The administration's tax proposal, promoted as a populist measure by President Reagan and his aides, is a major step in the nation's continuing retreat from a progressive tax rate system, originally designed to place a heavy burden on the rich. The wealthiest Americans benefit enormously as this retreat continues.
The original income tax was frankly designed to "soak the rich." It was directed exclusively at the wealthiest 2 percent of the population, exempting everyone else from any liability. Since then, the base of the income tax has been broadened to cover more and more of the population. But until 1981 at least, politicians felt they had to preserve high, graduated tax rates for those in the highest income brackets.
But the plan Reagan calls a "revolutionary" alteration of the nation's tax system would represent a reduction by half of wealthy Americans' marginal tax rates during his presidency. His 1981 tax bill reduced the stiffest marginal rate from 70 to 50 percent; his new tax plan would bring it down to 35.
Revealingly, there has been no political outcry against this proposal. Instead, Democrats have joined Republicans in praising the simplified rate structure that Reagan suggests. This can be explained largely by the fact that over the past 20 years, the impact of progressivity has hit a much broader segment of the population.
Altered by inflation and legislative tinkering, the tax code has become less a vehicle to put high rates on the well-to-do than a growing burden on working and middle-class Americans. As a result, Reagan's proposal to replace today's 14 tax brackets ranging from 11 to 50 percent with just three -- 15, 25 and 35 percent -- has enormous political appeal.
There are Democratic strategists who contend that the changing shape of the progressive tax rate system in the late 1960s and 1970s was a substantial cause of growing antigovernment views among the middle class. These views translated into a middle-class tax rebellion and increased Republican voting on Election Day.
Over the last generation, families right at the median income -- just over $27,000 in 1983 -- and those just below the median have experienced the largest tax increases. From 1954 to 1984, according to calculations by Joseph J. Minarik in his book "Making Tax Choices," the tax burden of the median-income family has grown by 67 percent. For families making 10 times the median income -- more than $270,000 in 1983 -- the tax burden has increased by just 18 percent in the same period.
These figures do not include the changing burden of the payroll tax to finance Social Security, which also falls most heavily on the working and middle classes. This tax has applied to ever-increasing income bases -- rising from $3,600 in 1954 to $37,800 in 1984 -- and has grown from 2 percent of taxable wages in 1954 to 7 percent in 1984.
So the tax structure has become most painful for the people whose votes are most crucial to the outcomes of national elections: voters close to the median income.
This is a new development. As recently as 1961, the federal income tax system amounted to a flat rate of 20 or 22 percent for 70 percent of all taxpayers. Steeply progressive marginal tax rates, reaching 91 percent for taxable income above $400,000, applied only to the top 5 percent of taxpayers.
But under the existing tax system, working and middle-class families face steadily rising marginal tax rates as they earn more money. A family whose taxable income grows from $16,000 to $20,300, for example, faces a marginal rate increase from 16 to 22 percent on the last dollars earned.
Under the Reagan plan, middle- and upper-middle-class Americans -- those earning between $20,000 and $200,000 a year -- would get tax cuts ranging from 8.7 percent to 4.1 percent. However, by putting the wealthy in the same boat as the upper middle class (neither would pay more than 35 percent on any income), the plan is much more generous to those with incomes in excess of $200,000 a year; they would get a tax cut of 10.4 percent.
Administration spokesmen have noted that the poor would benefit even more under the new proposal. Those earning less than $10,000 a year, for example, would get a 35.5 percent cut; those earning $10,000 to $15,000, a 22.8 percent cut, and those making $15,000 to $20,000, a 13.5 percent cut.
However, these same taxpayers received little or no benefit from the administration's 1981 tax cut. Inflation and the declining value of deductions and credits targeted toward the poor and lower middle class more than made up for the 1981 tax cuts for these taxpayers, forcing the poorest workers to pay higher taxes over the past four years. The new Reagan plan, according to tax experts, would have the effect of restoring the working poor to their pre-1981 tax status.