fiscal Responsibility Act in 1982 targeted corporations and it buttressed the Social Security Trust Funds through the payroll tax, the latter of which disproportionately affected lower income earners because of its regressive nature vis-a-vis the income tax (Hulten & O'Neill, 1982; Krugman, 2004; Steuerle, 1992). The Tax Reform Act of 1986 further reduced marginal rates, this time in stages over 1987 and 1988. The top marginal rate was reduced from 50 percent to 28 percent, while the corporate rate was reduced from 50 percent to 35 percent. The G.H. Bush administration in 1990 and the Clinton administration in 1993 both increased taxes in an effort to reduce Federal budget deficits (Joint Economic Committee, 1995). In 1990, Congress increased the top marginal tax rate to 31 percent. The 1993 tax increase was the more progressive of the two, again targeting more affluent taxpayers, raising the marginal tax rate for high income payers to 38.6 percent, and reversing the 3.86 percent decline of Federal income taxes of the top 10 percent of income earners during the G.H. Bush administration (Hartman, 2002; U.S. Department of the Treasury, 2003). During the second Clinton administration, however, half the tax cuts provided by the 1997 Tax Act went to the best-off 5 percent of taxpayers, while taxpayers in the lowest 40 percent of the income scale got nothing (Center for Tax Justice, 1997).