INCOMES HAVE become more unequal in this country over the past decade. The poor have become poorer since the middle 1970s, and the rich richer. That trend has been apparent for some time. Now the Congressional Budget Office has published a study showing that the federal tax system has simultaneously become less progressive. Tax rates have risen for the poor and middle classes, while declining sharply for the top tenth of the population.
Congress tried to change the balance for the better in the income tax reform bill last year, and the income tax is fairer now than it was. But those improvements, however welcome, have been swamped by the increasing Social Security tax and the other payroll taxes that pay for social insurance. While legally an employee pays only half of the Social Security tax and the employer pays the rest, the economic reality -- as the CBO observes -- is that, directly or indirectly, the employee bears all of it. Counted that way, four-fifths of all Americans -- all but the wealthiest -- are now paying more in social insurance taxes than in individual income taxes. The income tax rates have had more attention in recent years than they deserved. The growing importance of the mercilessly regressive payroll taxes has been largely neglected.
The virtue of the CBO's study is that it pulls together all the federal taxes, including the corporate income tax and the excise taxes, to measure their impact on individuals. While there is more than one way to calculate these burdens, the general pattern is beyond argument. The average effective rate of all the federal taxes together is the same as it was 10 years ago. But their weight has shifted significantly, to the advantage of the 20 percent of the population with the highest incomes. For nearly everyone else, poor through upper-middle, total tax rates are now higher.
The shift toward greater inequality in American incomes began well before the Reagan administration took office, and some of it is due to demographic change. The increasing number of families headed by women increases the poverty of people at the bottom of the income ladder, while the increasing number of two-income families benefits those on the upper rungs. But some of the change directly reflects public policy. In its assessment of Mr. Reagan's record at the end of his first term, the Urban Institute found that the spending cuts had reduced the incomes mainly of the poor, while the tax cuts had raised the incomes mainly of the more affluent. Those conclusions still hold true. While the growing distance between rich and poor did not begin with the Reagan administration, the politics of the past six years has greatly aggravated it