A Shrinking Burden
By George Hager
You read that right. It may be hard to believe when every street corner seems to have a politician claiming you're overtaxed and need a tax cut. But an analysis by the Deloitte & Touche accounting firm for The Washington Post shows that Reagan-era cuts for higher-income taxpayers, Clinton-era help for the working poor and targeted tax cuts contained in the 1997 balanced-budget agreement have all helped keep federal taxes for most Americans lower than they were in 1979.
"To the extent that the economy has made everybody better off, they're better off and they're not paying as much tax as they would have under the old rules," said Clint Stretch, director of tax policy for Deloitte & Touche.
This analysis might help explain why some of the oomph has gone out of the impact of tax-cut promises. Robert J. Dole's pledge to cut taxes across the board did little for his losing 1996 campaign against President Clinton. And recent polling indicates that Republican calls for another tax cut don't seem to excite many Americans. Most seem to prefer improving education or overhauling Social Security. Republicans argue that a tax cut is necessary because, by their analysis, when federal taxes are measured against the size of the overall economy, the federal tax burden is as high as it has been in more than half a century.
Federal tax revenue is projected by the Congressional Budget Office to hit 20.7 percent of the nation's gross domestic product this year (GDP is a common measure of the size of the economy). That would mark the second-highest level recorded since the dawn of the modern income tax in 1913. Tax revenue hit its highest level ever--20.9 percent of GDP--in 1944, when the federal government was extracting enormous amounts of tax revenue to finance World War II.
"There's no question that we have a heavier tax burden today" than in recent years, said Dan Mitchell, a senior fellow at the Heritage Foundation, a conservative think tank. Mitchell said the near-record federal revenue offers "at least some insight into whether the economy has a lesser capacity to grow," since money paid to the government is not available for investment in private business and industry.
But while this analysis suggests a crushing tax burden--and is technically correct--it is less relevant than the case-by-case tax experiences of individual American taxpayers, some experts argued.
"Both facts are correct," said William G. Gale, a senior fellow at the Brookings Institution, a liberal think tank. "Typical families . . . are paying less, but aggregate revenues are up."
According to Gale and other analysts, the chief explanation for that seeming impossibility is that the current economic boom is throwing off enormous tax revenue. That revenue is flowing particularly heavily from the highest-income taxpayers, whose tax rates were raised in 1990 and 1993 but are still lower than they were before the sweeping Reagan-era tax cuts of the 1980s.
Other, more technical factors also help explain the discrepancy. For instance, a big chunk of high-income taxpayers' income comes from capital gains. Those gains are not counted as part of GDP, but the taxes on them are counted as part of total revenue, an equation that tends to inflate the measure of taxes as a percentage of GDP.
What seems indisputable is that most taxpayers are feeling less of a bite from Uncle Sam.
Treasury Department statistics show the combined income and payroll tax rates for a median-income family of four are the lowest since 1976. "Tax burdens on middle-income families are lower than they've been in decades," said Deputy Treasury Secretary Lawrence H. Summers. "Those who are paying more taxes are also enjoying much higher after-tax incomes."
The Deloitte & Touche analysis appears to back Summers up. The study looked at six hypothetical taxpayers, from a single parent making $7.50 an hour to a father or mother of two earning $475,000 a year in salary and investments.
All but one of those taxpayers would fork over less of their gross income to the federal government in 1999 than a comparable taxpayer would have paid to the government in 1979. The only loser was a so-called DINK (double income, no kids) couple making $135,000 a year; they paid exactly the same bite in income taxes and payroll taxes (for Social Security and Medicare) in 1999 as they did in 1979, according to the analysis.
Everyone else's federal bite was at least a little bit lower--and the two who made out the best were the richest and the poorest. The low-income working parent's federal tax burden dropped by some 42 percent, thanks largely to increases in the earned income tax credit for the working poor. The wealthy taxpayer's bite dropped almost 15 percent, despite the disappearance of lucrative tax shelters a similar taxpayer would have used in the early 1980s.
Stretch of Deloitte & Touche pointed out that some of the tax policy changes of the past two decades have affected almost everyone's taxes. The decision to index taxes against inflation in the 1980s, for instance, helped keep all taxpayers from being driven into higher brackets as inflation increased their income. Broad tax cuts in the 1980s also helped drive down the income tax burden.
But then the effort to stave off the bankruptcy of Social Security by raising the payroll tax resulted in making the payroll tax more of a burden for most taxpayers than the income tax. Various tax changes slashed itemized deductions for most middle-income taxpayers, while the personal exemption was nearly tripled, from $1,000 to $2,750.
Following is the Deloitte & Touche analysis of the federal tax burden for six typical taxpayers:
Working mother. Income: $19,500. Federal tax bite in 1979: 8.6 percent of income. Tax bite in 1999: less than 5 percent. A working parent with one child at this income level would ordinarily have no income tax liability at all but would pay a substantial payroll tax (for Social Security and Medicare). Much of that payroll tax, however, would be offset by the earned income tax credit, a special tax break for the working poor that can be credited against an individual's income tax or paid directly if the individual pays no income tax. In 1979, a similar taxpayer would have had income of about $9,000 and would have paid a bigger share of it to the federal government.
Struggling middle-income family. Income: $35,100. Federal tax bite in 1979: 11.2 percent of income. Tax bite in 1999: 10.5 percent. Two wage earners, two kids and a modest income add up to a hard road, which makes this a prime target group for congressional tax cutters aiming to do right by the middle class. In 1979, a similar family would have had income of $16,000 and would have paid about 11.2 percent of that to the federal government--about half in income taxes and half in payroll taxes. Reductions in income tax rates and the increase in the personal exemption reduced the bite, but the 1997 child tax credit really helped, slashing their income tax by 40 percent. Now three-quarters of their tax bite is from the payroll tax.
Better-off middle-income family. Income: $85,000. Federal tax bite in 1979: 17 percent of income. Tax bite in 1999: 16.3 percent. Two working parents, two kids, one of whom is in college. Like their less well-off cousins a rung or two below, this family is the sort that both parties in Congress say they want to help when they tinker with the tax code. The 1997 child and education tax credits cut 20 percent of this family's income tax liability. In 1979, a similar family would have had about $39,000 in income and would have paid about about 17 percent of that to the federal government. Since then, the family benefited from President Ronald Reagan's 1981 and 1986 income tax rate cuts, while President Clinton's 1993 budget deal raised the Medicare portion of their payroll tax by taking the lid off the amount of wages the tax is applied to. This family also lost some ground to Reagan-era tax changes that took away or limited itemized deductions for sales taxes and other items.
Young urban professional. Income: $100,000. Federal tax bite in 1979: 24.3 percent of income. Tax bite in 1999: 24.1 percent. This well-off young professional has $95,000 in wages, $5,000 in investment income and not a great deal of sympathy from congressional tax cutters aiming at middle-class families with kids. But while such a taxpayer could not take the 1997 child or education credits available to parents, the 1980s income tax rate cuts and the increase in the personal exemption helped lower his or her income taxes enough to offset an increase in the payroll tax. In 1979, a similar yuppie would have had income of about $45,000 and would have paid slightly more in taxes than in 1999.
Double income, no kids (DINK). Income: $135,000. Federal tax bite in 1979: 24 percent of income. Tax bite in 1999: exactly the same. One is a young professional earning $90,000 a year, and the other runs a start-up business that netted $45,000. With no kids and a combined income that puts them toward the top of the middle class, this DINK couple, like their yuppie colleague in the previous example, is not high on the list of taxpayers congressional tax cutters are clamoring to help when they write targeted child and education tax breaks (though they might benefit from a reduction in the so-called marriage penalty, a top target of tax cutters this year). In 1979, a similar couple would have had income of $61,000 and would have paid an identical 24 percent of that to the federal government. In effect, the 1980s cuts in income tax rates and the increased personal exemption offset same-size increases in this couple's payroll taxes.
Country-club crowd. Income: $475,000. Federal tax bite in 1979: 33.1 percent of income. Tax bite in 1999: 28.3 percent. With one highly paid breadwinner, two kids in college, and significant income from dividends, interest and capital gains, this family is doing quite well, thanks. Chances are it is doing even better than a comparable family in 1979, which would have paid more of its $216,000 income to Uncle Sam. A family in this bracket benefited substantially from the Reagan-era income tax cuts, which cut the top marginal rate roughly in half for earned income. In 1986, though, tax reformers killed off popular tax shelters (passive loss real estate deductions, for example) that were heavily used by people in this bracket. And tax increases in President George Bush's 1990 budget deal and the 1993 Clinton budget pushed income tax rates back up again for the nation's wealthiest taxpayers. Even so, this family is doing better today tax-wise than it was in 1979.
NOT WHAT YOU MAY THINK
Contrary to the popular notions of many politicians, tax rates have been declining over the past two decades. Here are tax rates for 1979 and 1999 for six income levels across the spectrum, along with the percentage of those taxes that are payroll vs. income.
Tax rates Percentage that are payroll taxes
1979 $9,000 8.6% 78%
1999 $19,500 5.0% 100%
Struggling middle-income family
1979 $16,000 11.2% 50%
1999 $35,100 10.5% 75%
Better-off middle-income family
1979 $39,000 17.0% 20%
1999 $85,000 16.3% 40%
Young urban professional
1979 $45,000 24.3% 10%
1999 $100,000 24.1% 33%
Double income, no kids
1979 $61,000 24.0% 10%
1999 $135,000 24.0% 30%
1979 $216,000 33.1% 2%
1999 $475,000 28.3% 7%
SOURCE:Deloitte & Touche
© Copyright 1999 The Washington Post Company